Exam 2 Review Sheet with answers PDF

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Exam 2 Review Sheet Exam 2 Overview will summarize the topics covered. Solve the Practice Problems for the numerical examples that are related to the class work. (Sample quizzes/tests are available also in the Chapter Resources section, however attempt only the topics covered in the class.) There are 30 multiple choice questions in Exam 2, of which 10 will require numerical calculations.

Inventory Management - Chapter 12- Part 1 

Know the various types of inventory, its use and functions Raw material: Purchased but not processed, Work-in-process (WIP): Undergone some change but not completed, a function of cycle time for a product, Finished goods: Completed product awaiting shipment Maintenance/repair/operating (MRO): Necessary to keep machinery and processes productive. Examples of inventory include department stores, stockroom/warehouse, grocery store, and auto work in process. Inventory investment and customer service is very important. One of the most expensive assets of many companies representing as much as 50% of total invested capital, less inventory lowers costs but increases chances of running out. More inventory raises costs but always keeps customers happy. Inventory functions: To provide a selection of goods for anticipated demand and to separate the firm from fluctuations in demand, to decouple or separate various parts of the production process, to take advantage of quantity discounts, to hedge against inflation.

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Be able to distinguish dependent from independent demand Independent demand: the demand for item is independent of the demand for any other item in inventory. Dependent demand: the demand for item is dependent upon the demand for some other item in the inventory.

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ABC analysis, its basic premise and use ABC analysis classifies inventory. Divides inventory into three classes based on annual dollar volumeClass A - high annual dollar volume, Class B - medium annual dollar volume, & Class C - low annual dollar volume. Used to establish policies that focus on the few critical parts and not the many trivial ones. ABC analysis is also used to figure out, delivery problems, quality problems, high shortage or holding cost, & anticipated engineering changes. ABC policies include, more emphasis on supplier development for A items, ore care in forecasting A items, & tighter physical inventory control for A items.

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Cycle counting and its use for inventory accuracy Items are counted and records updated on a periodic basis, often used with ABC analysis Has several advantages: eliminates shutdowns and interruptions, eliminates annual inventory adjustment, trained personnel audit inventory accuracy, allows causes of errors to be identified and corrected, & maintains accurate inventory records.

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EOQ model: Calculate EOQ (Optimal lot size quantity), maximum and average inventory levels, # of orders per year and the time between orders. Calculation of annual holding costs and annual ordering costs. Assumptions made when using the EOQ model. Important assumptions: Demand is known, constant, and independent, lead time is known and constant, receipt of inventory is instantaneous and complete, quantity discounts are not possible, only variable

costs are setup (or ordering) and holding, & stock-outs can be completely avoided. EOQ examples on slides 35-38. The following Formulae will be given in the Exam: Total Annual Relevant Costs = Annual setup costs + Annual holding costs

Practice Problems: Chapter 12, Inventory Management Problem 1: ABC Analysis

Stock Number

Annual $ Volume

Percent of Annual $ Volume

J24

12,500

46.2

R26

9,000

33.3

L02

3,200

11.8

M12

1,550

5.8

P33

620

2.3

T72

65

0.2

S67

53

0.2

Q47

32

0.1

V20

30

0.1

 = 100.0

What are the appropriate ABC groups of inventory items, assuming that: - Class A items cover about 80% of the annual $ volume - Class B items cover about 15% of the annual $ volume - Class C items cover the rest of the annual $ volume

ANSWER:

ABC Groups

Class

Items

Annual Volume

Percent of $ Volume

A

J24, R26

21,500

79.5

B

L02, M12

4,750

17.6

C

P33, T72, S67, Q47, V20

800

2.9

 = 100.0

Problem 2: Assume you have a product with the following parameters: Demand  360

Holding cost per year $1.00 per unit

Cost of the product = $4.00 per unit

Order cos t: $100 per order a) What is the Economic Order Quantity (EOQ)? b) How many orders should be processed per year? c) Assuming a 300-day work year; what is the expected time between orders? d) What is the total cost for the inventory policy used? ANSWER:

a) EOQ  b) N  c) T 

2* Demand * Order cost Holding cost



2* 360* 100 1

 72000  268 items

Demand 360  134 . orders per year Q 268

Working days  300 / 134 .  224 days between orders Expected number of orders

d)

