Operations Management

02 Jul


Transformer Replacement at Mountain States Electric Service

 Mountain States Electric Service is an electrical utility company serving several states in the Rocky Mountain region. It is considering replacing some of its equipment at a generating substation and is attempting to decide whether it should replace an older, existing PCB transformer. (PCB is a toxic chemical known formally as polychlorinated biphenyl) Even though the PCB generator meets all current regulations, if on incident occurred, such as a fire, and PCB contamination caused harm either to neighboring businesses or farms or to the environment, the corn- pony would be liable for damages. Recent court cases have shown that simply meeting utility regulations does not relieve a utility of liability if an incident causes harm to others. Also1 courts have been awarding large damages to individuals and businesses harmed by hazardous incidents.

If the utility replaces the PCB transformer, no PC incidents will occur, and the only cost will be that o the transformer, $85,000. Alternatively, if the corn pony decides to keep the existing PCB transformer, then management estimates there is a 50—50 chance of there being a high likelihood of an incident or a low likelihood of an incident. For the case in which there is a high likelihood that an incident will occur, there is a 0.004 probability that a fire will occur sometime during the remaining life of the transformer and a 0.996 probability that no fire will occur. If a fire occurs, there is a 0.20 probability that it will be bad and the utility will incur a very high cost of approximately $90 million for the cleanup, whereas there is a 0.80 probability that the fire will be minor and a cleanup can accomplished at a low cost of approximately $8 million. If no fire occurs, then no cleanup costs will occur. For the case in which there is a low likelihood of an incident occurring, there is a 0.00 1 probability that a fire will occur during the life of the existing transformer and a 0.999 probability that a fire will not occur. If a fire does occur, then the same probabilities exist for the incidence of high and low cleanup costs, as well as the same cleanup costs, as indicated for the previous case. Similarly, if no fire occurs, there is no cleanup cost.

Q.1) Perform a decision-tree analysis of this problem For Mountain States Electric Service and indicate the recommended solution. Is this the decision you believe the company should make? Explain your reasons.



Herding the Patient

Bayside General Hospital is trying to streamline its operations. A problem-solving group consisting of a nurse, a technician, a doctor, an administrator, and a patient is examining outpatient procedures in an effort to speed up the process and make it more cost-effective. Listed here are the steps that a typical patient follows for diagnostic imaging:

  • Patient enters main hospital entrance.
  • Patient takes a number and waifs to be called to registration desk.
  • Patient registers.
  • Patient is taken to diagnostic imaging department.
  • Patient registers at diagnostic imaging reception.
  • Patient sits in department waiting area until dressing area clears.
  • Patient changes in dressing area.
  • Patient waits in dressing area.
  • Patient is token to exam room.
  • Exam is performed.
  • Patient is taken to dressing area.
  • Patient dresses.
  • Patient leaves.


Q.1 Create a process flowchart of the procedure and identify opportunities for improvement.



Streamlining the Refinancing Process

 First National Bank has been swamped with refinancing requests this year. To handle the increased volume, it divided the process into five distinct stages and created departments for each stage.
The process begins with a customer completing a loan application for a loan agent. The loan agent discusses the refinancing options with the customer and performs quick calculations based on customer- reported data to see if the customer qualifies for loan approval. If the numbers work, the customer signs a few papers to allow a credit check and goes home to wait for notification of the loan’s approval.
The customer’s file is then passed on to a loan processor, who requests a credit check, verification of loans or mortgages from other financial institutions, an appraisal of the property, and employment verification. If any problems are encountered, the loan processor goes to the loan agent for advice. If items appear on the credit report that are not on the application or if other agencies have requested the credit report, the customer is required to explain the discrepancies in writing. If the explanation is acceptable, the letter is placed in the customer’s file and the file is sent to the loan agent (and sometimes the bank’s board) for final approval.

