CH-4-5 Project Management – Operations and Supply Chain Management : Book Guide

This Document Contains Chapters 4 to 5 CHAPTER 4 PROJECT MANAGEMENT Discussion Questions 1. What was the most complex project that you have been involved in? Give examples of the following as they pertain to the project: the work breakdown structure, tasks, subtasks, and work package. Were you on the critical path? Did it have a good project manager? Obviously, the answer will vary. Remember that the project could be in a non-profit environment as well. School plays (especially musicals) are a good example, because there are many major tasks that need to be broken down and scheduled in parallel, but all must be completed by the time opening night comes. This would include selecting the play and obtaining the rights, auditions, rehearsals of the actors, rehearsals of the musicians, construction of the sets, setting the lighting, printing tickets and programs, staffing the theater, advertising and fund raising. 2. What are some reasons project scheduling is not done well? Several problems with project scheduling are discussed at the end of the chapter. The uncertainties inherent in the activities comprising the network of any project make it necessary to update the schedule on a regular basis. Maintaining accurate time and cost estimates is often difficult and frustrating. Managing this evolving process requires a discipline that is not always available. 3. Which characteristics must a project have for critical path scheduling to be applicable? What types of projects have been subjected to critical path analysis? Project characteristics necessary for critical path scheduling to be applicable are: a. Defined project beginning and ending b. Well-defined jobs whose completion marks the end of the project. c. The jobs of tasks are independent in that they may be started, stopped, and conducted separately within a given sequence. d. The jobs or tasks are ordered in that they must follow each other in a given sequence. e. An activity once started is allowed to continue without interruption until it is completed. A wide variety of projects have used critical path analysis. Some industries that more commonly use this approach include aerospace, construction, and computer software. 4. What are the underlying assumptions of minimum-cost scheduling? Are they equally realistic? The underlying assumptions of minimum cost scheduling are that it costs money to expedite a project activity and it costs money to sustain or lengthen the completion time of the project. While both assumptions are generally realistic, it often happens that there are little or no out-of-pocket costs associated with sustaining a project. Personnel are often shifted between projects, and in the short run there may be no incentive to compete a project in “normal time.” 5. “Project control should always focus on the critical path.” Comment. In many project situations, it is not the activities on the critical path which cause problems, but rather noncritical activities, which, for various reasons, become critical. In the context of PERT, it may turn out that the activities on the critical path have small variances associated with them and can be treated as near certain. At the same time, activities off the critical path may have extremely large variances and, in fact, if not closely monitored, may delay the project. Thus, while project control must keep track of critical path activities, it may be more useful to focus on those activities which are not on the critical path but, for one reason or another, have a high degree of uncertainty associated with them. Along these lines, some authors have suggested that the critical path approach should be replaced by a critical activity approach in which simulation is used to estimate which activities are likely to become sources of project delay. These activities, rather than critical path, would become the focus of managerial control. Additionally, the critical path focuses on the time or schedule aspects of the projects. Certain activities could be "critical" because of cost or quality considerations. 6. Why would subcontractors for a government project want their activities on the critical path? Under what conditions would they try to avoid being on the critical path? A subcontractor might want his activities on the critical path in situations where cost incentives are provided for early project completion. Since the critical path ultimately determines project length, it stands to reason that activities on the path would be the ones that would draw additional funds to expedite completion. A subcontractor might want his activities off the critical path because of some error on his part or because he doesn’t want to be bothered by the close monitoring of progress which often goes with critical path activities. 7. Discuss the graphic presentations in Exhibit 4.11. Are there any other graphic outputs you would like to see if you were project manager? The various graphs and charts presented are typical of the graphical techniques for presenting the necessary data. Most are adaptable to computer programming. The major requirements in the graphics package include planned activities related to time, a milestone chart to show major achievements, a breakdown to show how funds were spent plus a plot of actual completion versus planned. 8. Why is it important to use expected value management (EVM) in the overall management of projects? Compare to the use of baseline and current schedules only. Using schedules only captures the time aspect of project management. Costs and revenues are also critical to efficient project management and the overall success of any project. A project may be ahead of schedule but at an unacceptable cost. 9. Consider the EVM charts in Exhibit 4.12. Are there any other measures you might want to use in the management of a project? What are some controllable variables that may affect the costs being tracked? Students will likely have multiple answers to these questions. One might be quality defects and their costs in rework or scrap. Utilization figures for workers and expensive resources might also be useful. 