Management Lite & Ezy 41 – The Factor-Rating Method

There are instances when we need to evaluate various alternatives and select the best one. For example, when a U.S. company plans to outsource its call center to Asia, it can consider one of these countries: India, Malaysia and The Philippines.

The factor-rating method is a useful tool to help us make decision. It involves six steps:

1. Develop a list of relevant factors which affect our choice.
2. Assign a weight to each factor to reflect its relative importance.
3. Develop a scale for each factor, e.g. 1 to 10 or 1 to 100 points.
4. Determine the score of each factor using the scale in step 3.
5. Multiply the score by the weights for each factor and total the score for each alternative.
6. Make a decision based on the maximum point score.

Example

I wanted to buy a new car. Based on my budget, I narrowed down my choices to Honda City and Toyota Vios. I then applied the factor-rating method to evaluate each of these cars. The scores are given in the following table:

(Click to enlarge:)

As you would expect, I bought the City.

Reference:

Jay Heizer & Barry Render, “Operations Management”, 8^th edition

Mangrove Forest

Mangrove forest at Kuala Gula, state of Perak, Malaysia…

A bird resting on the branch of a tree… I wish I had a Canon EF 500mm f/4L IS USM .

The roots…

Related posts:
Sunset at Kuala Gula
Poisonous Fish

Management Lite & Ezy 40 – Decision Tree

A decision tree is a graphical display of the decision process that indicates decision alternatives and their respective payoffs.

Example

A company which manufactures car audio system is investigating the possibility of building a new plant. It has the options of either constructing a large of a small plant. The market for the product produced – car audio system – can be either favorable or unfavorable.

With a favorable market, a large facility will give the company a net profit of $200,000. If the market is unfavorable, a $180,000 net loss will occur. A small plant will result in a net profit of $100,000 in a favorable market, or a net loss of $20,000 in an unfavorable market. The company can, of course, choose not to do anything.

The probability of a favorable market is 0.60. The probability of an unfavorable market is 0.40.

(Click to enlarge.)

We will compute the Expected Monetary Value (EMV) for each alternative. The EMV for an alternative is given by the formula below:

EMV = (payoff of favorable market) x (probability of favorable market)

+ (payoff of unfavorable market) x (probability of unfavorable market)

A completed and solved decision tree is presented below:

(Click to enlarge.)

Based on the decision tree, a small plant should be built because it yields the highest EMV.

Reference:

Jay Heizer & Barry Render, “Operations Management”, 8^th edition

U.S. Doctors, Watch Out!

Santa Barbara, California-based company InTouch Health has developed a robot called RP-7 (RP for remote presence). This robot allows physicians to “project themselves to another location to move around, see, hear, talk and interact as though they were actually there”.

The real time video of RP-7 allows for detailed viewing, examination and digital image capture of human anatomy, bedside monitors and equipment, EKG strips, and light box images.

In the not-so-distant future, Asian doctors may be able to offer consultation service to their patients in the United States.

Watch out, American doctors! Your jobs could be offshored.

Poisonous Fish

Blowfish is one of the most poisonous fish. Known as fugu in Japanese, it is a delicacy in the Land of Rising Sun, after the poison is removed.

WARNING: Don't try to cook fugu at home.

In Japan, only qualified chefs are allowed to cook fugu, and they have been trained to remove poisonous parts of the fish. Despite that, many people have died after consuming the most delicious fish in the world.

When I went to Kuala Gula recently, a fisherman caught a fugu and showed it to us…

Related post: Sunset at Kuala Gula

When to Announce New Products

Readers of my blog are probably aware that I am a shutterbug. In learning to photography in the past few years, I have also become familiar with digital camera market.

Majority of the high-end digital cameras used by serious photographers and professionals belong to a technology called Digital Single Lens Reflex, or DSLR. Canon and Nikon are the two major DSLR-makers.

Product life cycle of DSLR typically ranges from 18 months to 3 years. Canon and Nikon regularly release new models. When Canon announces a new product, it usually will hit the shelves in 1 or 2 months. For the case of Nikon DSLR, consumers often need to wait 3 or 4 months. One may wonder why Nikon makes public announcement well before they are ready to deliver it.

Canon and Nikon are, of course, silent on their marketing strategies. I suspect that when Nikon announces a new DSLR, they are telling the customers: “Don’t buy Canon. Wait for us. We have some nice stuff in the pipeline.” Canon, on the other hand, avoids making announcement too early because they worry that sales of existing models would be dampened. They want customers to buy NOW instead of buy later.

Canon is the market leader while Nikon is the market challenger. Nikon wants to steal market share away from the leader, or at least defend its own share. Canon is more concerned with cannibalization – one product eats into the market of another. That basically explains the different strategies adopted by the two DSLR makers.

Sunset at Kuala Gula

Kuala Gula is located in the state of Perak in North Malaysia. It is known for its mangrove forest and bird sanctuary. Recently, I went to Kuala Gula for bird-watching. Unfortunately, my camera lens just wasn’t long enough to do the job. In the end, I had to be content with a few sunset pictures.

Sunset...


Fisherman apprentice... (You're fired )


Fisherwomen...


Posing for sunset...

Management Lite & Ezy 39 – Ohno’s Seven Wastes

In lean production, waste refers to anything that does not add value to a product from the customer’s perspective.

Taicho Ohno, the Toyota’s executive who spearheaded Toyota Production System, identified seven categories of wastes which are to be reduced or eliminated. They are:

1. Overproduction – producing more than the customer orders or producing early (before it is demanded) is waste. Inventory of any kind is usually a waste.
2. Queues – idle time, storage, and waiting are wastes.
3. Transportation – moving material between plants, between work centers, and handling more than once is waste.
4. Inventory – unnecessary raw material, work-in-process, finished goods, and excess operating supplies add no value.
5. Motion – movement of equipment or people that adds no value is waste.
6. Overprocessing – work performed on the product that adds no value is waste.
7. Defective product – returns, warranty claims, rework, and scrap are wastes.

Reference:

Jay Heizer & Barry Render, “Operations Management”, 8^th edition

Copying

Management Lite & Ezy 38 – Inventory Management II

Part I is here.

The Economic Order Quantity (EOQ) model is a simple inventory-control technique. It is based on several assumptions:

1. Demand is known and constant.
2. Receipt of inventory is instantaneous and complete, i.e. the inventory from an order arrives in one batch at one time.
3. No quantity discount.
4. The only variable costs are inventory holding cost and ordering cost (or setup cost).

With these assumptions, the graph of inventory usage over time has a sawtooth shape, as shown in the diagram below:

The optimum order quantity is the quantity which results in lowest variable costs (inventory holding cost plus ordering cost). It is given by this formula:

Where:

Q* = optimal order quantity

D = annual demand in units for the inventory item

S = setup or ordering cost for each order

H = inventory holding cost per unit per year

Example

The annual demand for an inventory item is 1,000 units; the setup or ordering cost is $10 per order; and the holding cost per unit per year is $0.50. Solving for optimal order quantity:

Reference:

Jay Heizer & Barry Render, “Operations Management”, 8^th edition