The customer receives a letter of loan approval and is asked to call the closing agent to schedule a closing dote and to lock in a loan rate if the customer has not already done so.
The closing agent requests the name of the customer’s attorney to forward the loan packet. The attorney is responsible for arranging a termite inspection, a survey, a title search, and insurance and for preparing the closing papers. The attorney and the closing agent correspond back and forth to verify fees, payment schedules, and payoff amounts.

The loan-servicing specialist makes sure the previous loan is paid off and the new loan is set up properly. After the closing takes place, the bank’s loan-payment specialist takes care of issuing payment books or setting up the automatic drafting of mortgage fees and calculating the exact monthly payments including escrow amounts. The loan- payment specialist also monitors late payment of mortgages.

It is difficult to evaluate the success or failure of the process, since the volume of refinancing requests is so much greater than it has ever been before. However, customer comments solicited by the loan-servicing specialist have been disturbing to management.
Customer Comments:

  • I refinanced with the same bank that held my original loan, thinking erroneously that I could save time and money. You took two months longer processing my loan than the other bank would have, and the money I saved on closing costs was more than eaten up by the extra month’s higher mortgage payments.
  • I just got a call from someone at your bank claiming my mortgage payment was overdue. How can it be overdue when you draft it automatically from my checking account?
  • How come you do everything in writing and through the mail? If you would just call and ask me these questions instead of sending forms for me to fill out, things would go much more quickly.
  • If I haven’t made any additions to my house or property in the past year, you appraised it last year, and you have access to my tax assessment, why bother with another appraisal? You guys just like to pass around the business.
  • I never know who to call for what. You have so many people working on my file. I know I’ve repeated the same thing to a dozen different people.
  • It took so long to get my loan approved that my credit report, appraisal report, and termite inspection ran out. You should pay for the new reports, not me.
  • I drove down to your office in person today to deliver the attorney’s papers, and I hoped to return them with your signature and whatever else you add to the closing packet. The loan specialist said that the closing agent wouldn’t get to my file until the morning of the scheduled closing and that if she hit a snag, the closing could be postponed I’m taking off half a day from work to attend the closing and “rescheduling” is not convenient. I know you have lots of business, but I don’t like being treated this way.
  • I received a letter from one of your loan-payment specialists today, along with a stack of forms to complete specifying how I want to set up my mortgage payments. I signed all these at closing—don’t you read your own work? I’m worried that if I fill them out again you’ll withdraw the payment twice from my account!

Questions: –

1. Create a process flowchart of the refinancing process. Why do you think the bank organized its process this way? What problems have ensued?

2. Examine the process carefully. Which steps create value for the customer? Which steps can be eliminated? Construct a new map showing how the overall process can be improved.



Workout Plus

Workout Plus is a health club that offers a full range of services to its clients.  Recently, two other fitness clubs have opened up in town, threatening Workout’s solvency.  While Workout is tops among serious fitness buffs, it has not attracted a wide spectrum of members.  Shannon Hiller, owner and manager, has decided it’s time for a face lift.  She started the process by sponsoring a week-long “ideathon” among club members.  Nonmembers who frequented an adjacent grocery store were also canvassed for suggestions. Their comments are provided below along with the current facility layout.

Free weights Circuit






 Current layout:


Free Weights



Circuit Training



Aerobics Room

Cardio Machines
  • I don’t feel like strutting through the gym from one end to the other iust to finish my workout.
  • How about a quick 30-minute workout routine for busy folks?
  • I like working out with my friends, but aerobics is not for me. What other group activities are good for cardio?
  • Separate the people who want to gab from the people who want to pump.
  • It’s so confusing with all those machines and weights. You need a novice section that’s not so intimidating.
  • It’s hard to work yourself in when you come from across the gym. ‘d like to see the machines I’ll be using to gauge my time.
  • Circuit training is for wimps. The next thing you know you’ll be stopping and starting the music to tell us when to change machines.
  • We all seem to arrive at the popular machines at once. Can you space us out?
  • I’d like for my kids to get some exercise too while I’m working out.
  • But I don’t wandering all over Place trying to find me.
  • This place is too crowded and disorganized. It’s not fun anymore.
  • The cardio machines fill up too fast on rainy days. Then everything else gets backer up.

