Operations

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Lesson 2 12/10/2002
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Website

• http//www.vub.ac.be/BEDR/cmach.html
• http//www.vub.ac.be/BEDR/download.html

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Topics
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Chapter 2 Developing an Operations Strategy

• Identify the competitive priorities required to
  support the business strategy
  
• Common priorities include
• Cost
• Quality
• Time
• Flexibility

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Strategy exercise Automobile

• Ferrari and Ford Mercedes and Toyota
• Ferrari and Mercedes
• Quality, customization and exclusivity
• Supporting operational decision research
  (higher costs), TQM
  
• Ford and Toyota
• Speed of delivery, cost
• Just-in-time, mass production/customization

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Books

• Fnac and waterstone
• Fnac
• Price
• Mass volumes, large distribution network
• Waterstone
• Quality
• Good selection

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Transport industry

• De Post and DHL
• De Post
• (price?), accessibility
• Labor-intensive
• DHL
• Flexibility, quality
• TQM, high training of the workforce

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Airlines

• Ryanair and KLM Virgin Express and Ryanair
• Ryanair
• Price
• No use of travel agents, e-booking, aggressive
  marketing, regional airports, short distances
  
• KLM
• Quality
• Highly qualified personnel
• Flexibility in ticketing, rescheduling, etc.
• Virgin Express
• Flexibility
• Good booking facilities, good on-board facilities

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Retailers/supermarkets

• Aldi and Carrefour Delhaize and Colruyt Wall
  Mart and Delhaize Delhaize and Aldi
  
• Aldi and Colruyt
• Price
• No shelfs, very few personnel, minimal
  infrastructure, no bags, only one or two brands
  for one type of product, food
  
• Delhaize
• Quality
• Nice environment, quality of service, quality
  control through external partners
  
• Wall Mart
• Price and open 24 hours a day
• Cooperation with suppliers supply chain
  management
  
• Carrefour
• Flexibility?
• Large amount and variety of products, also non
  food

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Fast food

• Mac Donalds and Ekki Tasty and Quick Goodys
  and Mac Donalds Mac Donalds and Quick Pizza Hut
  and Mac Donalds
  
• All
• Speed and cost
• Standardized production proces, quality control,
  conformance and consistency
  

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Product Design Process Selection

• 3

C H A P T E R
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Learning Objectives

• Explain the strategic impact of product design
• Understand the steps in product design
• Apply break-even analysis to guide
  decision-making
  
• Identify the characteristics of different
  production processes
  
• Illustrate process flowcharting

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Continuum of Process Types

• Projects
• Used for one-at-a-time products made exactly to
  customer specifications
  
• Batch processes
• Used for small quantities (batches) with a high
  level of customization
  
• Line processes
• Used for relatively high volumes with little
  customization
  
• Continuous processes
• Used for very high volume standardized products
  (often commodities)

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Continuum of Process Types
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Supply Chain Management

• 4

C H A P T E R
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Learning Objectives

• Describe supply chains and SCM
• Describe the bullwhip effect and the role of
  information sharing in SCM
  
• Describe the role of vertical integration and
  outsourcing
  
• Describe the role of purchasing in SCM
• Describe the technologies used in information
  sharing
  
• Describe the role of warehouses in supply chains
• Describe trends in SCM

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What is a Supply Chain?

• A network of activities that deliver a finished
  product or service to the customer.
  
• The connected links of external suppliers,
  internal processes, and external distributors.
  

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Components of a Typical Supply Chain
External Suppliers
Internal Functions
External Distributors
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A Basic Supply Chain
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Supply Chain Management

• Supply Chain Management entails
• Coordinating the movement of goods and delivery
  of services.
  
• Sharing information between members of the supply
  chain.
  
• For example sales, forecasts, promotional
  campaigns, and inventory levels.

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Supply Chain for Milk Products
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External Suppliers

• External suppliers provide the necessary raw
  materials, services, and component parts.
  
• Purchased materials services frequently
  represent 50 (or more) of the costs of goods
  sold.
  
• Suppliers are frequently members of several
  supply chains often in different roles.

