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Matching Supply with Demand: An Introduction to Operations Management / Edition 3

Matching Supply with Demand: An Introduction to Operations Management / Edition 3

by Gerard Cachon

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ISBN-10: 0073525200

ISBN-13: 9780073525204

Pub. Date: 02/24/2012

Publisher: McGraw-Hill Higher Education

Gerard Cachon and Christian Terwiesch, Matching Supply with Demand: An Introduction to Operations Management, 3e is the most authoritative, cutting-edge book for operations management MBAs. The book demands rigorous analysis on the part of students without requiring consistent use of sophisticated mathematical modeling to perform it. When the use of quantitative


Gerard Cachon and Christian Terwiesch, Matching Supply with Demand: An Introduction to Operations Management, 3e is the most authoritative, cutting-edge book for operations management MBAs. The book demands rigorous analysis on the part of students without requiring consistent use of sophisticated mathematical modeling to perform it. When the use of quantitative tools or formal modeling is indicated, it is only to perform the necessary analysis needed to inform and support a practical business solution.

The guiding principle in the development of Matching Supply with Demand has been “real operations, real solutions.” “Real operations” means that most of the chapters in this book are written from the perspective of a specific company so that the material in this text will come to life by discussing it in a real-world context. “Real solutions” means that equations and models do not merely provide students with mathematical gymnastics for the sake of an intellectual exercise.