Demand *Order Cost (Quantity of Items ) *(Holding Cost ) 360 * 100 268 * 1 TC     134  134 $268 Q 2 268 2 = $268 Problem 3: We need 1,000 electric drills per year. The ordering cost for these is $100 per order and the carrying cost is assumed to be 40% of the per unit cost. The drills cost $78 per unit. a) What is the Economic Order Quantity (EOQ)? b) How many orders should be processed per year? c) Assuming a 300-day work year; what is the expected time between orders? ANSWER: a) Q*p ($78) 

(2 )(1000 )(100 ) 80 units ( 0.4)( 78)

b) N = Demand / Q = 1000 / 80 = 12.5 orders per year c) T = Working Days / Expected number of orders = 300 / 12.5 = 24 days Problem 4: Annual demand in a Distribution Center for a Coffee Maker is 6,000 units per year. The company purchases 500 units every month. The Total cost (that includes Ordering + Holding) is $2,000 per year, of which the cost of Holding is $1,500 per year. a) What is the yearly cost of ordering? b) Is the Economic Order Quantity higher or lower than the current order quantity of 500 units? ANSWER: a) Yearly cost of ordering = Yearly Total Cost – Yearly Holding cost = $2,000 - $1,500 = $500 ( Note that the Holding cost is more than the Ordering cost, where as the two costs are the same at the point of EOQ.) b) Economic Order Quantity is lower than the current order quantity of 500 units. See the chart saved in OMIS 338 folder.

Inventory Management - Chapter 12- part 2   

Understand the impact on quantity discount models by different factors such as ordering cost, carrying cost and product cost; and related their trade-offs – know the logic of calculations. Calculate the Reorder point and safety stock for given probability distribution with standard deviation (or variance) for the demand over lead time or standard deviation for the demand and given lead time. Calculate Inventory Turns and Days of Inventory as a measure of Inventory performance The following Formulae will be given in the Exam: - z table for service level or stockout level will be given ROP = (d x L) + Safety stock Mean of X = Mean Demand over Lead time = (d x L) Std Dev of demand over lead timedlt = d x SQRT(Lead time) d is Std Dev of daily demand Safety stock = Z x dlt = Z x d x SQRT(Lead time)

Inventory Turns = (Cost of Goods Sold) / Average Inventory Days of Inventory = (365 days per year) / Inventory Reorder Point Practice Problems Problem 1: ABC Company sells a line of office furniture which includes a very popular swivel chair with height adjustment. The average daily demand is constant at 5 chairs and the lead time to receive an order is 7 days. The manager wants to maintain a safety stock of 15 chairs. a) What is the reorder point? b) If the daily demand was variable averaging 5 chairs per day and the standard deviation of demand over the lead time was 7 chairs, what would be the service level with the policy of 15 chairs of safety stock?

ANSWER: a) ROP = (d x L) + Safety stock ROP = 5 chairs x (7 days) + 15 chairs = 50 chairs b) Safety stock = Z x ( Std Dev of demand over the lead time) = Z x dlt 15 = Z x 7, therefore Z = 15 /7 = 2.14 From the standard normal distribution table, for z = 2.14, cumulative probability is 98.38%. Therefore, the service level is 98.38% and the risk of stock out is 1.62% (100% -98.38%).

Problem 2:

A Water Treatment operation has daily usage of salt at 1000 lbs per day. The demand is normally distributed and has a standard deviation of 90 lbs per day. The lead-time to get salt is 4 days. The operations manager has set the ROP at 4200 lbs. What is the service level and what is the risk of stock-out? ANSWER: ROP = (d x L) + Z x d x SQRT(Lead time) 4200 = (1000 x 4) + Z (90) SQRT( 4) Z = ( 4200 – 4000) / (90 x 2) = 200/180 = 1.11 From the standard normal distribution table, for Z = 1.11 cumulative probability is 86.65% Therefore, the service level is 86.65% and the risk of stock out is 13.35% (100% -86.65%).

Problem 3: The average daily demand for Apple iPods at a local store is 15 with a standard deviation of 5 units. The lead time is constant at 2 days. Find the reorder point if the manager wants a 90% service level (i.e., risk of stockout during the lead time period is 10%).