10. What do you think might be some barriers to the successful, effective use of the project management software packages discussed in the chapter? Students will have varying answers here, but we would expect them to include training and hiring personnel with the right technical aptitude as well as the cost of buying and upgrading such systems. Objective Questions 1. What are the three types of projects based on the amount of change involved? Derivative, breakthrough, platform. 2. What are the four major categories of projects based on the type of change involved? Product change, process change, research & development, and alliance & partnership. 3. Match the following characteristics with their relevant project team organizational structures. B The project is housed within a functional division of the firm. A: Pure project A project manager leads personnel from different functional areas. B: Functional project Personnel work on a dedicated project team. C: Matrix project A team member reports to two bosses. Team pride, motivation, and commitment are high. Team members can work on several projects. Duplication of resources is minimized. 4. What is the term for a group of project activities that are assigned to a single organizational unit? Work package 5. The following activities are part of a project to be scheduled using CPM: a. Draw the network. b. What is the critical path? A-C-D-E-G, also shown in the network above as the bold path. c. How many weeks will it take to complete the project? 6+7+2+4+7 = 26 weeks d. How much slack does activity B have? Activity B has 6 weeks of slack – the difference between its early and late start times. 6. Schedule the following activities using CPM: a. Draw the network path. b. What is the critical path? A-B-D-E-H, also shown in the network above as the bold path. c. How many weeks will it take to complete the project? 15 weeks, 1+4+2+5+3 d. Which activities have slack, and how much? C, 3 weeks; F, 1 week; and G, 1 week. 7. The R&D department is planning to bid on a large project for the development of a new communications system for commercial planes. The accompanying table shows the activities, times, and sequences required: a. Draw the network diagram. Note that G has both D and F as immediate predecessors. However, D is redundant because F also has D as an immediate predecessor. b. What is the critical path? A-C-F-G-I, and A-D-F-G-I at 18 weeks. c. Suppose you want to shorten the completion time as much as possible, and you have the option of shortening any or all of B, C, D, and G each one week. Which would you shorten? B is not on a critical path and has slack of 4; therefore, do not shorten as it will not change the project completion time. Shorten C, D, and G one week each. C and D are on parallel critical paths, reducing them both will only reduce project completion time by 1 week. d. What is the new critical path and earliest completion time? A-C-F-G-I; and A-D-F-G-I remain the critical paths. Project completion time is reduced from 18 to 16 weeks. 8. The following represents a project that should be scheduled using CPM: a. Draw the network. TIMES (DAYS) IMMEDIATE ACTIVITY PREDECESSORS a m b ET A — 1 3 5 3 0.4444 B — 1 2 3 2 0.1111 C A 1 2 3 2 0.1111 D A 2 3 4 3 0.1111 E B 3 4 11 5 1.7778 F C, D 3 4 5 4 0.1111 G D, E 1 4 6 3.833 0.6944 H F, G 2 4 5 3.833 0.2500 b. What is the critical path? B-E-G-H c. What is the expected project completion time? 2.00+5.00+3.833+3.833 = 14.67 d. What is the probability of completing this project within 16 days? Variance of project completion time is found by adding the variances of activities on the critical path. .1111 + 1.7778 + .6944 + .2500 = 2.833 Z= (16−14.67) = .79 2.833 P(T<16) = P(Z<.79) = .7852 (From Excel’s NORMSDIST() function) 9. There is an 82 percent chance the project below can be completed in X weeks or less. What is X? Activity Most optimistic Most likely Most pessimistic Expected Time Variance A B C D E 2 3 1 6 4 5 3 3 8 7 11 3 5 10 10 5.5 3 3 8 7 2.25 0 .444 .444 1 First find the value of Z that results in a probability of .82. Using Excel’s NORMSINV(.82) = .915. Then find the critical path (ABD) and the variance on the critical path: 2.25+ 0 + .444 = 2.694. Finally, use equation 5.3 to solve for D. Paths ABD 16.5 .915=D−16.5 D = 18 2.694 ACE 15.5 10. The following table represents a plan for a project: a. Construct the appropriate network diagram. Job No. a m b ET 2 1 2 3 4 3.00 .111 2 1 2 3 2.00 .111 3 4 5 12 6.00 1.78 4 3 4 11 5.00 1.78 5 1 3 5 3.00 .444 6 1 2 3 2.00 .111 7 1 8 9 7.00 1.78 8 2 4 6 4.00 .444 9 2 4 12 5.00 2.78 10 3 4 5 4.00 .111 11 5 7 8 6.83 .25 b. Indicate the critical path. 1-3-6-8-9-11 c. What is the expected completion time for the project? 