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Table of Contents

Introduction     1
Learning Objectives and Framework     3
Road Map of the Book     6
The Process View of the Organization     10
Presbyterian Hospital in Philadelphia     10
Three Measures of Process Performance     15
Little's Law     16
Inventory Turns and Inventory Costs     19
Five Reasons to Hold Inventory     23
Pipeline Inventory     23
Seasonal Inventory     24
Cycle Inventory     25
Decoupling Inventory/Buffers     26
Safety Inventory     26
The Product-Process Matrix     27
Summary     29
Further Readings     29
Practice Problems     29
Understanding the Supply Process: Evaluating Process Capacity     32
How to Draw a Process Flow Diagram     33
Bottleneck, Process Capacity, and Flow Rate (Throughput)     38
How Long Does It Take to Produce a Certain Amount of Supply?     40
Process Utilization and Capacity Utilization     41
Workload and Implied Utilization     43
Multiple Types of Flow Units     44
Summary     48
Practice Problems     50
Estimating and Reducing Labor Costs     56
Analyzing an Assembly Operation     56
Time to Process a Quantity X Starting with an Empty Process     58
Labor Content and Idle Time     60
Increasing Capacity by Line Balancing     63
Scale Up to Higher Volume     66
Increasing Capacity by Replicating the Line     67
Increasing Capacity by Selectively Adding Workers     67
Increasing Capacity by Further Specializing Tasks     69
Summary     72
Further Readings     74
Practice Problems     74
The Link between Operations and Finance     80
Paul Downs Cabinetmakers     81
Building an ROIC Tree     82
Valuing Operational Improvements     87
Analyzing Operations Based on Financial Data     90
Summary     95
Further Readings     95
Practice Problem     95
Batching and Other Flow Interruptions: Setup Times and the Economic Order Quantity Model     97
The Impact of Setups on Capacity     98
Interaction between Batching and Inventory     101
Choosing a Batch Size in the Presence of Setup Times     103
Balancing Setup Costs with Inventory Costs: The EOQ Model     106
Observations Related to the Economic Order Quantity     110
Transfer Batches     114
Setup Time Reduction     114
Other Flow Interruptions: Buffer or Suffer     115
Summary     117
Further Reading     119
Practice Problems     119
Variability and Its Impact on Process Performance: Waiting Time Problems     124
Motivating Example: A Somewhat Unrealistic Call Center     125
Variability: Where It Comes From and How It Can Be Measured     127
Analyzing an Arrival Process     129
Stationary Arrivals     131
Exponential Interarrival Times     133
Nonexponential Interarrival Times     134
Summary: Analyzing an Arrival Process     135
Service Time Variability     135
Predicting the Average Waiting Time for the Case of One Resource     137
Predicting the Average Waiting Time for the Case of Multiple Resources     141
Service Levels in Waiting Time Problems     144
Economic Implications: Generating a Staffing Plan     145
Impact of Pooling: Economies of Scale     148
Priority Rules in Waiting Lines     152
Service-Time-Dependent Priority Rules      152
Service-Time-Independent Priority Rules     152
Reducing Variability     153
Ways to Reduce Arrival Variability     153
Ways to Reduce Service Time Variability     154
Summary     156
Further Reading     157
Practice Problems     157
The Impact of Variability on Process Performance: Throughput Losses     163
Motivating Examples: Why Averages Do Not Work     163
Ambulance Diversion     164
Throughput Loss for a Simple Process     165
Customer Impatience and Throughput Loss     169
Several Resources with Variability in Sequence     171
The Role of Buffers     172
Summary     174
Further Reading     175
Practice Problems     175
Quality Management, Statistical Process Control, and Six-Sigma Capability     178
Controlling Variation: Practical Motivation     179
The Two Types of Variation     180
Constructing Control Charts     182
Control Chart Example from a Service Setting     185
Design Specifications and Process Capability     188
Attribute Control Charts     190
Robust Process Design      192
Impact of Yields and Defects on Process Flow     194
Rework     195
Eliminating Flow Units from the Process     196
Cost Economics and Location of Test Points     196
Defects and Variability     197
A Process for Improvement     198
Further Reading     200
Practice Problems     200
Lean Operations and the Toyota Production System     202
The History of Toyota     202
TPS Framework     204
The Seven Sources of Waste     205
JIT: Matching Supply with Demand     208
Achieve One-Unit-at-a-Time Flow     208
Produce at the Rate of Customer Demand     209
Implement Pull Systems     209
Quality Management     211
Exposing Problems through Inventory Reduction     213
Flexibility     214
Standardization of Work and Reduction of Variability     215
Human Resource Practices     216
Lean Transformation     217
Further Reading     218
Practice Problems     218
Betting on Uncertain Demand: The Newsvendor Model     220
O'Neill Inc.     221
An Introduction to the Newsvendor Model      223
Constructing a Demand Forecast     223
The Expected Profit-Maximizing Order Quantity     232
Performance Measures     236
Expected Lost Sales     237
Expected Sales     239
Expected Leftover Inventory     239
Expected Profit     240
Fill Rate     240
In-Stock Probability and Stockout Probability     241
Other Objectives for Choosing an Order Quantity     242
Managerial Lessons     244
Summary     246
Further Reading     248
Practice Problems     248
Assemble-to-Order, Make-to-Order, and Quick Response with Reactive Capacity     256
Evaluating and Minimizing the Newsvendor's Demand-Supply Mismatch Cost     257
When Is the Mismatch Cost High?     259
Reducing Mismatch Costs with Make-to-Order     262
Quick Response with Reactive Capacity     263
Unlimited, but Expensive, Reactive Capacity     263
Limited Reactive Capacity     267
Summary     274
Further Reading     276
Practice Problems     276
Service Levels and Lead Times in Supply Chains: The Order-up-to Inventory Model      283
Medtronic's Supply Chain     284
The Order-up-to Model Design and Implementation     287
The End-of-Period Inventory Level     290
Choosing Demand Distributions     291
Performance Measures     295
In-Stock and Stockout Probability     295
Expected Back Order     297
Fill Rate     298
Expected On-Hand Inventory     299
Pipeline Inventory/Expected On-Order Inventory     300
Choosing an Order-up-to Level to Meet a Service Target     300
An In-Stock Probability Target     301
A Fill Rate Target     301
Choosing an Appropriate Service Level     304
Controlling Ordering Costs     307
Medtronic Wrap-up     310
Managerial Insights     312
Summary     315
Further Reading     316
Practice Problems     316
Risk-Pooling Strategies to Reduce and Hedge Uncertainty     321
Location Pooling     321
Pooling Medtronic's Field Inventory     322
Medtronic's Distribution Center(s)     326
Electronic Commerce     328
Product Pooling     330
Lead Time Pooling: Consolidated Distribution and Delayed Differentiation     336
Consolidated Distribution     336
Delayed Differentiation     341
Capacity Pooling with Flexible Manufacturing     344
Summary     349
Further Reading     352
Practice Problems     352
Revenue Management with Capacity Controls     357
Revenue Management and Margin Arithmetic     357
Protection Levels and Booking Limits     359
Overbooking     365
Implementation of Revenue Management     367
Demand Forecasting     368
Dynamic Decisions     368
Variability in Available Capacity     368
Reservations Coming in Groups     368
Effective Segmenting of Customers     368
Multiple Fare Classes     369
Software Implementation     369
Variation in Capacity Purchase: Not All Customers Purchase One Unit of Capacity     369
Summary     371
Further Reading     372
Practice Problems     372
Supply Chain Coordination     377
The Bullwhip Effect: Causes and Consequences     377
Order Synchronization     380
Order Batching     382
Trade Promotions and Forward Buying     383
Reactive and Overreactive Ordering     386
Shortage Gaming     387
Bullwhip Effect: Mitigating Strategies     388
Sharing Information     389
Smoothing the Flow of Product     389
Eliminating Pathological Incentives     390
Using Vendor-Managed Inventory     390
Incentive Conflicts in a Sunglasses Supply Chain     392
Buy-Back Contracts     395
More Supply Chain Contracts     401
Quantity Discounts     401
Options Contracts     401
Revenue Sharing     401
Quantity Flexibility Contracts     402
Price Protection     402
Summary     403
Further Reading     403
Practice Problems     403
Statistics Tutorial     406
Tables     415
Evaluation of the Loss Function     427
Equations and Approximations     430
Solutions to Selected Practice Problems     437
Glossary     462
References     471
Index of Key "How to" Exhibits     474
Summary of Key Notation and Equations     475
Index     479

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