ANSWER: ROP = (d x L) + Safety stock Safety stock = Z x dlt = Z x d x SQRT(Lead time) From the standard normal distribution table, Z = 1.28 for a 90% service level. Safety stock = 1.28 x 5 x 2 = 9.05 units ( In practice, units of hard goods are rounded up to 10) ROP = 15 * 2 + Safety Stock = 30 units + 9.05 units = 39.05 units (or 40 units rounded up) At this ROP level, the service level is 90% which means the probability of stock out is 10% (100% - 90%).

Problem 4: A manager is reordering chemistry ink cartridges when the amount on-hand reaches the reorder point of 200, that provides 93.3 % service level (z = 1.5). The lead time for ordering is 16 days. Average daily usage of the test kits is 10 kits and is normally distributed. What is the Standard Deviation of the Daily usage? ANSWER: ROP = (d x L) + Safety stock 200 = 10 x 16 + Safety Stock Safety Stock = 200 – 160 = 40 units Safety stock = Z x dlt = Z x d x SQRT(Lead time) 40 = 1.5 x d x SQRT (16) Standard Deviation of the Daily usaged = 40 / (1.5 x SQRT (16)) = 40 / 6 = 6.67 units

Problem 5:

The new startup auto company, Tesla, makes environmentally friendly electric cars that run on only batteries. Tesla had sales of $413M in the year 2012. Their Cost of Revenue (or Cost of Goods sold) was $383M for 2012. Tesla’s Inventory level was $269 on Dec 31, 2012 and $159 on Sept 30, 2012. How many days of Inventory does Tesla have for the period ending 4 quarter of 2012? ANSWER: Average 4th qtr Inventory = (Dec 31 2012 Inventory + Sept 30 2012 Inventory) / 2 = ($269M + $159M) / 2 = $214M Inventory Turns

= (Cost of Goods Sold) / Average Inventory = $383M / $214M = 1.79 Turns

Days of Inventory = (365 days per year) / Inventory Turns = 365 / 1.79 = 204 days

Quality Management, Ch. 6 

Understand the definition and dimensions of quality o The ability of a product or service to meet and exceed customer expectations - It is customer view of quality, product characteristics & features that affect customer satisfaction, product conforming to design specification, services provided meeting and exceeding expectations. An operations manager’s objective is to build a total quality management system that identifies and satisfies customer needs. The totality of features and characteristics of a product or service that bears on its ability to satisfy stated or implied needs. Managing quality supports differentiation, and response strategies, quality helps firms increase sales and reduce costs. Quality improves profitability via sales gains and reduced costs. Dimensions of quality - For a Product - Laptop computer. Customer view - Features, Performance to specification, Reliability, Ruggedness, Appearance, Packaging, On-time delivery, handing off product to the Customer, Getting the Computer started, Ease of Use, Customer Service help desk, Customer Service Technical support, Customer Repair center service time. Operations view – Ease of manufacturing (Cycle time) , First time yield in manufacturing (Repair cost and scrap), Quality administration costs, Design for manufacturing, Supplier rejects/on-time delivery/costs, Operations overhead costs, Logistics costs. Society view – Recycling of batteries and scrapped computers. Implications of quality: Company reputation- perception of new products, employment practices, & supplier relations. Product liability- Reduce risk. Global implications- Improved ability to compete

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Understand ways to improve quality and what is included in cost of quality

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Know various concepts of TQM that improve quality and understand their approaches o Encompasses entire organization from supplier to customer. Stresses a commitment by management to have a continuing companywide drive toward excellence in all aspects of products and services that are important to the customer. Concepts of TQM: Continuous improvement, Six Sigma, Employee empowerment, Benchmarking, Just-in-time (JIT), Taguchi concepts, & Knowledge of TQM tools. Used to describe continuous improvement.