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External Suppliers

• Tier one suppliers
• Directly supplies materials or services to the
  firm that does business with the final customer
  
• Tier two suppliers
• Provides materials or services to tier one
  suppliers
  
• Tier three suppliers
• Providers materials or services to tier two
  suppliers

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Internal Functions

• Vary by industry firm, but might include
• Processing
• Purchasing
• Production Planning Control
• Quality Assurance
• Shipping

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Logistics Distribution

• Logistics getting the right material to the
  right place at the right time in the right
  quantity
  
• Traffic Management
• The selection, scheduling control of carriers
  (e.g. trucks rail) for both incoming
  outgoing materials products
  
• Distribution Management
• The packaging, storing handling of products in
  transit to the end-user.

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Information Sharing

• Supply chain partners can benefit by sharing
  information on sales, demand forecasts, inventory
  levels marketing campaigns
  
• Inaccurate or distorted information leads to the
  Bullwhip Effect

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Typical Information Flow
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The Bullwhip Effect

• Farther away from the customer, the quality of
  information gets worse worse as supply chain
  members base their guesses on the bad guesses of
  their partners.
• The result is increasingly inefficient inventory
  management, manufacturing, logistics

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The Bullwhip Effect

• If information isnt shared, everyone has to
  guess what is going on downstream.
  
• Guessing wrong leads to too much or too little
  inventory
  
• If too much, firms hold off buying more until
  inventories fall (leading suppliers to think
  demand has fallen).
  
• If too little, firms demand a rush order order
  more than usual to avoid being caught short in
  the future (leading suppliers to think demand has
  risen).

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Short-Circuit the Bullwhip

• Make information transparent
• Use Electronic Data Interchange (EDI) to support
  Just-In-Time supplier replenishment
  
• Use bar codes electronic scanning to capture
  share point-of-sale data
  
• Eliminate wholesale price promotions quantity
  discounts
  
• Allocate scarce items in proportion to past sales
  to avoid attempts to game the system

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Electronic Data Interchange

• The most common method of using
  computer-to-computer links to exchange data
  between supply chain partners in a standardized
  format.
• Benefits include
• Quick transfer of information
• Reduced paperwork administration
• Improved data accuracy tracking capability
• Reduced clerical costs
• Improved communications

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Vertical Integration

• A measure of how much of the supply chain is
  controlled by the manufacturer.
  
• Backward integration
• Acquiring control of raw material suppliers.
• Forward integration
• Acquiring control of distribution channels.

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Outsourcing

• Entails paying third-party suppliers to provide
  raw materials and services, rather than making
  them in-house.
  
• Outsourcing is increasing as many firms try to
  focus their internal operations on what they do
  best.

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Whether to Outsource?

• What volume is required?
• Are items of similar quality available in the
  marketplace?
  
• Is long-term demand for the item stable?
• Is the item critical to success of the firm?
• Does the item represent a core competency of the
  firm?

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Breakeven Analysis
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Break-Even Analysis
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Example The Bagel Shop

• Nic Ann plan to open a small bagel shop.
• The local baker has offered to sell them bagels
  at 40 cents each. However, they will need to
  invest 1,000 in bread racks to transport the
  bagels back forth from the bakery to their
  store.
• Alternatively, they can bake the bagels at their
  store for 15 cents each if they invest 15,000 in
  kitchen equipment.
  
• They expect to sell 60,000 bagels each year.
• What should they do?

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Example Solved

• Interpretation
• They anticipate selling 60,000 bagels (greater
  than the indifference point of 56,000).
  
• Therefore, make the bagels in-house.

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Developing a Supply Base

• How to chose between suppliers?
• One supplier or many per item?
• Whether to partner with suppliers?

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Criteria for Choosing Suppliers

• Cost
• Cost per unit transaction costs
• Quality
• Conformance to specifications
• On-time delivery
• Speed predictability

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Arguments for One Supplier per Item

• May only be one practical source for the item
• Patent issues, geography, or quality
  considerations
  
• Contract might bind you to using only one
  supplier
  
• The supply chain is integrated to support JIT or
  EDI
  
• Making multiple suppliers impractical
• Availability of quantity discounts
• Supplier may be more responsive if its
  guaranteed all your business for the item
  
• Deliveries may be scheduled more easily

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Arguments for Multiple Suppliers per Item

• No single supplier may have sufficient capacity
• Competition may result in better pricing or
  service
  