You have classes only at busy times. During the day the gym is empty, but you don’t provide many services. I think you’re missing a great opportunity to connect with the not-o-fit at off-peak times.


1. How can Workout update its facility to attract new customers? What additional equipment or services would you suggest? How could something as simple as revising the layout help?

2. It is your job to design a new layout for Workout Plus. Visit a nearby gym to get ideas. Watch the customer flow, unused space, and bottlenecks. What aspects of a process layout do you see? a product layout? cells? Draw a simple diagram of your proposed layout. (You’ll want to be more detailed than the original layout.) How does your layout respond to the comments collected by Shannon?



 Photo Op — Please line Up

 Tech is modernizing its college ID system. Beginning this term, all faculty, staff, and students will be required to carry a “smart” identification card, called a student passport. What makes it smart is a magnetic strip with information on club memberships, library usage, class schedules (for taking exams), restrictions (such as no alcohol), medical insurance, emergency contacts, and medical conditions. If desired, it can also be set up as a debit card to pay fines or purchase items from the bookstore, vending machines, cash machines, copy machines, and several local retailers.
University administrators are excited about the revenue potential and increased control of the passport, but they are not looking forward to the process of issuing approximately 60,000 new cards. If applicants could be processed at the rate of 60 an hour, the entire university could be issued passports in a month’s time (with a little overtime).

The steps in the process and approximate times follow. Steps 1 and 2 must be completed before step 3 can begin. Steps 3 and 4 must precede step 5, and step 5 must be completed before step 6.

Steps in Process Time                                            Approximate

  1. Review application                                     10 seconds for correctness
  2. Verify information and check                 60 seconds for outstanding debt
  3. Process and record payment                   30 seconds
  4. Take photo                                                  20 seconds
  5. Attach photo and laminate                     10 seconds
  6. Magnetize and issue passport               10 seconds

a. Is it possible to process one applicant every minute? Explain.

b. How would you assign tasks to workers in order to process 60 applicants an hour?

c. How many workers are required? How efficient is your line?

Jetaway Industries

Jetway, a small manufacturer of replacement parts for the aircraft industry, had always maintained a simple layout-all like machines were located together.  That way the firm could be as flexible as possible in producing small amounts of the variety of parts its customers required. No one questioned the production arrangement until Chris Munnelly started to work for the company.  Chris was actually hired to upgrade Jetaway’s computer system.  In the process of creating a database of parts produced.  A part routing Matrix for nine of the most popular parts is shown on the facing page, along Jetaway, a small manufacturer of replacement parts with a schematic of the factory layout.
Chris, who was already tired of being a pro-grammer, decided to reorder the matrix and see what he could find.  If he could identify distinct part families, he could reorganize the placement of machines into the cells he had been reading about in his business magazines.  Maybe then someone would notice his management potential.


Q.1) Help Chris gain status in Jateway by creating a cellular layout for the company.  Show your results in a schematic diagram.  Be sure to include the reordered routing matrix.



