Production and Operations Analysis

Sixth Edition

Steven Nahmias
Santa Clara University

Me Graw Hill
Boston Burr Ridge, IL Dubuque, IA Madison, Wl New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

Contents
About the Author xv Preface xvi Introduction xvii
Chapter 1
1.11 Capacity Growth Planning: A Long-Term Strategic Problem 38
Economies of Scale and Economies of Scope 38 Make or Buy: A Prototype Capacity Expansion Problem 39 Dynamic Capacity Expansion Policy 40 Issues in Plant Location 44 Problems for Section 1.11 46

Strategy and Competition 1

Chapter Overview 1 Snapshot Application: Apple Adopts a New Business Strategy and Shifts Its Core Competency from Computers to Portable Music 3 1.1 Manufacturing Matters 5 Manufacturing Jobs Outlook 6 1.2 A Framework for Operations Strategy 7 Strategic Dimensions 8 1.3 The Classical View of Operations Strategy S Time Horizon 9 Focus 11 Evaluation 12 Consistency 12 1.4 Competing in the Global Marketplace 14 Problems for Sections 1.1-1.4 16 Snapshot Application: Global Manufacturing Strategies in the Automobile Industry 17 1.5 Strategic Initiatives: Reengineering the Business Process 18 1.6 Strategic Initiatives: Just-in-Time 21 1.7 Strategic Initiatives: Time-Based Competition 23 1.8 Strategic Initiatives: Competing on Quality 24 Problems for Sections 1.5-1.8 26 1.9 Matching Process and Product Life Cycles 27 The Product Life Cycle 2 7 The Process Life Cycle 28 The Product-Process Matrix 29 Problems for Section 1.9 31 1.10 Learning and Experience Curves 31 Learning Curves 32 Experience Curves 34 Learning and Experience Curves and Manufacturing Strategy 36 Problems for Section 1.10 36

1.12 Summary 47
Additional Problems for Chapter 1 48

Appendix 1-A Present Worth Calculations 50 Bibliography 51

Chapter 2 Forecasting

52

Chapter Overview 52 2.1 The Time Horizon in Forecasting 55 2.2 Characteristics of Forecasts 56 2.3 Subjective Forecasting Methods 56 2.4 Objective Forecasting Methods 57
Causal Models 57 Time Series Methods 58 Snapshot Application: Advanced Forecasting, Inc., Serves the Semiconductor Industry 59 Problems for Sections 2.12.4 59

2.5 2.6
2.7

Notation Conventions 61 Evaluating Forecasts 61

Problems for Section 2.6 63 Methods for Forecasting Stationary Series 64 Moving Averages 64 Problems on Moving Averages 67 Exponential Smoothing 67 Multiple-Step-Ahead Forecasts 71 Comparison of Exponential Smoothing and Moving A verages 72 Problems for Section 2.7 73 Snapshot Application: Sport Obermeyer Slashes Costs with Improved Forecasting 74 Trend-Based Methods 75 Regression Analysis 75 Problems for Section 2.8 76 Double Exponential Smoothing Using Holt's Method 77 More Problems for Section 2.8 78

2.8

viii Contents

Methods for Seasonal Series 79 Seasonal Factors for Stationary Series 79 Seasonal Decomposition Using Moving Averages 81 Problems for Section 2.9 83 Winters s Methodfor Seasonal Problems 84 More Problems for Section 2.9 89 2.10 Box-Jenkins Models 89 Estimating the Autocorrelation Function 90 The Autoregressive Process 93 The Moving-Average Process 94 Mixtures: ARMA Models 96 ARIMA Models 96 Using ARIMA Models for Forecasting 98 Summary of the Steps Requiredfor Building ARIMA Models 99 Case Study: Using Box-Jenkins Methodology to Predict Monthly International Airline Passenger Totals 100 Snapshot Application: A Simple ARIMA Model Predicts the Performance of the U.S. Economy 104 Box-Jenkins ModelingA Critique 104 Problems for Section 2.10 104 2.11 Practical Considerations 105 Model Identification and Monitoring 105 Simple versus Complex Time Series Methods 106 2.12 Overview of Advanced Topics in Forecasting 107 Simulation as a Forecasting Tool 107 Forecasting Demand in the Presence of Lost Sales 108 2.d.3 Linking Forecasting and Inventory Management 110 Snapshot Application: Predicting Economic Recessions 111 2.14 Historical Notes and Additional Topics 112 2.15 Summary 113 Additional Problems on Forecasting 113 Appendix 2-A Forecast Errors for Moving Averages and Exponential Smoothing 118 Appendix 2-B Derivation of the Equations for the Slope and Intercept for Regression Analysis 120 Appendix 2-C Glossary of Notation for Chapter 2 122 Bibliography 122