3.00+6.00+2.00+4.00+5.00+6.83 = 26.83 d. You can accomplish any one of the following at an additional cost of $1,500: (1)Reduce job 5 by two days. (2) Reduce job 3 by two days. (3) Reduce job 7 by two days. If you save $1,000 for each day that the earliest completion time is reduced, which action, if any, would you choose? None of these. Job 5 is not on the critical path; therefore, reducing its time by two days will not reduce project completion time. If you reduce job 3 by two days, then path 1-4-7-10-11 becomes critical and the project length is 25.83 days. You’ve saved $1,000 but paid $1,500. Task 7 is not on the critical path, so reducing it alone will not shorten the project. You could reduce both 3 and 7 to reduce the project length by two days, but would only save $2,000 while spending $3,000. e. What is the possibility that the project will take more than 30 days to complete? First, you need to compute the variance of the C.P.: .111+1.78+.111+.444+2.78+.25 = 5.47. Then use equation 5.3 to find the correct Z and look its value up in Appendix E. Z= 30−26.83 =1.355 P.91 5.47 A construction project is broken down into the following 10 activities: a. Draw the network diagram. b. Find the critical path. 1-3-6-9-10, length = 26 weeks c. If activities 1 and 10 cannot be shortened, but activities 2 and 9 can be shortened to a minimum of one week each at a cost of $10,000 per week, which activities would you shorten to cut the project by four weeks? The most logical option would be to cut activity 3 by 3 weeks, and then reduce activity 6 or 9 by one week. This is the lowest cost option, and does not create an additional critical path. Another option would be to reduce activities 6 and 9 by a total of 3 weeks, and then reduce activity 3 by one week. This also has the same cost, but creates an additional critical path (13-5-8-10). Here is a CPM network with activity times in weeks: a. Determine the critical path. 0 7 A-E-G-C-D c. How many weeks will the project take to complete? 26 weeks d. Suppose F could be shortened by two weeks and B by one week. How would this affect the completion date? No difference in completion date. Neither B nor F is on the critical path. Here is a network with the activity times shown in days: a. Find the critical path. A-C-D-F-G b. The following table shows the normal times and the crash times, along with the associated costs for each activity. If the project is to be shortened by four days, show which activities, in order of reduction would be shortened and the resulting cost. Solution: Activity Normal Time (NT) Crash Time (CT) Normal Cost (NC) Crash Cost (CC) NT-CT Cost/day to expedite A 7 6 $7,000 $8,000 1 $1,000 B 3 2 5,000 7,000 1 2,000 C 4 3 9,000 10,200 1 1,200 D 5 4 3,000 4,500 1 1,500 E 2 1 2,000 3,000 1 1,000 F 4 2 4,000 7,000 2 1,500 G 5 4 5,000 8,000 1 3,000 First, the lowest cost activities to crash are A and E at $1,000 per day. E is not on the critical path, therefore select A. Critical path remains the same. Second, lowest cost activity on the critical path is C. Crash activity C. Now two paths have become critical. Third, D and F are next lowest cost activities on the critical paths. Both have a cost of $1,500 per day. Select D then F or reverse the order (F then D). F cannot be reduced by two days because it would cause E to become part of a critical path. Summary of steps to reduce project by four days: 1 A $1,000 1 2 C 1,200 1 3 D (or F) 1,500 1 4 F (or D) 1,500 1 Total $5,200 Step Activity to crash Cost to crash Days saved 14. The home office billing department of a chain department stores prepares monthly inventory reports for use by the stores’ purchasing agents. Given the following information, use the critical path method to determine: a. How long the total process will take. 100 hours b. Which jobs can be delayed without delaying the early start of any subsequent activity. Activities b and d are not on the critical path. Their start can be delayed without delaying the start of any subsequent activities. Activity b can be delayed by 10 hours and d can be delayed by 30 hours without affecting the project completion date. 15. For the network shown: a. Determine the critical path and the early completion time in weeks for the project. A-B-D-G, 5+10+6+4 = 25 weeks b. For the data shown, reduce the project completion time by three weeks. Assume a linear cost per week shortened, and show, step by step, how you arrived at your schedule. Solution: Activity Normal Time (NT) Normal Cost (NC) Crash Time (CT) Crash Cost (CC) NT-CT Cost/week to expedite A 5 $7,000 3 $13,000 2 $3,000 B 10 12,000 7 18,000 3 2,000 C 8 5,000 7 7,000 1 2,000 D 6 4,000 5 5,000 1 1,000 E 7 3,000 6 6,000 1 3,000 F 4 6,000 3 7,000 1 1,000 G 4 7,000 3 9,000 1 2,000 First, reduce D (lowest cost activity on the critical path) by one week. This adds an additional critical path with activities C and E in it. Second, crash activity G by one week. Critical paths remain the same. Third, crash activity A by one week at a cost of $3,000, which is the least expensive. Summary of activities crashed: Step Activity Cost to crash Weeks reduced 1 D $1,000 1 2 G 2,000 1 3 A 3,000 1 Total cost $6,000 16. The following CPM network has estimates of the normal time in weeks listed for the activities: a. Identify the critical path. A-C-D-F-G b. What is the length of time to complete the project? 7+4+5+4+5 = 25 weeks c. Which activities have slack, and how much? B, 2 weeks; E, 2 weeks. d. Here is a table of normal and crash times and costs. Which activities would you shorten to cut two weeks from the schedule in a rational fashion? What would be the incremental cost? Is the critical path changed? Solution: Activity Normal Time (NT) Crash Time (CT) Normal Cost (NC) Crash Cost (CC) NT-CT Cost/week to expedite A 7 6 $7,000 $8,000 1 1,000 B 2 1 5,000 7,000 1 2,000 C 4 3 9,000 10,200 1 1,200 D 5 4 3,000 4,500 1 1,500 E 2 1 2,000 3,000 1 1,000 F 4 2 4,000 7,000 2 1,500 G 5 4 5,000 8,000 1 3,000 First, shorten activity A by one week at a cost of $1,000. This is the lowest cost/week activity on the critical path. Second, shorten activity C by one week at a cost of $1,200. This is the next lowest cost/week activity on the critical path. The total cost is $2,200 and the critical path remains unchanged. 