• Multiple suppliers spreads the risk of supply
  chain interruption
  
• Eliminates purchasers dependence on a single
  source of supply
  
• Provides greater volume flexibility
• Government regulation may require multiple
  suppliers
  
• Antitrust issues
• Allows testing new suppliers without risking a
  complete disruption of material flow

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Partnering with Suppliers

• Involves developing a long-term,
  mutually-beneficial relationship
  
• Requires trust to share information, risk,
  opportunities, investing in compatible
  technology
  
• Work together to reduce waste and inefficiency
  develop new products
  
• Agree to share the gains

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The Role of Warehouses

• General Warehouses
• Used for long-term storage of goods with minimal
  handling
  
• Distribution Warehouses for moving and mixing
  goods
  
• 3 Roles
• Transportation consolidation
• Consolidate LTL into TL deliveries
• Product mixing blending
• Group multiple items from various suppliers
• Improve service
• Reduced response time
• Allow for last-minute customization

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Factors affecting supply chain management in the
future

• Consumer expectations and competition
• Globalization
• Information technology
• Governement regulations
• Environment

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Future Challenges

• Household Replenishment
• Fulfilling consumer demand at the point of use
  (the home).
  
• Often called the last mile problem.
• Freeze Point Delay (Postponement)
• Last minute customization to provide exactly what
  the consumer wants while maintaining very small
  inventories

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Other future developments

• E-commerce reduction of inventories of
  thousands retail outlets around the world
  
• Virtual organisations provide core functions
  and outsources everything else
  
• Outsourcing non-core businesses
• Partnering with suppliers
• Technology gathering and collection of accurate
  data

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Intermodal transport
Intermodality

• the movement of goods in one and the same loading
  unit or vehicle which uses succesively several
  modes of transport without handling the goods
  themselves in changing modes

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Intermodal transport chain
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Units

• containers
• swapbodies
• semi-trailer
• lorries
• TEU Twenty foot Equivalent Unit based on a
  6-metre-long standard container

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Swapbody
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Terminals in Belgium
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Inland waterway/road terminals

• Started before 1998
• Actif from 1999
• Projects

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Total Quality Management

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C H A P T E R
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Learning Objectives

• Define Total Quality Management (TQM)
• Identify the TQM philosophy
• Describe the four dimensions of quality
• Identify the costs of quality
• Describe problem-solving tools
• Describe quality certifications

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What is TQM?

• Total Quality Management
• An integrated effort designed to improve quality
  performance at every level of the organization.
  
• Customer-defined quality
• The meaning of quality as defined by the customer.

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Defining Quality

• Conformance to Specifications
• How well the product or service meets the targets
  and tolerances determined by its designers
  
• Fitness for Use
• Definition of quality that evaluates how well the
  product performs for its intended use.
  
• Value for Price Paid
• Quality defined in terms of product or service
  usefulness for the price paid.

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Defining Quality

• Support Services
• Quality defined in terms of the support provided
  after the product or service is purchased
  
• Psychological Criteria
• A way of defining quality that focuses on
  judgmental evaluations of what constitutes
  product or service excellence.

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Manufacturing vs. Service

• Manufacturing produces a tangible product
• Quality is often defined by tangible
  characteristics
  
• Conformance, Performance, Reliability, Features
• Service produces an intangible product
• Quality is often defined by perceptual factors
• Courtesy, Friendliness, Promptness, Atmosphere,
  Consistency
  

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Changing Focus of Quality Management
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Overview of TQM Philosophy

• Focus on identifying root causes of reoccurring
  problems correcting them
  
• A proactive, not reactive approach
• Allow customers to determine whats important
  (customer-driven quality)
  
• Involve everyone in the organization

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TQM Philosophy

• Maintain a Customer Focus
• Identify and meet current customer needs
• Continually gather data (look for changing
  preferences)
  
• Continuous Improvement
• Continually strive to improve
• Good enough, isnt good enough
• Quality at the Source
• Find the source of quality problems correct
  them
  

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TQM Philosophy

• Employee Empowerment
• Empower all employees to find quality problems
  and correct them
  
• Focus on internal external customer needs
• External customers
• People who purchase the companys goods and
  services
  
• Internal customers
• Other downstream employees who rely on preceding
  employees to do their job

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TQM Philosophy

• Understanding Quality Tools
• All employees should be trained to properly
  utilize quality control tools
  
• Team Approach
• Quality is an organization-wide effort
• Quality circles work groups acting as
  problem-solving teams
  
• Benchmarking
• Studying the business practices of other
  companies for purposes of comparison.

