1. OUTLINE
Questions, Comments?
Return Quiz
Review
Evaluating supplier
Layout procedures

2. Chapter 14 – Sourcing Decisions
Newspaper problem
Buyback and revenue sharing
Assessing suppliers
Selecting suppliers - Single or multiple
Contracts
Negotiation (BATNA, ZOPA, Reservation values)
Design Collaboration
Procurement Process

3. Layout procedures
Systematic Layout Planning
Relationship charts
From to charts
Flow x Distance and Adjacency
Layout planning chart
Space requirements
Facilities layout programs
Minisum
Minimax
Pairwise exchanges
VBA for Flow x Distance and Adjacency

4. Definitions
Cost of Goods Sold – total expenditures to obtain or manufacture the product. This does not include Sales and administrative costs.
Safety Inventory – Inventory held to protect against variations in demand and lead time
Cycle Inventory – Inventory held to account for lot sizing
Landed Cost – Purchase Price plus transportation in
Bullwhip effect – accentuation of variations in demand as we go up the chain
Replenishment lead time – time from ordering to receipt

5. Definitions - continued
Quantity Discounts – Price depends on the amount purchased
Double Marginalization – Retailer sets price higher than is optimal for the chain in order to have enough margin (Sales are a function of price)
Newspaper problem – Deciding how many of a perishable item to order, based on loss of profits (under stocking) and cost of unsold goods (over stocking)
Excel Norm functions to calculate normal probabilities:
NORMINV(percentage, mean, standard deviation) = Value
NORMDIST(Value, mean, standard deviation, TRUE) = percentage

6. Newspaper problem Newspaper person’s cost = $0.25, no salvage value
Profit on a paper = $0.50
Estimated average sales = 60
Estimated standard deviation of sales = 5
Percentage (Service level) = 0.50/( ) = .667
NORMINV(0.667, 60, 5) = 63 or Q= average + z(std. dev)
If the overage cost is lower than the shortage cost we order more than the average
Underage cost = lost profit = Selling price – Cost
Overage cost = Excess unsalvageable inventory = Cost – salvage value
Service level = Underage cost/ (Underage + overage cost)

7. The newspaper problem
Expected Profit at Q = 62: $28.64
Expected Profit at Q = 63: $28.62
The formula for expected profit comes from the probability of demand being less or more than the order quantity

8. The newspaper problem

9. The newspaper problem

10. Assessing suppliers
Price (landed) and terms
Lead time, mean and variance affect safety inventory
Supply flexibility – changes in quantities (lot sizes) (safety inventory)
Delivery frequency – affects cycle inventory
Quality
Information infrastructure
Design collaboration
Exchange rates, taxes, duties
Viability – are they going to be around

11. Evaluation Company Profile Management Capability
Personnel capabilities
Cost Structure (see example on next three slides)
Total quality management
Process and technology
Environmental capability
Financial capability (see slides from Park’s Engineering Economics Text)
Production scheduling and control systems
Information Systems capability
Supplier sourcing strategies
Potential for a long term relationship

12. CHAPTER 2 of Park - CATEGORIES OF RATIOS
DEBT MANAGEMENT - HOW DO YOU GET YOUR CAPITAL
LIQUIDITY - CAN YOU PAY YOUR DEBTS
ASSET MANAGEMENT- INVENTORY AND RECEIVABLES
MARKET VALUE - HOW REALISTIC IS THE VALUE OF THE STOCK
PROFITABILITY - HOW WELL ARE YOUR INVESTMENTS GENERATING PROFITS

13. CHAPTER 2 of Park - DEBT MANAGEMENT
DEBT RATIO = TOTAL DEBT / TOTAL ASSETS
HAVE YOU BORROWED TOO LARGE A PART OF YOUR ASSETS?
TIMES INTEREST EARNED RATIO =
EARNINGS BEFORE INTEREST AND INCOME TAXES /
INTEREST EXPENSE
CAN YOU EARN ENOUGH TO PAY THE INTEREST?

14. CHAPTER 2 of Park - LIQUIDITY
CURRENT RATIO =
CURRENT ASSETS / CURRENT LIABILITIES
DO YOU OWE MORE THAN YOU HAVE?
QUICK RATIO =
(CURRENT ASSETS - INVENTORIES) /
CURRENT LIABILITIES
HOW FAST CAN YOU PAY YOUR DEBTS?

15. CHAPTER 2 of Park - ASSET MANAGEMENT
INVENTORY TURNOVER =
SALES / AVERAGE INVENTORY BALANCE
ARE YOU MOVING YOUR INVENTORY FAST ENOUGH?
ACCOUNT RECEIVABLE TURNOVER (DAYS SALES OUTSTANDING) =
RECEIVABLES / DAILY SALES
ARE YOU COLLECTING FROM YOUR CUSTOMERS?
TOTAL ASSET TURNOVER =
SALES / TOTAL ASSETS
ARE YOUR ASSETS GENERATING SALES?

16. CHAPTER 2 of Park - MARKET VALUE
PRICE EARNING RATIO =
STOCK PRICE / ANNUAL EARNINGS PER SHARE
LIKE INTEREST (JUST A LOT LOWER)
BOOK VALUE PER SHARE
(TOTAL STOCK HOLDER EQUITY - PREFFERED STOCK) /
SHARES OUTSTANDING
USUALLY MUCH LOWER THAN THE STOCK PRICE

17. CHAPTER 2 of Park - PROFITABILITY
PROFIT MARGIN ON SALES =
NET INCOME / SALES
HOW EFFECTIVE ARE YOUR SALES IN GENERATING INCOME?
RETURN ON TOTAL ASSETS =
(NET INCOME + TAXED INTEREST EXPENSE) /
AVERAGE TOTAL ASSETS
ARE YOUR INVESTMENTS GENERATING ENOUGH INCOME?

18. Contracts
Objectives
Protect both parties
Reduce double marginalization
Reduce information distortion
Increase agent effort
Induce improvement in performance
Types
Buyback or return
Revenue sharing

19. Minisum
Objective –find the location of a new facility such that the total distance from it to all other facilities is minimized.
Given – The location and weights (importance) of all the other (existing) facilities
Procedure –
Order the x coordinates in nondecreasing order
Calculate cumulative weight
Find half the total weight
Select the x coordinate of the new facility such that the cumulative weight is equal to or greater than half the total weight
Repeat for y

20. Minimax
Objective –find the location of a new facility such that the maximum distance from it to all other facilities is minimized.
Given – The location of all the other (existing) facilities (ai, bi)
Procedure –
Calculate the following parameters:
C1 = min(ai + bi)
C2 = max(ai + bi)
C3 = min(-ai + bi)
C4 = max(-ai + bi)
C5 = max(c2 - c1, c4 - c3)

21. Minimax - continued
Procedure (continued)–
The optimum location lies on a line between the two points:
(x,y) = ½(C1 - C3 , C1 + C3 + C5)
(x,y) = ½(C2 – C4 , C2 + C4 – C5 )
At any optimal point the maximum distance is C5 / 2

22. Definitions
Space planning units (SPU)
Affinities (relationships)
Space requirements
Block layout

23. Systematic layout planning

24. Activity relationship chart

25. “Automated” Layout procedures
Pair wise Exchange (demo file)
MCRAFT (see algorithms upload)
Divide the building into bands
Place departments starting on one end into the first band
When you reach the end of the band, start on the send band, dividing the department into an L shape if necessary
Continue placing departments until you get to the end of the second band and if there is a third band, procede to the right
Evaluate either flow times distance or adjacency