2.9

Chapter 3 Aggregate Planning

124

Chapter Overview 124 3.1 Aggregate Units of Production 127 3.2 Overview of the Aggregate Planning Problem 128 3.3 Costs in Aggregate Planning 130 Problems for Sections 3.1-3.3 132 3.4 A Prototype Problem 133 Evaluation of a Chase Strategy (Zero Inventory Plan) 135 Evaluation of the Constant Workforce Plan 136 Mixed Strategies and Additional Constraints 138 Problems for Section 3.4 139 3.5 Solution of Aggregate Planning Problems by Linear Programming 141 Cost Parameters and Given Information 141 Problem Variables 142 Problem Constraints 142 Rounding the Variables 143 Extensions 144 Other Solution Methods 146 3.6 Solving Aggregate Planning Problems by Linear Programming: An Example 147 Problems for Sections 3.5 and 3.6 149 3.7 The Linear Decision Rule 152 3.8 Modeling Management Behavior 153 Problems for Sections 3.7 and 3.8 155 3.9 Disaggregating Aggregate Plans 155 Snapshot Application: Welch's Uses Aggregate Plann ingfor Production Scheduling 157 Problems for Section 3.9 158 3.10 Production Planning on a Global Scale 158 3.11 Practical Considerations 159 3.12 Historical Notes 160 3.13 Summary 161 Additional Problems on Aggregate Planning 162 Appendix 3-A Glossary of Notation for Chapter 3 167 Bibliography 168

Supplement 1 Linear Programming 169

51.1 Introduction 169 51 .2 A Prototype Linear Programming Problem 169 51.3 Statement of the General Problem 171 Definitions of Commonly Used Terms 172 Features of Linear Programs 173

Contents

ix

ST.4 Solving Linear Programming Problems Graphically 174 Graphing Linear Inequalities 174 Graphing the Feasible Region 176 Finding the Optimal Solution 177 Identifying the Optimal Solution Directly by Graphical Means 179 51.5 The Simplex Method: An Overview 180 51.6 Solving Linear Programming Problems with Excel 181 Entering Large Problems Efficiently 185 51.7 Interpreting the Sensitivity Report 187 Shadow Prices 187 Objective Function Coefficients and RightHand Sides 188 Adding a New Variable 188 Using Sensitivity Analysis 189 51.8 Recognizing Special Problems 191 Unbounded Solutions 191 Empty Feasible Region 192 Degeneracy 194 Multiple Optimal Solutions 194 Redundant Constraints 194 51.9 The Application of Linear Programming to Production and Operations Analysis 195 Bibliography 197

Summary, of the Solution Technique for AlUUnits Discounts 223 Incremental Quantity Discounts 223 Summary, of the Solution Technique for Incremental Discounts 225 Other Discount Schedules 225 Problems for Section 4.7 226 *4.8 Resource-Constrained Multiple Product Systems 227 Problems for Section 4.8 230 4.9 EOQ Models for Production Planning 230 ProblemsfanSection 4.9 234 4.10 Power-of-Two Policies 235 4.11 Historical Notes and Additional Topics 237 Snapshot Application: Mervyn 's Recognized for State-of-the-Art Inventory Control System 238 4.12 Summary 239 Additional Problems on Deterministic Inventory Models 240 Appendix 4-A Mathematical Derivations for Multiproduct Constrained EOQ Systems 244 Append ix 4-B Glossary of Notation for Chapter 4 246 Bibliography 246