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TQM Philosophy

• Manage Supplier Quality
• Ensuring that suppliers engage in the same high
  quality practices
  
• Strategic partnering with key suppliers

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Four dimensions of quality

• Quality of Design
• Determining which features will be included in
  the final design of a product to meet customers
  needs preferences
  
• Quality of Conformance to Design
• Degree to which the product conforms to its
  design specifications (a measure of consistency
  lack of variation)
  

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Four dimensions of quality

• Ease of Use
• Ergonomics, easy to understand directions, etc.
• Post-Sale Service
• Assisting with issues that arise after the
  purchase
  
• Warranty repair issues, follow through on any
  promises to build a continuing relationship with
  the customer

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Costs of Quality
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Ways to Improve Quality

• PDSA Cycle Plan-Do-Study-Act Cycle
• Quality Function Deployment
• Problem-solving tools

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Plan-Do-Study-Act Cycle (PDSA)
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Plan-Do-Study-Act Cycle (PDSA)

• Plan Plan experiments to uncover the root cause
  of problems
  
• Do Conduct the experiments
• Study Study the data generated
• Act Implement improvements or start over
• Repeat Continuously improve

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Quality Function Deployment

• Compares customer requirements products
  characteristics
  
• Understand how the product delivers quality to
  the customer

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Comparing Voices
Voice of the Engineer
Voice of the Customer
Customer-based Benchmarks
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Setting Specifications
Trade-offs
Technical Benchmarks
Targets
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QFD

• In addition, QFD
• Provides for competitive evaluation (benchmarks)
• Considers design trade-offs synergies
• Facilitates target setting developing product
  specifications

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Problem Solving Tools

• Cause-and-Effect Diagrams
• Flow Charts
• Check Lists
• Control Charts
• Scatter Diagrams
• Pareto Charts
• Histograms

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Cause-and-Effect Diagrams

• Also called Fishbone Diagrams
• Help identify potential causes of specific
  effects (quality problems)

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Flow Charts

• Diagrams of the steps involved in an operation or
  process
  

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Example
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Checklists

• Simple forms used to record the appearance of
  common defects and the number of occurrences

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Control Charts

• Track whether a process is operating as expected

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Scatter Diagrams

• Illustrate how two variables are related to each
  other

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Pareto Analysis

• Helps identify the degree of importance of
  different quality problems

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Histograms

• Illustrate a frequency distribution

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Quality Standards

• ISO 9000 Standards
• Set of internationally recognized quality
  standards
  
• Companies are periodically audited certified
• ISO 14000
• Focuses on a companys environmental
  responsibility
  
• QS 9000
• Auto industrys version of ISO 9000

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Why TQM effort fail

• Lack of genuine quality culture
• Lack of top management support and commitment
• Over- and under reliance on statistical process
  control (SPC) methods
  

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Statistical Quality Control

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C H A P T E R
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Learning Objectives

• Describe quality control methods
• Understand the use of statistical process control
  
  
• Describe apply control charts
• Distinguish x-bar, R, p and c-charts
• Define process capability
• Describe apply capability indexes
• Define six-sigma capability

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Statistical quality control

• Descriptive statistics
• Used to describe distributions of data
• Acceptance sampling
• Used to accept or reject entire batches by only
  inspecting a few items
  
• Statistical process control (SPC)
• Used to determine whether a process is performing
  as expected
  

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Sources of variation

• Common causes of variation based on common
  causes that we can not identify. These causes are
  unavoidable and are due to slight differences in
  processing
• Assignable causes of variation Causes that can
  be identified and eliminated. E.g. Machine that
  needs to be readjusted, employee that need more
  training

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Descriptive Statistics

• Mean (x-bar)
• The average or central tendency of a data set
• Standard deviation (sigma)
• Describes the amount of spread or observed
  variation in the data set
  
• Range
• Another measure of spread
• The range measures the difference between the
  largest smallest observed values in the data set

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Equations

• Mean
• Standard deviation

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Impact of Standard Deviation
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Skewed Distributions (One Form of Non-Normal
Distribution)
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Statistical Process Control Methods