17. Bragg’s Bakery is building a new automated bakery in downtown Sandusky. Here are the activities that need to be completed to get the new bakery built and the equipment installed. a. Draw the project diagram. b. and c. What is the normal project length? What is the project length if all activities are crashed to their minimum? Solution: Path Normal Length Crashed Length ABDF 24 15 ACDF 31 20 ACEF 36 23 d. Bragg’s loses $3,500 in profit per week for every week the bakery is not completed. How many weeks will the project take if we are willing to pay crashing cost as long as it is less than $3,500? We would only crash the project until 29 weeks since the cost of crashing C is $4000 which is greater than the $3500 in additional profit. LENGTH ABDF - 24 24 24 24 24 23 22 21 21 ACDF - 31 31 31 31 31 30 29 28 27 ACEF - 36 35 34 33 32 31 30 29 28 Activity Crashed E E E E A A A C Crash cost 2500 2500 2500 2500 3000 3000 3000 4000 Cumulative Cost 2500 5000 7500 10000 13000 16000 19000 23000 18. Assume the network and data that follow: a. Construct the network diagram. Activity Normal Time (NT) Crash Time (CT) Normal Cost (NC) Crash Cost (CC) NT-CT Cost/week to expedite A 2 1 $50 $70 1 20 B 4 2 80 160 2 40 C 8 4 70 110 4 10 D 6 5 60 80 1 20 E 7 6 100 130 1 30 F 4 3 40 100 1 60 G 5 4 100 150 1 50 b. Indicate the critical path when normal activity times are used. The critical path is A-B-E-G, with a length of 2+4+7+5 = 18 c. Compute the minimum total direct cost for each project duration based on the cost associated with each activity. Consider durations of 13, 14, 15, 16, 17, and 18 weeks. The normal time project cost is $500 at 18 weeks. Minimum cost crashing to 13 weeks is shown below. LENGTH ABEG - 18 17 16 15 14 13 ACG - 15 14 14 13 13 13 ADFG - 17 16 16 15 14 13 Activity Crashed A E G B+D B+F Crash cost 20 30 50 60 100 Cum. Crash Cost 20 50 100 160 260 Total Direct Cost 520 550 600 660 760 d. If the indirect costs for each project duration are $400 (18 weeks), $350 (17 weeks), $300 (16 weeks), $250 (15 weeks), $200 (14 weeks), and $150 (13 weeks), what is the total project cost for each duration? Indicate the minimum total project cost duration. Computations build off the earlier table and are shown below. The total project cost in normal time is $500 + $400 = $900. LENGTH ABEG - 18 17 16 15 14 13 ACG - 15 14 14 13 13 13 ADFG - 17 16 16 15 14 13 Activity Crashed A E G B+D B+F Crash cost 20 30 50 60 100 Cum. Crash Cost 20 50 100 160 260 Total Direct Cost 520 550 600 660 760 Indirect Cost 350 300 250 200 150 Total Project Cost 870 850 850 860 910 We can achieve minimum cost by reducing the project to either 16 or 15 weeks. Both durations have the same total cost of $850. 19. Your project to obtain charitable donations is now 30 days into a planned 40-day project. The project is divided into 3 activities. The first activity is designed to solicit individual donations. It is scheduled to run the first 25 days of the project and to bring in $25,000. Even though we are 30 days into the project, we still see that we have only 90 percent of this activity complete. The second activity relates to company donations and is scheduled to run for 30 days starting on day 5 and extending through day 35. We estimate that even though we should have (25/30) 83 percent of this activity complete, it is actually only 50 percent complete. This part of the project was scheduled to bring in $150,000 in donations. The final activity is for matching funds. This activity is scheduled to run the last 10 days of the project and has not started. It is scheduled to bring in an additional $50,000. So far $175,000 has actually been brought in on the project. Calculate the schedule variance, schedule performance index, and cost (actually value in this case) performance index. How is the project going? Hint: Note that this problem is different since revenue rather than cost is the relevant measure. Use care in how the measures are interpreted. Solution: Activity Expected Revenue Planned Duration Planned Start Date Planned Comp. Date Expected % Complete Actual % Complete Actual Rev. to Date 1. Solicit $25,000 25 0 25 100% 90% 2. Donations $150,000 30 5 35 83.3% 50% 3. Matching Funds $50,000 10 30 40 0% 0% Total $225,000 $175,000 BCWS Activity 1 100% of $25,000 = 25,000 Activity 2 83.3% of = 125,000 $150,000 Activity 3 0 % of 50,000 = 0 $150,000 BCWP Activity 1 90% of 25,000 = 22,500 Activity 2 50% of 150,000 = 75,000 Activity 3 0% of $50,000 = 0 97,500 Scheduled Variance = 97,500 - 149,500 = -52,000 Scheduled Performance Index = 97,500/150,000 = .650 Cost Variance = 97,500 - 175,000 = -77,500 Cost Performance = 97,500/175,000 = .557 Because we are working with revenues instead of costs, we have to invert the evaluation rules listed in the text. Our performance measures here are actually good. Although we are behind schedule on completing tasks 1 and 2, we have brought in more money than expected for the amount of work we have completed. 20. A project to build a new bridge seems to be going very well since the project is well ahead of schedule and costs seem to be running very low. A major milestone has been reached where the first two activities have been totally completed and the third activity is 60 percent complete. The planners were only expecting to be 50 percent through the third activity at this time. The first activity involves prepping the site for the bridge. It was expected that this would cost $1,420,000 and it was done for only $1,300,000. The second activity was the pouring of concrete for the bridge. This was expected to cost $10,500,000 but was actually done for $9,000,000. The third and final activity is the actual construction of the bridge superstructure. This was expected to cost a total of $8,500,000. To date they have spent $5,000,000 on the superstructure. Calculate the schedule variance, schedule performance index, and cost index for the project to date. How is the project going? Solution: Activity Expected Cost Expected % Complete Actual % Complete Actual Cost to Date 1. Site preparation $1,420,000 100% 100% $1,300,000 2. Pour concrete $10,500,000 100% 100% $9,000,000 3. Construction $8,500,000 50% 60% $5,000,000 Total $20,420,000 $15,300,000 BCWS Activity 1 100% of $1,420,000 = $1,420,000 Activity 2 100% of $10,500,000 = $10,500,000 Activity 3 50 % of $8,500,000 = $4,250,000 $16,170,000 BCWP Activity 1 100% of $1,420,000 = $1,420,000 Activity 2 100% of $10,500,000 = $10,500,000 Activity 3 60 % of $8,500,000 = $5,100,000 $17,020,000 Scheduled Variance = 17,020,000-16,170,000 = 850,000 Scheduled Performance Index = 17,020,000/16,170,000 = 1.053 Cost Performance = 17,020,000/15,300,000 = 1.11 Ahead of schedule and under budget. 