Chapter 5 Chapter 4

Inventory Control Subject to Known Demand 198

Chapter Overview 198 4.1 Types of Inventories 201 4.2 Motivation for Holding Inventories 202 4.3 Characteristics of Inventory Systems 203 4.4 Relevant Costs 204 Holding Cost 204 Order Cost 206 Penalty Cost 207 Problems for Sections 4.1-4.4 208 4.5 The EOQ Model 210 The Basic Model 210 Inclusion of Order Lead Time 213 Sensitivity 214 EOQ and JIT 215 Problems for Section 4.5 216 4.6 Extension to a Finite Production Rate 218 Problems for Section 4.6 219 4.7 Quantity Discount Models 220 Optimal Policyfor All-Units Discount Schedule 221

Inventory Control Subject to Uncertain Demand 248

Chapter Overview 248 Overview of Models Treated in This Chapter 252 5.1 The Nature of Randomness 253 5.2 Optimization Criterion 255 Problems for Sections 5.1 and 5.2 256 5.3 The Newsboy Model 257 Notation 257 Development of the Cost Function 258 Determining the Optimal Policy 259 Optimal Policy for Discrete Demand 261 Extension to Include Starting Inventory 261 Snapshot Application: Using Inventory Models to Manage the Seed-Corn Supply Chain at Syngenta 262 Extension to Multiple Planning Periods 263 Problems for Section 5.3 264 5.4 Lot Size-Reorder Point Systems 266 Describing Demand 267 Decision Variables 267

x Contents

Derivation of the Expected Cost Function 267 The Cost Function 269 Inventory Level versus Inventory Position 271 5.5 Service Levels in (Q, R) Systems 272 Type 1 Service 272 Type 2 Service 273 Optimal (Q, R) Policies Subject to Type 2 Constraint 274 Imputed Shortage Cost 275 Scaling of Lead Time Demand 2 76 Estimating Sigma When Inventory Control and Forecasting A re Linked 2 76 *Lead Time Variability 277 Calculations in Excel 278 Negative Safety Stock 2 78 Problems for Sections 5.4 and 5.5 279 5.6 Additional Discussion of Periodic-Review Systems 281 (s, S) Policies 281 *Service Levels in Periodic-Review Systems 281 Problems for Section 5.6 282 Snapshot Application: Tropicana Uses Sophisticated Modeling for Inventory Management 283 5.7 Multiproduct Systems 283 ABCAnalysis 283 Exchange Curves 285 Problems for Section 5.7 288 *5.8 Overview of Advanced Topics 289 Multi-echelon Systems 289 Perishable Inventory Problems 290 Snapshot Application: Triad's Inventory Systems Meet Markets 'Needs 291

Chapter 6 Supply Chain Management 311

Chapter Overview 311 The Supply Chain as a Strategic Weapon 315 Snapshot Application: Wal-Mart Wins with Solid Supply Chain Management 316 6.1 The Transportation Problem 316 The Greedy Heuristic 319 6.2 Solving Transportation Problems with Linear Programming 320 6.3 Generalizations of the Transportation Problem 322 Infeasible Routes 323 Unbalanced Problems 323 6.4 More General Network Formulations 324 Problems for Sections 6.1-6.4 327 Snapshot Application: IBM Streamlines Its Supply Chain for Spare Parts Using Sophisticated Mathematical Models 328 6.5 Distribution Resource Planning 330 Problems for Section 6.5 332 6.6 Determining Delivery Routes in Supply Chains 332 Practical Issues in Vehicle Scheduling 336 Snapshot Application: Air Products Saves Big with Routing and Scheduling Optimizer 337 Problems for Section 6.6 337 6.7 Designing Products for Supply Chain Efficiency 338 Postponement in Supply Chains 339 Additional Issues in Supply Chain Design 340 Snapshot Application: Dell Computer Designs the Ultimate Supply Chain 342 Problems for Section 6.7 342 6.8 The Role of Information in the Supply Chain 343 The Bullwhip Effect 344Snapshot Application: Saturn Emerges as an Industry Leader with Scientific Supply Chain Management 347 Electronic Commerce 347 Electronic Data Interchange 348 Web-Based Transactions Systems 349 RFID Technology Provides Faster Product Flow 350 Problems for Section 6.8 351 6.9 Multilevel Distribution Systems 351 Problems for Section 6.9 354

