EC207 Study Guide - Midterm Guide: Histogram, Central Limit Theorem, Poisson Distribution
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-Is the upper limit on the workload that an operating unit can handle. An operating unit might be a
plant, department, machine, store, or worker.
Strategic Capacity Planning
-is the systematic determination of facility and major machine/equipment requirements to meet long
term demand for goods and services.
Measuring Capacity and two Related Performance Measures
1. Design Capacity:
-The maximum output rate under ideal conditions
2. Effective Capacity:
-The maximum output rate that can be sustained given work breaks, scheduling difﬁculties and
expected delays, machine/equipment maintenance, etc.
-The ratio of actual output rate to effective capacity
-The ratio of uptime(actual operating time) to available time
Factors inﬂuencing Effective Capacity
Facilities and Machines
-The design of facilties, including ﬂoor space and layout, directly inﬂuence effective capacity. Layout of the work area
often determines how smoothly work can be performed.
-When items are similar, the ability of the system to produce those items is much greater than when successive items
differ. There is less need for product change-over and machine/equipment setup.
-The tasks that make up a job, the variety of activities involved, and the training, skill, and experience required to perform
a job all have an impact on the potential output.
Planning and Operational Factors
-Scheduling problems may occur when there are differences in equipment capabilities or differences in job requirements.
-Product standards, especially minimum quality and performance standards, can restrict managements options for
increasing effective capacity. Also pollution standards on products and equipment often reduce effective capacity, as
does paperwork required by government regulatory agencies. A similar effect occurs when a union contract limits the
type of work an employee may do.
Strategic Capacity Planning Process in Organizations
-Capacity decisions in organizations are usually part of the annual strategic planning process. They
directly inﬂuence capital budgeting. The steps taken are:
1. Forecast demand for products one to ﬁve years, or more, ahead
2. Calculate capacity requirements to meet the forecasts
3. Measure capacity now, and decide if and how to bridge the gap in capacity in the future.
A. Generate technically feasible alternatives varying in nature, size, location, price changes..
B. Evaluate each alternative economically
-Initial investment? Annual revenues? Annual operating expenses? Life of
-Method of evaluation: break even analysis, payback period, or net present value
C. Consider noneconomic aspects to, e.g., ease of use, reliability, etc
D. Choose the best alternative and implement it.
Major Consideration for Developing Capacity Alternatives
1. Design Flexibility into System
-The long term nature of capacity decisions and the risks inherent in long term forecasts suggest potential beneﬁts from
designing ﬂexible systems
2. Differentiate Between New and Mature Products
-Mature products tend to be more predictable in terms of capacity requirements, and they may have predictable life
spans. This means less risk choosing an incorrect capacity length of life for the investment. New products tend to carry
higher risk because of the uncertainty (unkown reaction of customers, evolving technologies, and uncertain competitors
reactions) Flexibility and starting small is more important in this case.
3. Take a “Big Picture” Approach to capacity changes.
-When developing capacity alternatives, it is important to consider how parts of the system interrelate. This is sometimes
called Capacity Balance. Capacity imbalance results in Bottlenecks, which restrict the capacity of the whole system. To
increase the capacity of the system, the capacity of the bottleneck operation should be increased.
4. Choose Capacity Timing and Increments.
-Consider whether capacity is to be installed before, during or after demand occurs. If before it is called leading strategy,
if after, lagging strategy.
5. Prepare to Deal with Capacity “Chunks”
-Capacity increases are often acquired in fairly large chunks rather than smooth increments, making it difﬁcult to achieve
a match between desired capacity and actual capacity.
6. Attempt to Smooth Out Capacity Requirements
-Unevenness in capacity requirements can create certain problems. Seasonal variations are generally easier to to cope
with, one solution is to identify the product/service that have complementary demand patterns. ex. Water skis vs Snow
7. Use Capacity Cushion
-When demand is variable, capacity is usually chosen above the average forecast demand. The excess of capacity over
the average demand is called capacity cushions or safety capacity.
8. Identify the Optimal Operative Level
-Production units typically have an ideal or optimal level of operation in terms of average unit cost of output. At the
optimal operating level, average cost per unit is the lowest for that production unit; larger or smaller rates of output will
result in a higher unit cost, i.e., the average cost curve is “u” shaped.
Break Even Analysis
-Use of break even analysis requires identiﬁcation of all costs related to the production of a given
product. These costs are then classiﬁed as ﬁxed or variable costs.
-Fixed Costs tend to remain constant regardless of quantity of output.
-Variable costs vary directly with quantity of output (generally materials/labour)
Break-Even point (BEP)
-The quantity of output at which total cost and total revenue are equal.