Moore Housing Contractors

Moore housing on contractors is negotiating a deal with Countryside Realtors to build six houses in a new development. Countryside wants Moore Contractors to start in late winter or early spring when the weather begins to moderate and build through the summer into the fall. The summer months are a busy time for the realty company, and it believes it can sell the houses almost as soon as they are ready—sometimes before. The houses all have similar floor plans and are of approximately equal size; only the exteriors are noticeably different. The completion time is so critical for Countryside Realtors that it is insisting a project management network accompany the contractor’s bid for the job with an estimate of the completion time for a house. The realtor also needs to be able to plan its offerings and marketing for the summer. The realtor wants each house to be completed within 45 days after it is started. If a house is not completed within this time frame, the realtor wants to be able to charge the contractor a penalty. Mary and Sandy Moore, the president and vice president of Moore Housing Contractors, are concerned about the prospect of a penalty. They want to be confident they can meet the deadline for a house before entering into any agreement with a penalty involved. (if there is a reasonable likelihood they cannot finish a house within 45 days, they want to increase their bid to cover potential penalty charges.)
The Moores are experienced home builders, so it was not difficult for them to list the activities involved in building a house or to estimate activity times. However, they made their estimates conservatively and tended to increase their pessimistic estimates to compensate for the possibility of bad weather and variations in their workforce. Following is a list of the activities for building a house and the activity time estimates:

Activity                   Description                          Predecessors                                    Time (Days) 

A          m          b

A               Excavation pour footers               –                                             3             4                6

B               Lay foundation                              a                                             2             3                5

C               Frame and roof                             b                                              2             4                5

D               Lay drain tiles                               b                                              1             2                4

E                Sewer (floor) drains)                  b                                              1             2                3

F                Install insulation                          c                                             2             4                5

G               Pour basement floor                    e                                             2             3                5

H               Rough plumbing pipes               e                                              2             4                7

I                 Install windows                            f                                              1             3                4

J                 Rough electrical wring               f                                              1             2                4

K               Install furnace air                    c, g                                              3             5                8


l                 Exterior brickwork                   i                                               5            6                  10

m               Install plasterboard                 j, h, k                                      6            8                  12

mud plaster

n                Roof shingles flashing                  l                                            2            3                   6

o                Attach gutter, downspouts          n                                            1          2                    5

p                Grading                                          d, o                                        2            3                   7

q                Lay subflooring                             m                                           3            4                   6

r                 Lay driveway, way                        p                                           4            6                   10

s                 Finish carpentry                           q                                            3            5                   12

t                Kitchen cabinetry, sink               q                                              2            4                   8                                           and appliances

u               Bathroom cabinetry, fixtures      q                                             2            3                   6

v               painting (interior and                 t, u                                           4            6                   10


w               Finish wood floors,                      v, s                                           2            5                   8

lay carpet

x                Final electrical,                          v                                                   1            3                   4                                         light fixtures



Q.1) Develop a CPM/PERT network for Moore House Contractors and determine the probability that the contractors can complete a house within 45 days. Does it appear that the Moores might need to increase their bid to compensate for potential penalties?

Q.2) Indicate which project activities Moore Contractors should be particularly diligent to keep on schedule by making sure workers and materials are always available. Also indicate which activities the company might shift workers from as the need arises.



Somerset Furniture Company’s Global Supply Chain

The Somerset Furniture Company was founded in 1 957 in Randolph County, Virginina. It traditionally has manufactured large, medium-priced, ornate residential home wood furniture such as bedroom cabinets and chests of draws, and dining and living room cabinets, tables, and choirs, at its primary manufacturing facility in Randolph County. It employed a marketing strategy of rapidly introducing new product lines every few years. Over time it developed a reputation for high-quality, affordable furniture for a growing U.S. market of homeowners during the last half of the twentieth century. The company was generally considered to be an innovator in furniture manufacturing processes and in applying TQM principles to furniture manufacturing. However, in the mid-i 990s, faced with increasing foreign competition, high labor rates, and diminishing profits, the Somerset Company contracted to outsource several of its furniture product lines to manufacturers in China, simultaneously reducing the size of its own domestic manufacturing facility and labor force. This initially proved to be very successful in reducing costs and increasing profits, and by 2000 Somerset had decided to close its entire manufacturing facility in the United States and out- source all of its manufacturing to suppliers in China. The company set up a global supply chain in which it arranges for shipments of wood from the United States and South America to manufacturing plants in China where the furniture products are produced by hand by Chinese laborers. The Chinese manufacturers are very good at copying the Somerset ornate furniture designs by hand without expensive machinery. The average labor rate for furniture manufacturing in the United States is between $9 and $20 per hour, whereas the average labor rate for furniture manufacturers in China is $2 per day. Finished furniture products are shipped by container ship from Hong Kong or Shanghai to Norfolk, Virginia, where the containers are then transported by truck to Somerset warehouses in Randolph County. Somerset supplies retail furniture stores from this location. All hardware is installed on the furniture at the retail stores in order to reduce the possibility of damage during transport.