21. What feature in project management information systems can be used to resolve overallocation of project resources? Leveling 22. What was the first major project management information system that is now commonly used for managing very large projects? Primavera Project Planner 23. What type of chart compares the current project schedule with the original baseline schedule so that deviations from the original plan can be easily noticed? Tracking Gantt chart Analytics Exercise: Product Design Project 1, 2. The project will take 37 weeks to complete. The critical path is P1-P2-P3-P4-S1-D2-I2-I3-I4-V2. 3. Slack for each activity is listed in the following table. Major Subprojects/Activities Activity ID Dependencies Duration (Weeks) ES, LS Slack Project Specifications (P) 16 Market research P1 -- 2 0, 0 -- Overall product specification P2 P1 4 2, 2 -- Hardware P3 P2 5 6, 6 -- Software P4 P3 5 11, 11 -- Supplier specifications (S) 6 Hardware S1 P4 5 16, 16 -- Software S2 P4 6 16, 19 3 Product design (D) 6 Battery D1 S1 1 21, 23 2 Display D2 S1 2 21, 21 -- Camera D3 S1 1 21, 23 2 Outer cover D4 D1, D2, D3 4 23, 24 1 Product integration (I) 12 Hardware I1 D4 3 27, 28 1 User interface I2 D2 4 23, 23 -- Software coding I3 I2 4 27, 27 -- Prototype testing I4 I1, I3 4 31, 31 -- Subcontracting (V) 12 Supplier selection V1 S1, S2 10 22, 25 3 Contract negotiation V2 I4, V1 2 35, 35 -- 4. Assume that the activity lengths remain the same, but the precedence relationships within subprojects no longer apply as all activities in a subproject will be worked on in parallel. Therefore, the length of each subproject will now be equal to the length of the longest activity in the subproject. The subprojects are outlined in dashed lines in the network drawing above. Subproject P will take 5 weeks to complete; subproject S, 6 weeks; D, 4 weeks; I, 4 weeks; and V, 10 weeks. Since all of these subprojects will completed in series now, the length of the project is the sum of the subproject times: 5+6+4+4+10 = 29 weeks, a decrease of 8 weeks. 5. The revised network diagram is shown below. Adding P5 extends the time of subproject P to 12 weeks while subprojects D and I remain at 4 weeks each. By eliminating subprojects S and V, the project length is now down to 20 weeks – 17 weeks less than the original schedule. 6. Having the team focus on a single subproject at a time will allow more collaboration on each subproject as opposed to the team being split across several subprojects. This might result in higher quality of work as the entire project team is focused on a single subproject at a time and you will have more input and a wider variety of experiences working on each subproject than you would otherwise. By combining subprojects S and V with P, Nokia can perhaps take advantage of supplier expertise in designing the new phone. Nokia would better understand the technological capabilities of their suppliers and include them in the phone design from the beginning. One concern might be the feasibility of eliminating the original precedence relationships when changing to the new project structures in parts 4 and 5. Assuming there were good reasons for those relationships originally, eliminating them might cause problems in the project if Nokia does not fully address those reasons in the new project structure. For example, if they select suppliers and negotiate contracts before the product specifications are complete, and they do not include their suppliers in the product specification process, they might end up with a supplier that cannot supply the needed materials nor do so at the proper level of quality. Assuming the technical/managerial precedence issues are properly addressed, the new project structures make sense. In addition to reducing project time, there are other possible benefits to be gained from the increased collaboration the new structures would bring. CHAPTER 5 STRATEGIC CAPACITY MANAGEMENT Discussion Questions 1. What capacity problems are encountered when a new drug is introduced to the market? The primary concerns come from uncertain demand for the drug and the high capital investment typically needed for modern drug production. Being a new drug, there are no historical sales data on which to base forecasts of future demand. If forecasts are too high, significant capital resources will be underutilized. If forecasts are too low, there may be insufficient capital resources to meet the actual demand, resulting in lost sales when the price for the new drug is typically highest. 2. List some practical limits to economies of scale; that is, when should a plant stop growing? The obvious answer is that a plant should stop growing when its long-run average cost curve hits the inflection point and starts increasing. Factors leading to this situation include difficulties coordinating and managing a facility of that size, demand variations that can lead to regular periods of low capacity utilization, and capacity imbalance within the facility. 