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Understand the Six Sigma program o Product and Service view: Statistical definition of a process that is 99.9997% capable, allow only 3.4 defects per million opportunities (DPMO). A quality program designed to reduce defects, lower costs, save time, and improve customer satisfaction. Sigma Six is a comprehensive system for achieving and sustaining business success. Sigma six program was originally developed by Motorola, adopted and enhanced by Honeywell and GE. It is a highly structured approach to process improvement- A strategy, A discipline – DMAIC: (Defines the project’s purpose, scope, and outputs, then identifies the required process information keeping in mind the customer’s definition of quality. Measures the process and collects data. Analyzes the data ensuring repeatability and reproducibility. Improves by modifying or redesigning existing processes and procedures& Controls the new process to make sure performance levels are maintained) , & A set of 7 tools: (Tools for generating ideas: check sheet, scatter diagram, casue-and-efftect diagram, Tools to organize the data: pareto chart, flow chart, Tools for identifying problems: histogram, and statistical process control chart. Implementing of six sigma, Emphasize defects per million opportunities as a standard metric, provides extensive training, Focuses on top management leadership (Champion), Creates qualified process improvement experts (Black Belts, Green Belts, etc.), & Set stretch objectives.

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Taguchi techniques promote robustness within product and process design o Engineering and experimental design methods to improve product and process design. Identify key component and process variables affecting product variation. Taguchi Concepts: Targetoriented quality & Quality robustness: Ability to produce products uniformly in adverse manufacturing and environmental conditions

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Understand what Poka-yoke attempts to accomplish o The concept of foolproof devices or techniques designed to pass only acceptable products. (Failsafing- design so that the defect never happens ex: USB can’t be put into the computer any other way, only one way it can go). Used primarily for managing safety in work environment. Formalize in Japan by Shigeo Shingo in the 60’s. A foolproof device or mechanism that prevent defects from occurring. Generally cheap, provide immediate feedback, and become part of the process

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Understand the basic purpose and methodology for each of the seven tools of quality, such as Pareto chart, Cause and Effect diagram, etc. and how they are used. o Check sheet- an organized method of recording data. Tools for generating ideas. (tally marks). Scatter diagram- a graph of the value of one variable vs. another variable. Tools for generating ideas. Cause and effect diagram- a tool that identifies process elements (causes) that may effect an outcome. Also known as the fishbone or ishakawa diagram. Pareto chart- a graph that identify and plot problems or defects in descending order or frequency. Tools to organize data. Flow chart- a chart that describes the steps in a process and their relationship. Process diagram. Tool to organized data. Histogram- a distribution showing the frequency of occurrences of a variable. Tools for identifying problems. Statistical process control chart- a chart with time on the horizontal axis to plot values of a statistic. Tool for identifying problems. Uses statistics and control charts to tell when to take corrective action, drives process improvement, 4 key steps: Measure the process – Take a sample, when a change is indicated, find the assignable cause, Eliminate or incorporate the cause, and then restart the revised process.

Statistical Process Control, Ch. 6S 

Know the difference between natural and assignable causes of variation o Natural Variations: Natural (random) variation inherent in any process, output measures follow a probability distribution, system is “in control”, when distribution of output falls within acceptance limits. Assignable Cause: Non-random (assignable) variation due to identifiable factors, can be identified and eliminated through operator or management action. o To measure the process, we take samples and analyze the sample statistics following these steps: 1. Samples of the product, say five boxes of cereal taken off the filling machine line, vary from each other in weight. 2. After enough samples are taken from a stable process, they form a pattern called a distribution. 3. There are many types of distributions, including the normal (bellshaped) distribution, but distributions do differ in terms of central tendency (mean), standard deviation or variance, and shape. 4. If only natural causes of variation are present, the output of a process forms a distribution that is stable over time and is predictable. 5. If assignable causes are present, the process output is not stable over time and is not predicable.

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Know the difference between attribute and variable data o Attribute Data (Qualitative Data)- Product characteristic evaluated with a discrete choice. Good/bad, acceptable/unacceptable. Variable Data (Quantitative Data)- Product characteristic that can be measured on a continuous scale. Length, size, weight, height, time, velocity

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Know which charts are used for each type of data ( p, X bar and R bar) o x-chart tracks changes in the central tendency. Average value of the variable. R-chart indicates a gain or loss of dispersion. Variation among items. Type of variables control chart, shows sample ranges over time, difference between smallest and largest values in sample, monitors process variability, independent from process mean. P-chart tracks percentage defect in a sample and is used for attribute data.

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Be able to determine when a process is in control and/or out of control o Process is in control when: No sample points outside limits, most points near process average, about equal # points above & below centerline, and points appear randomly distributed. One plot out of chart, so investigate for cause....