The order processing and fulfillment system for Somerset includes a great deal of variability, as does all aspects of the company’s global supply chain. The company processes orders weekly and biweekly. In the United States it takes between 12 and 25 days for the company to develop a purchase order and release it to their Chinese suppliers. This process includes developing a demand forecast, which may take from one to two weeks; converting the forecast to on order fulfillment schedule; and then developing a purchase order. Once the purchase order is processed overseas by the Chinese manufacturer, which may take 10 to 20 days depending on the number of changes made, the manufacturing process requires approximately 60 days. The foreign logistics process requires finished furniture items to be transported from the manufacturing plants to the Chinese ports, which can take up to several weeks depending on trucking availability and schedules. An additional 5 to 10 days is required to arrange for shipping containers and prepare the paperwork for shipping. However, shipments can then wait from one day to a week for enough available containers. There are often too few containers at the ports because large U.S. importers, like “Big W” discount stores in the United States, reserve all the available containers for their continual stream of overseas shipments. Once enough containers are secured, it requires from three to six days to optimally load the containers. The furniture pieces often have odd dimensions that result in partially filled containers. Since 9/li, random security checks of containers can delay shipment another one to three weeks, and smaller companies like Somerset are more likely to be extensively checked than larger shippers like Big W, who the port authorities don’t want upset with delays. The trip overseas to Norfolk requires 28 days. Once in port, one to two weeks are required for a shipment to clear customs and to be loaded onto trucks for transport to Somerset’s warehouse in Randolph County, which takes from one to three days. When a shipment arrives, it can take from one day up to a month to unload a trailer, depending on the urgency to fill store orders from the shipment.

Because of supply chain variability, shipments can be off schedule (i.e., delayed) by as much as 40%. The company prides itself on customer service and fears that late deliveries to its customers would harm its credibility and result in cancelled orders and lost customers. At the same time, keeping excess inventories on hand in its warehouses is very costly, and since Somerset redesigns its product lines so frequently a real problem of product obsolescence arises if products remain in inventory very long. Somerset has also been experiencing quality problems. The Chinese suppliers employ quality auditors who rotate among plants every few weeks to perform quality control tests and monitor the manufacturing process for several days before visiting another plant. However, store and individual customer complaints have forced Somerset to inspect virtually every piece of furniture it receives from overseas before forwarding it to stores. In some instances, customers have complained that tables and chairs creak noisily during use. Somerset subsequently discovered that the creaking was caused by humidity differences between the locations of the Chinese plants and the geographic areas in the United States where their furniture is sold. Replacement parts (like cabinet doors or table legs) are difficult to secure because the Chinese suppliers will only agree to pro- vide replacement parts for the product lines currently in production. However, Somerset provides a one year warranty on its furniture, which means that they often need parts for a product no longer being produced. Even when replacement parts were available, it took too long to get them from the supplier in order to provide timely customer service.

Although Somerset was initially successful at outsourcing its manufacturing process on a limited basis, it has since discovered, as many companies do, that outsourcing can result in a host of supply chain problems, as indicated above.


Q.1) Discuss Somerset’s global supply chain and possible remedies for its supply chain problems, including strategic and tactical changes that might improve the company’s supply chain performance, reduce system variability, and improve quality and customer service. As part of your discussion, determine the product lead time by developing a timeline from the initiation of a purchase order to product delivery.

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