Point of indifference between 2 alternatives
Chapter 9: Management if Quality
Quality: refers to the ability of a good or service to consistently meet or exceed customer expectations
Quality Control: Monitoring testing, and correcting quality quality problems after they occur
Quality Assurance: Providing conﬁdence that a products quality will be good by preventing defects
before they occur
Quality of Goods
-Dimensions of quality of goods include:
-Performance (main characteristics or function of the product)
-Aesthetics (appearence, feel, smell, taste)
-Special features (extra characteristics)
-Conformance (how well a product corresponds to design speciﬁcations)
-Reliability (consistency of performance over time)
-Durability (long life)
-Perceived quality (subjective evaluations of quality - reputation, image)
-Serviceability (handling of complaints)
-Tangibles (the physical appearance of facility, equipment, personnel and communication
-Convenience (the availability and accessibility of the service)
-Reliability (dependably, consistently, and accurately for a certain length of time)
-Responsiveness (willingness of the service provider to help customers in unusual
situations and to deal with problems)
-Time (the speed with which service is delivered)
-Assurance (knowledge exhibited by personnel and their ability to convey true and
-Curtesy (the way customers are treated by employees)
-Consistency (the ability to provide the same level of good quality repeatedly)
Determinants of quality
1. Product design, 2. Process design, 3. Production
Cost of Quality
-Failure costs - injured by defective parts or products
-Internal Failures: those discovered during productions
-External Failures: those discovered after delivery to the customer (largest)
-Appraisal (detection) costs - Costs of inspection and testing (cost of inspectors, testing, test
equipment, and labs)
-Prevention costs - Costs of preventing defects from occurring (costs such as quality planning and
administration, working with vendors, standards operating procedures, and training)
-The purpose of the International Organization for Standardization (ISO) is to promote worldwide
standards that will improve operating efﬁciency and productivity, and reduce costs
-the international standard for a quality management system. Critical for companies doing business internationally
-They must have well documented problem solving and processes
-their documents must satisfy ISO inspectors include a quality manual and a procedure manual
-they undergo an assessment that typically lasts 12-18months
-is a family of standards related to environmental management that was introduced by the international Organizations for
Standardization in 1996. It concerns what an organization does to minimize harmful effects to the environment caused
by its operations. The standards for certiﬁcation bear upon three major areas:
-Management Systems (System development and integration of environmental responsibilities into business
-Operations (Consumption of natural resources and energy)
-Environmental Systems (Measuring, assessing, and managing emissions, efﬂuents, and other waste
Hazard Analysis Critical Control Point (HACCP)
-a quality management system, similar to ISO 9001, designed for food processors, especially meat, poultry, and ﬁsh
-There are three main HACCP steps:
1. Perform Hazard analysis: checking sources
2. Determine the Critical Control Points (CCPs)
3. Establish the HACCP Plan
Canada Awards for Excellence (CAE)
Level 1 - requires developing a mission statement, deﬁning customers, planning training in management principles and
practises, and performing an assessment of the above activities.
Level 2 - involves strategic planning, identifying customer needs; human resource planning; identifying, documenting, and
improving key processes; and supplier/partner planning.
Level 3 - the organization demonstrates shared commitment; performs periodic feedback; involves employees in health and
safety, provides training and measures its effectiveness, and measures employee satisfaction; analyses, i
improves and documents processes, involved customers an suppliers and benchmarks process
management, and shares information with suppliers and involves them in new product design. All activities
are continuously improved
Level 4 - build on the other levels, and the organization demonstrates that it has achieved good to excellent overall results
and at least 3 years of positive trends from the improvement efforts
Total Quality Management (TQM)
-an approach to quality management that involves everyone in an organization in quality
management and a continual effort to improve quality and customer satisfaction
-There are three key features in TQM. One is a never-ending push to improve quality, which is
referred to as a continuous improvement: the second is the involvement of everyone in the
organization in quality management; and the third is the goal of ever-increasing customer
-The TQM can be describes as:
1. Find out what customer want. This might involve the use of surveys, focus groups,
interviews, or some other technique that integrates the customers voice in the
2. Design a product that will meet (or exceed what customers want
3. Design processes that facilitate doing the job right the ﬁrst time (called “quality at the
source”) Determine where mistakes are likely to occur and try to prevent them
(called Poka-yoke - fail safeing) i.e. incorporating process design elements that
4. Keep track of results (TQM is data driven), and use them to guide improvement in
the system. Never stop trying to improve - continuous improvement
5. Extend these concepts to suppliers/partners
-a more sophisticated statistical approach to problem solving and quality improvement than used in the PDSA cycle of
the continuous improvement. The problem solving and quality improvement methodology in Six Sigma has ﬁve steps:
-deﬁne, measure, analyze, improve, and control (DMAIC)
Methods for Generating Ideas and Reaching Consensus
-Brainstorming: Technique for generating a free ﬂow of ideas on ﬁnding causes and solutions, and
implementing the solutions in a group of people
-Quality Circle: A group of workers who meet to discuss ways of improving the products or
-Benchmarking: Process of measuring an organizations performance against the best in the same
or another industry
-5W2H approach: a method of asking questions about a problem that begin with: What, why, where,
when, who, how, and how much
-Reaching Consensus: The team approach works best when it reaches decisions based on
consensus. This may be achieved using one or more of the following methods:
1. List reduction (clarify items and, in the process, reduce the list of items by posing questions
about affordability, feasibility, and likelihood of solving the problem)
2. Balance sheet (approach lists the pros and cons of each item and focuses discussion on
3. Paired Comparisons (a process by which each item on a list is compared with every other
item, two at a time)
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