5.9

Historical Notes and Additional Readings 292 5.10 Summary 293

Additional Problems on Stochastic Inventory Models 294

Appendix 5-A Notational Conventions and Probability Review 300 Appendix 5-B Additional Results and Extensions for the Newsboy Model 301 Appendix 5-C Derivation of the Optimal (Q,R) Policy 304 Appendix 5-D Probability Distributions for Inventory Management 304 Appendix 5-E Glossary of Notation for Chapter 5 308 Bibliography 309

Contents

xi

6.10 Designing the Supply Chain in a Global

Environment 355 Snapshot Application: Norwegian Company Implements Decision Support System to Streamline Its Supply Chain 356 Snapshot Application: Timken Battles Imports with Bundling 358 Supply Chain Management in a Global Environment 359 Snapshot Application: Digital Equipment Corporation Uses Mathematical Modeling to Plan Its Global Supply Chain 360 Trends in Offshore Outsourcing 360 Problems for Section 6.10 361 6.11 Summary 362 Bibliography 362

Implementation of JIT in the United States 401 Problems for Section 7.6 402

7.7 7.8 7.9

A Comparison of MRP and JIT 403 JIT or Lean Production? 404 Historical Notes 405
Additional Problems for Chapter 7 407

7.10 Summary 406

Appendix 7-A Optimal Lot Sizing for Time-Varying Demand 411 Appendix 7-B Glossary of Notation for Chapter 7 415 Bibliography 416

Chapter 8 Operations Scheduling

417

Chapter 7 Push and Pull Production Control Systems: MRP and JIT 364
Chapter Overview 364
MRP Basics 367 JIT Basics 369 The Explosion Calculus 370 Problems for Section 7.1 374 Alternative Lot-Sizing Schemes 376 EOQ Lot Sizing 376 The Silver-Meal Heuristic 377 Least Unit Cost 378 Part Period Balancing 3 79 Problems for Section 7.2 380 Incorporating Lot-Sizing Algorithms into the Explosion Calculus . 382 Problems for Section 7.3 383 Lot Sizing with Capacity Constraints 384 Problems for Section 7.4 387 Shortcomings of MRP 388 Uncertainty 388 Capacity Planning 389 Rolling Horizons and System Nervousness 390 Additional Considerations 392 Snapshot Application: Raymond Corporation Builds World-Class Manufacturing with MRP II 393 Problems for Section 7.5 394 JIT Fundamentals 395 The Mechanics ofKanban 395 Single Minute Exchange of Dies 397 Advantages and Disadvantages of the Justin-Time Philosophy 398

Chapter Overview 417 8.1 Production Scheduling and the Hierarchy of Production Decisions 420 8.2 Important Characteristics of Job Shop Scheduling Problems 422
8.3 Objectives of Job Shop Management 422 Job Shop Scheduling Terminology 423

8.4

7.1 7.2

A Comparison of Specific Sequencing Rules 425

First-Come, First-Served 425 Shortest Processing Time 426 Earliest Due Date 426 Critical Ratio Scheduling 427 Objectives in Job Shop Management: An Example 428 Problems for Sections 8.1-8.5 429 An Introduction to Sequencing Theory for a Single Machine 430 Shortest-Processing-Time Scheduling 431 Earliest-Due-Date Scheduling 432 Minimizing the Number of Tardy Jobs 432 Precedence Constraints: Lawler's Algorithm 433 Snapshot Application: Millions Saved with Scheduling System for Fractional Aircraft Operators 435 Problems for Section 8.6 435 Sequencing Algorithms for Multiple Machines 437 Scheduling n Jobs on Two Machines 438 Extension to Three Machines 439 The Two-Job Flow Shop Problem 441 Problems for Section 8.7 444 Stochastic Scheduling: Static Analysis 445 Single Machine 445 Multiple Machines 446

8.5

7.3

8.6

7.4 7.5

8.7

7.6

8.8

xii

Contents

The Two-Machine Flow Shop Case- 447 Problems for Section 8.8 448

8.9

Stochastic Scheduling: Dynamic Analysis 449

Selection Disciplines Independent of Job Processing Times 451 Selection Disciplines Dependent on Job Processing Times. 452 The cfi Rule 454 Problems for Section 8.9 454