3. What are some capacity balance problems faced by the following organizations or facilities? a. An airline terminal Congested flight arrival/departure scheduling typically leads to problems throughout the system, including waiting areas, distances from boarding gates, ground crew requirements, runways, baggage handling, etc. b. A university computing lab The number of computer workstations, the size of each workstation (room for student papers, etc.), the mix of different computer types (Mac or PC), the number of printers, the capacity of the network access, study space for students waiting. These problems are exacerbated by surges in demand during certain points in the semester (e.g. finals week). c. A clothing manufacturer Many manufacturers now use highly decentralized shops to make clothes. This means that capacity of multiple sites must be accounted for in planning production. 4. At first glance, the concepts of the focused factory and capacity flexibility may seem to contradict each other. Do they really? This is not necessarily true. This will depend on the available technology of the facility and on the type of industry it competes in. An FMS plant may, for example, use flexible processes to enlarge the variety of products produced and delivered in a very short time. Therefore, it can choose to compete on fast delivery of customized products rather than on cost. The PWP concept can capitalize on the overall facility economies of scale while maintaining focus within each individual PWP. 5. Management may choose to build up capacity in anticipation of demand or in response to developing demand. Cite the advantages and disadvantages of both approaches. The strategy of building up capacity ahead of demand is a risk-taking stance. Investment is based on projections. This investment involves costs for new facilities, equipment, human resources, and overhead. If the demand materializes, the investment is worthwhile since the firm may capture a large amount of market share. If it does not materialize, the firm must redirect the invested resources. This strategy is most appropriate in high growth areas. If the demand materializes, but the capacity planning strategy is risk averse, i.e., building capacity only as demand develops, then most likely market share will be lost. The growth in demand will encourage new entrants, resulting in more competition. The risk averse strategy may be most appropriate for small firms who cannot afford to invest in unproven prospects. To prevent potential loss of market share, firms may choose to incrementally increase capacity to match the increase in demand. 6. What is capacity balance? Why is it hard to achieve? What methods are used to deal with capacity imbalances? In a perfectly balanced plant, the output of each stage provides the exact input requirement for the subsequent stage. This continues throughout the entire operation. This condition is difficult to achieve because the best operating levels for each stage generally differ. Variability in product demand and the processes may also lead to imbalance, in the short run. There are various ways of dealing with capacity imbalances. One is to add capacity to those stages that are the bottlenecks. This can be achieved by temporary measures such as overtime, leasing equipment, or subcontracting. Another approach is to use buffer inventories so that interdependence between two departments can be loosened. A third approach involves duplicating the facilities of one department upon which another is dependent. 7. What are some reasons for a plant to maintain a capacity cushion? How about a negative capacity cushion? A plant may choose to maintain a capacity cushion for a number of reasons. If the demand is highly unstable, maintaining cushion capacity will ensure capacity availability at all times. Also, capacity cushions can be useful if high service quality levels are established. Some organizations choose to use capacity cushions as a competitive weapon to create barriers to entry for competitors. Negative capacity cushions may be maintained when demand is expected to decrease rapidly and capacity investment is high enough to discourage short run capacity acquisitions. It may also make sense where capital investment needed to achieve a capacity cushion is extremely expensive, and capacity can be easily increased in the short run by methods such as overtime or subcontracting. 8. Will the use of decision tree analysis guarantee the best decision for a firm? Why or why not? If not, why bother using it? No they cannot, due to the effect of future chance events. First, the probabilities are not known with certainty, but are just estimates. However, even if the probabilities used are accurate, we are still just computing expected values. For any one decision, there is no guarantee it will be the best possible decision. Then why use it? For any one decision you are going with the “best odds” so to speak. For a series of decisions over time, the best long-term results will come from decision tree analysis with accurate probabilities. 9. Consider the example in Exhibit 5.5. Can you think of anything else you might do with that example that would be helpful to the ultimate decision maker? As with the probabilities in the prior question, the rate of return used in NPV analysis is only an estimate. The analyst could repeat the decision tree analysis with multiple rates of return, performing sort of a sensitivity analysis on the decision model with respect to the rate of return. If the same solution results from all of the analyses, the decision maker can feel more confident in choosing the recommend approach. 