• Control charts
• Use statistical limits to identify when a sample
  of data falls within a normal range of variation

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The Normal Distribution
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Setting Limits RequiresBalancing Risks

• Control limits are based on a willingness to
  think somethings wrong, when its actually not
  (Type I or alpha error), balanced against the
  sensitivity of the tool - the ability to quickly
  reveal a problem (failure is Type II or beta
  error)

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Types of Data

• Variable level data
• Can be measured using a continuous scale
• Examples length, weight, time, temperature
• Attribute level data
• Can only be described by discrete
  characteristics
  
• Example defective not defective

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Control Charts for Variable Data

• Mean (x-bar) charts
• Tracks the central tendency (the average value
  observed) over time
  
• Range (R) charts
• Tracks the spread of the distribution over time
  (estimates the observed variation)

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x-Bar Computations
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Example

• Assume the standard deviation of the process is
  given as 1.13 cl
  
• Management wants a 3-sigma chart (only 0.26
  chance of alpha error)
  
• Observed values shown in the table are in cl.

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Computations

• Center line (x-double bar)
• Control limits

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2nd Method Using R-bar
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Control Chart Factors
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Example
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Computations
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Example x-bar Chart
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R-chart Computations(Use D3 D4 Factors Table
6-1)
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Control Chart Factors
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Example R-chart
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Using x-bar R-charts

• Use together
• Reveal different problems

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Control Charts for Attribute Data

• p-Charts
• Track the proportion defective in a sample
• c-Charts
• Track the average number of defects per unit of
  output

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Process Capability

• A measure of the ability of a process to meet
  preset design specifications
  
• Determines whether the process can do what we are
  asking it to do
  
• Design specifications (a/k/a tolerance limits)
• Preset by design engineers to define the
  acceptable range of individual product
  characteristics (e.g. physical dimensions,
  elapsed time, etc.)
• Based upon customer expectations how the
  product works (not statistics!)

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Measuring Process Capability

• Compare the width of design specifications
  observed process output

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Capability Indexes

• Centered Process (Cp)
• Cp1 the process variability just meets
  specifications
  
• Cp1 Process variability is outside the range of
  specifications (see (b))
  
• Cp1 Process variability is tighter than
  specifications
  

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Example

• Design specifications call for a target value of
  16.0 /-0.2 microns (USL 16.2 LSL 15.8)
  
• Observed process output has a mean of 15.9 and a
  standard deviation of 0.1 microns
  

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Capability Indexes

• Any Process (Cpk)

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Computations

• Cp
• Cpk

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Three Sigma Capability

• Until now, we assumed process output should be
  modeled as /- 3 standard deviations
  
• By doing so, we ignore the 0.26 of output that
  falls outside /- 3 sigma range
  
• The result a 3-sigma capable process produces
  2600 defects for every million units produced

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Six Sigma Capability

• Six sigma capability assumes the process is
  capable of producing output where /- 6 standard
  deviations fall within the design specifications
  (even when the mean output drifts up to 1.5
  standard deviations off target)
• The result only 3.4 defects for every million
  produced
  

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3-Sigma versus 6-Sigma
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Acceptance sampling

• Before the process sampling materials received
  from suppliers
  
• After the process sampling finished items that
  are to be shipped either to a customer or to a
  distribution center

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Sampling plans

• A plan for acceptance sampling that precisely
  specifies the parameters of the sampling process
  and the acceptance/rejection criteria
  
• The size of the lot (N)
• The size of the sample inspected from the lot
  (n)
  
• The number of defects above which a lot is
  rejected (c)
  
• The number of samples

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Setting Limits RequiresBalancing Risks

• Control limits are based on a willingness to
  think somethings wrong, when its actually not
  (Type I or alpha error), balanced against the
  sensitivity of the tool - the ability to quickly
  reveal a problem (failure is Type II or beta
  error)

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Risks

• Consumer risk the probability that a lot will
  be accepted that is in fact bad Type II error or
  ?
  
• Producers risk the probability that a lot will
  be rejected that is in fact good- Type I error
  (a)
  

126
Operating Characteristic (OC) Curves
OC Curve with N1000,n5, c1
A graph that shows the probability or chance of
accepting a lot given various proportions of
defects in the lot.