Chapter 9 Project Scheduling 500

Chapter Overview 500 9.1 Representing a Project as a Network 503 9.2 Critical Path Analysis 505
Finding the Critical Path 508 Problems for Sections 9.1 and 9.2 511

8.10

Assembly Line Balancing

455

9.3 9.4

Time Gosting Methods

513

Problems for Section 8.10 459 Snapshot Application: Manufacturing Divisions Realize Savings with Scheduling Software 461

Problems for Section 9.3 517

Solving Critical Path Problems with Linear Programming 518

Linear Programming Formulation of the Cost-Time Problem 521 Problems for Section 9.4 523

8.11 8.12 8.13 8.14

Simulation: A Valuable Scheduling Tool Post-MRP Production Scheduling Software 463 Historical Notes 463 Summary 464
Additional Problems on Scheduling 465

462

9:5". PERT: Project Evaluation and Review Technique 523

Path Independence 528 Problems for Section 9.5 531 Snapshot Application: Warner Robins Streamlines Aircraft Maintenance with CCPM Project Management 533

Bibliography

471

Supplement 2 Queuing Theory 473

52.1 52.2 52.3 52.4 52.5 Introduction 473 Structural Aspects of Queuing Models 474 Notation 475 Little's Formula 476 The Exponential and Poisson Distributions in Queuing 476
Aside 477'

9.6

Resource Considerations

533

Resource Constraints for Single-Project Scheduling 533 Resource Constraints for Multiproject Scheduling 535 Resource Loading Profiles 536 Problems for Section 9.6 538

9.7 9.8 9.9

52.6 52.7 52.8 52.9 52.10 52.11 52.12 52.13 52.14

Birth and Death Analysis for the M/M/l Queue 478 Calculation of the Expected System Measures for the M/M/l Queue 481 The Waiting Time Distribution 482 Solution of the General Case 484 Multiple Servers in Parallel: The M/M/c Queue 485 The M/M/l Queue with a Finite Capacity 489 Results for Nonexponential Service Distributions 492 The M/G/oo. Queue 493 Optimization of Queuing Systems 495
Typical Service System Design Problems 495 Modeling Framework 495

Organizational Issues in Project Management 540 Historical Notes 541 Project Management Software for the PC 542
Snapshot Application: Project Management Helps United Stay on Schedule 543 Snapshot Application: Thomas Brothers Plans Staffing with Project Management Software 543 Snapshot Application: Florida Power and Light Takes Project Management Seriously 543

9.10 Summary

544

Additional Problems on Project Scheduling 545

52.15 Simulation of Queuing Systems 498 Bibliography 499

Appendix 9-A Glossary of Notation for Chapter 9 548 Bibliography 549

Contents xiii

Chapter 10
Facilities Layout and Location 550 Chapter Overview 550 Snapshot Application: Sun Microsystems Pioneers New Flex Office System 553 10.1 The Facilities Layout Problem 554 10.2 Patterns of Flow 555 Activity Relationship Chart 555 From-To Chart 557 10.3 Types of Layouts 559 Fixed Position Layouts 559 Product Layouts 559 Process Layouts 560 Layouts Based on Group Technology 560 Problems for Sections 10.1-10.3 562 10.4 A Prototype Layout Problem and the Assignment Model 564 The Assignment Algorithm 565 Problems for Section 10.4 567 *10.5 More Advanced Mathematical Programming Formulations 568 ProblemfarSection 10.5 569 10.6 Computerized Layout Techniques 569 CRAFT 570 COFAD 574 ALDEP 575 CORELAP 576 PLANET 577 Computerized Methods versus Human Planners 577 Dynamic Plant Layouts 5 78 Other Computer Methods 578 Problems for Section 10.6 579 10.7 Flexible Manufacturing Systems 582 Advantages of Flexible Manufacturing Systems 584 Disadvantages of Flexible Manufacturing Systems 584 Decision Making and Modeling of the FMS 585 The Future of FMS 588 Problems for Section 10.7 590 10.8 Locating New Facilities 590 Snapshot Application: Kraft Foods Uses Optimization and Simulation to Determine Best Layout 591 Measures of Distance 592 Problems for Section 10.8 593

