OPERATIONS & TECHNOLOGY MANAGEMENT

Management 410, FEMBA Section 01 Summer Quarter 2011

Professor Felipe Caro

ASSIGNMENT 1
PROCESS ANALYSIS, EOQ AND PROJECT MANAGEMENT
Note: To receive partial/full credit all calculations must be explained and shown.
QUESTION 1 (20 POINTS)

Consider the following simple assembly process:

A
Raw Material 3 min/unit

B
5 min/unit

C
2 min/unit Finished Goods

The numbers below each step refer to the time necessary to process one unit of the product at that step.

no set ups are required, processing times are constant and no Work in Process (WIP) is permitted beyond that actually being worked on at each process step (i.e., there are no buffers between process steps).
a) What is the Capacity of the process? b) What is the Utilization of the operator at Step A?

The process is staffed by three operators with one operator assigned to each of the three steps. Assume

c) Each operator receives regular wages of $12/hour for the first 8 hours, and overtime wages of $18/hour for any additional time. Twelve hours per day is the maximum work time permitted. A finished unit sells for $10 while its direct material cost is $6/unit. Does it pay to use overtime under this cost structure (assuming sufficient demand exists)? d) Would you hire a skilled operator whose wage rate were $20/hour (regular time), but could perform Step B at a processing time of 4 minutes/unit? (Assume no overtime.) e) Would you hire a skilled operator whose wage rate were $20/hour (regular time), but could perform Step A at a processing time of 2 minutes/unit? (Assume no overtime.)
QUESTION 2 (30 POINTS)

Professor Caro is thinking of buying a pizza carry-out shop in West Los Angeles and has asked you to help him evaluate the current operation. The shop, OTMs Pizza, currently operates in a build-to-order fashion with four employees: an order taker who receives/processes orders and does bookkeeping; a pizza tosser who tosses the pizza shell; a pizza assembler who prepares the pizza shell and customizes the pizza and a chef who supervises the placement of the pizza in the oven. The production process begins when an order is transmitted to a computer in the kitchen. Order processing takes a negligible amount of time. It takes one half of a minute for the pizza assembler to

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OPERATIONS & TECHNOLOGY MANAGEMENT

SUMMER QUARTER 2011

prepare the pizza shell to give to the pizza tosser. The pizza tosser then tosses the shell for two minutes to obtain proper shape and consistency. The tossing operation is highly skilled and can only be performed by the tosser. It then takes one minute for the pizza assembler to customize the pizza by adding the correct sauce and ingredients (e.g., cheese, pepperoni, mushrooms). The secret to OTMs famous taste is a three-minute wait prior to placing the pizza in the oven. This wait allows the flavors of the ingredients to blend. After this three-minute delay, the chef places the pizza in one of six ovens (with a capacity of one pizza each) for a baking time of ten minutes. a) What is the capacity of the current cooking process? Specifically, what is the maximum number of pizzas that OTMs can produce in the first hour (assuming an empty system at the beginning of the day) and in each subsequent hour? b) The professor has suggested producing pizza shells for inventory before each days hours of operations. That is, the pizza tosser would arrive prior to the business hours and perform all of the work associated with pizza shell production (shell preparation and tossing). These shells would then be available to the assembler for customization during store hours. How would producing pizza shells to inventory change your answer to question (a)? c) The professor would like to increase potential demand by offering pizza delivery direct to the customer. Demand in the past has been 20 pizzas per hour, but he is concerned that the current production process will not be able to support this demand increase. What (if any) changes will be needed in the cooking process to support a demand of 40 pizzas/hour (after the first hour startup period)? Assume that pizza shells are made to inventory as indicated in question (b).
QUESTION 3 (20 POINTS)

A specialty coffee house sells Jamaican Blue Mountain Coffee at a fairly steady rate of 280 pounds annually. The beans are purchased from a local supplier for $2.40 per pound. The coffee house estimates that it costs $45 in paperwork and labor to place an order for the coffee and that inventory holding costs are based on a 20% annual interest rate. a) Determine the optimal order quantity for Jamaican Blue Mountain Coffee. b) What is the time between consecutive replenishments of the item when the EOQ is used? c) What is the annual holding and ordering cost due to this item? d) If the replenishment lead-time is three weeks, determine the reorder point based on the on-hand inventory. (Under a reorder point system, a fixed quantity Q is ordered whenever the inventory position drops below the reorder point.) e) Suppose the fixed ordering cost was in fact $15. Compute the total loss (ordering and carrying costs) from using the order quantity determined in (a) rather than the optimal order quantity, based on the actual ordering cost of $15.

QUESTION 4 (30 POINTS)

You are in charge of a medium-size real estate development project in Los Angeles County. You have attracted $100 million in capital to fund this project, over which you are paying 6% interest per year. The first step you need to do is the architectural design, which will take 6 months. After that, you will do market research, to ensure the demand is still there; that will take 4 months. After the market research, you can start marketing the project to prospective buyers. In parallel to the market research, you need to complete an environmental impact assessment (EIA), which can take anywhere between 2 months and several years. After the market research and the EIA are completed, you can start construction.

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Construction starts with the underground work: water mains, sewage, etc., which takes 3 months. After that, building homes takes 6 months, and building roads also takes 6 months; homes and roads can be built simultaneously. Marketing involves first designing an advertising campaign, which takes 2 months; then the actual advertising itself, which takes 4 months; then the sales period, which takes 4 months. After construction and marketing are complete, the new owners can move in to their brand new home. a) Draw a visual representation of this project. (Activity-on-Nodes diagram, Gantt chart, whichever format you prefer.) It does not need to be a pretty diagram, just a basic picture, in Word, is fine. (If you use Excel or PowerPoint, please paste the diagram into your Word file with the solutions.) b) Assume the EIA only takes 2 months to be approved. What is the critical path of this project? How long will it take before the new owners move in? c) What does the critical path tell you? d) You are very unlucky, and the only rainstorm of the year occurs while you are in the midst of construction, leading to a delay. How much delay (if any) can you accept before getting worried? e) Now consider the more likely scenario: after 2 months, the EIA is rejected, due to protests from local communities. You expect it may well take another 6 months to revise and resubmit the EIA, but you are optimistic it will be approved next time. What is the critical path now? Would you change the timing of any other steps in response to this delay in getting approval for the EIA? f) [optional no credit] How much would a 1-month delay in the EIA (i.e., 3 months instead of the original 2 months) cost you? How about the expected 6 month delay? How can you reduce the likelihood of this occurring?

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