10. What are some major capacity considerations in a hospital? How do they differ from those of a factory? Some capacity considerations are size and composition of nursing staff (RNs vs. LPNs), balance between operating room and intensive care units, emergency rooms, etc., and, of course, how many beds are to be available. One of the differences in capacity considerations between a hospital and a factory is that a hospital can add capacity rather quickly in the short run, through “simply” adding more staff and more beds. A factory is usually technologically limited, and, therefore, must plan well in advance to add major chunks of capacity. On the other hand, though, the general uncertainty which surrounds the demand for hospital services on any given day is much greater than would be faced by a factory. Additionally, factory management generally has the ability to backlog demand in such a way as to achieve more efficient levels of capacity utilization than does a hospital. Sick and injured patients cannot be put on a shelf and made to wait during periods of peak demand. 11. Refer to Exhibit 5.6. Why is it that the “critical zone” begins at a utilization rate of about 70 percent in a typical service operation? Draw upon your own experiences as either a customer or a server in common service establishments. Uncertainty in the arrival and service rates is the key problem here. The utilization rate of 70 percent is based on the average arrival rate and service rate. As most of us have observed, both can vary widely throughout the day or even from one customer to the next. Sometimes things just “get busy” as more customers than average arrive during a short time window. Also, a “problem customer” or two can greatly extend the time to service them and consume valuable resources. Even though the average utilization rate may be 70 percent, these issues can make the short term utilization rate exceed 100 percent occasionally. Objective Questions 1. A manufacturing shop is designed to operate most efficiently at an output of 550 units per day. In the past month the plant produced 490 units. What was their capacity utilization rate last month? 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 89.1% 2. A company has a factory that is designed so that it is most efficient (average unit cost is minimized) when producing 15,000 units of output each month. However, it has an absolute maximum output capability of 17,250 units per month, and can produce as little as 7000 units per month without corporate headquarters shifting production to another plant. If the factory produces 10,925 units in October, what is the capacity utilization rate in October for this factory? 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 72.83% 3. Hoosier Manufacturing operates a production shop that is designed to have the lowest unit production cost at an output rate of 100 units per hour. In the month of July, the company operated the production line for a total of 175 hours and produced 16,900 units of output. What was its capacity utilization rate for the month? 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 57% 4. AlwaysRain Irrigation, Inc., would like to determine capacity requirements for the next four years. Currently two production lines are in place for making bronze and plastic sprinklers. Three types of sprinklers are available in both bronze and plastic: 90-degree nozzle sprinklers, 180-degree nozzle sprinklers, and 360-degree nozzle sprinklers. Management has forecast demand for the next four years as follows: Both production lines can produce all the different types of nozzles. The bronze machines needed for the bronze sprinklers require two operators and can produce up to 12,000 sprinklers. The plastic injection molding machine needed for the plastic sprinklers requires four operators and can produce up to 200,000 sprinklers. Three bronze machines and only one injection molding machine are available. What are the capacity requirements for the next four years? (Assume that there is no learning.) Solution: Plastic Demand for plastic sprinklers Percentage of capacity used Machine requirements Labor requirements Year 1 97 48.5% .485 1.94 Year 2 115 57.5% .575 2.30 Year 3 136 68.0% .680 2.72 Year 4 141 70.5% .705 2.82 Bronze Year 1 Year 2 Year 3 Year 4 Demand for bronze sprinklers 21 24 29 34 Percentage of capacity used 58.3% 66.7% 80.6% 94.4% Machine requirements 1.75 2.00 2.42 2.83 Labor requirements 3.50 4.00 4.83 5.66 There is sufficient capacity to meet expected demand over the 4-year planning horizon. The only concern might be year 4 on the bronze line. Capacity is approaching 100% in that year, and forecast error might lead to an over-capacity situation. It is probably not a large concern at this point in time, but management should pay special attention to that point in time as forecasts are updated in the future. 5. Requirements for plastic remain unchanged. Bronze Year 1 Year 2 Year 3 Year 4 Demand for bronze sprinklers 32 36 41 52 Percentage of capacity used 88.9% 100.0% 113.9% 144.4% Machine requirements 2.67 3 3.42 4.33 Labor requirements 5.33 6 6.83 8.67 It is obvious that not enough capacity is available after year two to meet the increased demand. AlwaysRain will have to consider purchasing additional machines for the bronze operations. 6. Bronze Year 1 Year 2 Year 3 Year 4 Demand for bronze sprinklers 32 36 41 52 Percentage of capacity used 66.67% 75.00% 85.42% 108.33% Machine requirements 2.67 3.00 3.42 4.33 Labor requirements 5.33 6.00 6.83 8.67 No. An additional machine will provide enough capacity cushion until the third year. AlwaysRain must consider additional ways of meeting the fourth year demand. This can include purchasing or leasing an additional machine, or outsourcing some of the demand. 