The Single-Facility Rectilinear Distance Location Problem 593 Contour Lines 596 Minimax Problems 597 Problems for Section 10.9 600 10.10 Euclidean Distance Problems 601 The Gravity Problem 601 The Straight-Line Distance Problem 602 Problems for Section 10.10 603 10.11 Other Location Models 604 Locating Multiple Facilities 605 Further Extensions 606 Problems for Section 10.11 608 10.12 Historical Notes 609 10.13 Summary 610 Additional Problems on Layout and Location 611 Spreadsheet Problems for Chapter 10 616 Appendix 10-A Finding Centroids 617 Appendix 10-B Computing Contour Lines 619 Bibliography 622

10.9

Chapter 11 Quality and Assurance 624

Chapter Overview 624 Overview of This Chapter 628 11.1 Statistical Basis of Control Charts 629 Problems for Section 11.1 631 11.2 Control Charts for Variables: The X and R Charts 633 X Charts 636 Relationship to Classical Statistics 636 R Charts 638 Problems for Section 11.2 639 11.3 Control Charts for Attributes: The p Chart 641 p Charts for Varying Subgroup Sizes 643 Problems for Section 11.3 644 11.4 Thee Chart 646 Problems for Section 11.4 648 11.5 Classical Statistical Methods and Control Charts 649 Problem for Section 11.5 649 *1 1.6 Economic Design of X Charts 650 Problems for Section 11.6 656

xiv

Contents

11.7

Overview of Acceptance Sampling 657

Snapshot Application: Navistar Scores with Six-Sigma Quality Program 659

12.2

Increasing and Decreasing Failure Rates 712

Problems for Section 12.2 714

11.8 11.9

Notation 660 Single Sampling for Attributes 660

Derivation of the OC Curve 662 Problems for Section 11.9 664

12.3

The Poisson Process in Reliability Modeling 715

Series Systems Subject to Purely Random Failures 718 Problems for Section 12.3 719

* 11.10 Double Sampling Plans for Attributes 665

Problems for Section 11.10 666

12.4

Failures of Complex Equipment 720

Components in Series 720 Components in Parallel 721 Expected Value Calculations 721 K Out of N Systems 722 Problems for Section 12.4 724

11.11 11.12

Sequential Sampling Plans 667 ProblemsfarSectionll.il 671 Average Outgoing Quality 672
Snapshot Application: Motorola Leads the Way with Six-Sigma Quality Programs 674 Problems for Section 11.12 674

11.13

Total Quality Management 675

Definitions 675 Listening to the Customer 675 Competition Based on Quality 677 Organizing for Quality 678 Benchmarking Quality 679 The Deming Prize and the Baldrige Award 680 ISO 9000 682 Quality: The Bottom Line 683

12.5 12.6

Introduction to Maintenance Models 724 Deterministic Age Replacement Strategies 726

The Optimal Policy in the Basic Case 726 A General Age Replacement Model 728 Problems for Section 12.6 732

12.7

Planned Replacement under Uncertainty 732

Planned Replacement for a Single Item 732 Block Replacement for a Group of Items 736 Problems for Section 12.7 738

11.14 11.15 11.16

Designing Quality into the Product 684

Design, Manufacturing, and Quality 686

*12.8 Analysis of Warranty Policies 740

The Free Replacement Warranty 740 The Pro Rata Warranty 742 Extensions and Criticisms 744 Problems for Section 12.8 744

Historical Notes 688 Summary 689

Additional Problems on Quality and Assurance 691

12.9

Software Reliability 745

Snapshot Application: Reliability-Centered Maintenance Improves Operations at Three Mile Island Nuclear Plant 746

Appendix 11-A Approximating Distributions 695 Append ix 11 -B Glossary of Notation for Chapter 11 on Quality and Assurance 697 Bibliography 698

12.10 Historical Notes 747 12.11 Summary 748

Additional Problems on Reliability and Maintainability 749

Chapter 12
Reliability and Maintainability 700 Chapter Overview 700 12.1 Reliability of a Single Component 704
Introduction to Reliability Concepts 704 Preliminary Notation and Definitions 705 The Exponential Failure Law 707 Problems for Section 12.1 710

Appendix 12-A Glossary of Notation on Reliability and Maintainability 751 Bibliography 753

Appendix: Tables 754 Index 772