7. Year 1 Year 2 Year 3 Year 4 Labor requirements-bronze 5.33 6.00 6.83 8.67 Labor requirements-plastic 1.94 2.30 2.72 2.82 Total labor requirements 7.27 8.30 9.55 11.49 AlwaysRain will face a problem of not having enough trained personnel for running the equipment after the third year. At that time, they will need to either hire new trained employees or initiate a training program for existing employees from other workstations who can be utilized at the bronze or plastic molding machines. 8. For the small facility, NPV = .40 ($12 Million) + .60 ($10 Million) - $6 Million = $4.8 Million Do nothing, NPV = $0 For the large facility NPV = .40($14 Million) + .60($10 Million) - $9 Million = $2.6 Million Therefore, build the small facility. 9. The “Do Nothing” option is included here for completeness. Rezoned shopping center (includes $1.0 rezoning costs): Point 1: Expected value = .70($4 Million) + .30($5 Million) - $1.0 million = $3.3 Million Rezoned apartments: Point 2: Expected value = .60($4.5 Million) + .40($3 Million) - $1.0 million = $2.9 Million Since a shopping center has more value, prune the apartment choice. In other words, if rezoned, build a shopping center with a revenue of $4.3 Million - $1 Million = $3.3 Million. (The purchase cost could be included here if desired, but would need to be included in the calculations for all development options. This solution shows it at the leftmost part of the tree.) If not rezoned the revenue will be $2.4 million from building homes: Point 3: Expected value of developing the land is .6*($3.3 million) + .4*($2.4 million) = $2.94 million. Expected profit of buying and developing the land is $2.94 million - $2 million purchase cost = $940,000. Since this is a positive expected value, prune the option of doing nothing. 10. A local restaurant is concerned about their ability to provide quality service as they continue to grow and attract more customers. They have collected data from Friday and Saturday nights, their busiest time of the week. During these time periods about 75 customers arrive per hour for service. Given the number of tables and chairs, and the typical time it takes to serve a customer, they figure they can serve on average about 100 customers per hour. During these nights, are they in the zone of service, the critical zone, or the zone of non-service? 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 75% According to the text, this restaurant is in the critical zone on these nights. 11. The restaurant in the prior problem anticipates that in one year, their demand will double as long as they can provide good service to their customers. How much will they have to increase their service capacity to stay out of the critical zone? If demand doubles, they will be receiving about 150 customers per hour on average. Find the service rate necessary to result in a utilization rate of 70%. 150 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑢𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 70% ⟹ 𝜇 = 214.3 𝜇 Therefore, the restaurant will have to increase capacity to at least 215 customers per hour to stay out of the critical zone. That will be quite an expansion. Case: Shouldice Hospital - A Cut Above 1. Mon. - Fri. Operations with 90 beds (30 patients per day) Beds Required Monday Tuesday Wednesday Thursday Friday Saturday Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sunday 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 Total 60 90 90 90 60 30 30 450 Utilization 66.7% 100.0% 100.0% 100.0% 66.7% 33.3% 33.3% 71.4% Check-in On 2. Mon. - Sat. Operations with 90 beds (30 patients per day) Beds Required Monday Tuesday Wednesday Thursday Friday Saturday Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sunday Total 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 30 60 90 90 90 90 60 60 540 Utilization 66.7% 100.0% 100.0% 100.0% 100.0% 66.7% 66.7% 85.7% Check-in On 3. Mon. - Fri. Operations with 135 beds (minimum) Beds Required Monday Tuesday Wednesday Thursday Friday Saturday Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sunday Total 45 45 45 45 45 45 45 45 45 45 45 45 45 45 45 90 135 135 135 90 45 45 675 Utilization 66.7% 100.0% 100.0% 100.0% 66.7% 33.3% 33.3% 71.4% Check-in On Can the capacity of the rest of Shouldice keep up? One operating room can handle about 1 patient every hour. Since there are five operating rooms, each must be able to handle 45/5 or 9 patients per day. This means they must be operated 9 hours a day. In order to finish operating early enough for all patients to recover by the evening, Shouldice would probably have to add operating room capacity although it might be easy to just start earlier in the day. With 45 patients each day the total number of operations each week is 225. The 12 surgeons would need to do between 18 and 19 each week or between 3 and 4 a day. This should be feasible and even if it were not Shouldice could hire some additional surgeons. These guys would be making over $450,000/year (3 ops/day x 5 days/week x 50 weeks/yr x $600 = $450,000)! 4. Using the financial data given in the fourth discussion question it is easy to justify the expansion to 135 beds. The following is the analysis as presented in the spreadsheet. Based on average costs and full capacity utilization, the hospital would pay back its investment in about 86 weeks, or 1.72 years. Beds Required Mon Tues Wed Thurs Fri Sat Sun 45 45 45 45 45 45 45 45 45 45 45 45 45 45 45 90 135 135 135 90 45 45 675 Mon Tues Wed Check-in day Thurs Fri Sat Sun Total Beds Total 66.7% 100.0% 100.0% 100.0% 66.7% 33.3% 33.3% 71.4% 135 Utilization Operating Rooms Operations 45 5 Oper/Room 9 Surgeons 12 Oper/Surg 3.75 Cost of expansion Beds 45 Cost/Bed $100,000 Total $4,500,000 Incremental Rev/Oper Revenue $1,300 Surgeon $600 Incr Rev $700 Additional Oper/Week 75 Rev/Week $52,500 Payback 85.7 Weeks Solution Manual for Operations and Supply Chain Management F. Robert Jacobs, Richard B. Chase 9780078024023, 9780077824921, 9781260238907, 9780077228934, 9781259666100