Operations Management Exam: Qualitative and Quantitative Questions

Qualitative Questions (50 marks in total)

a. Can Lean thinking be used in service businesses? Discuss. (10 marks)

b. Explain the difference between reactive and responsive supply chains. What are the advantages and disadvantages of adopting each strategy? (10 marks)

c. What are the main decisions involved in adopting a postponement production strategy? When is it appropriate? (10 marks)

d. How can companies cope with large variability in demand and lead times? (20 marks)

After a hectic but fun year at UCD, you ditched a career in consulting to become the MD of the Sugar plant. You are looking forward to apply your extensive knowledge of Operations principles to this plant.

On your first visit to the sugar producing facility, you learn the following. Sugar production has basically three steps: Purification of Molasses, followed by Superheating of the purified molasses, and finally Crystallization. The facility has three extremely reliable continuous processing machines for the three process steps. To ensure the freshness of sugar, at no point in the process, can one build work in process inventories. The performance of the individual processing machines is described below.

Step 1, Purification: Capacity: 100 Tons/hour (T/hr); Yield: 90% (in other words, if 100 Tons of input are introduced in the machine, only 90 tons are available for the next step) 
Step 2, Superheating: Capacity: 80 Tons/hour; Yield: 80% 
Step 3, Crystallization: Capacity: 70 Tons/hour; Yield: 80% 

i.a) Draw the process flow diagram assuming 50 T/hr of molasses are introduced into the Purification stage. (4 marks)

i.b) What would be the utilization of each of the stages? What stage is the bottleneck? What is the capacity of this plant (in Tons of crystallized sugar per hour)? What is the input required at the Purification stage to reach plant’s capacity? (10 marks)

ii) After analyzing the plant, you feel a little frustrated by the high yield losses. You contact Tommy Tierman, a UCD Alum who is now the leading process improvement consultant for the sugar industry. He mentions a new technology available that can re-process the losses from the Crystallization stage. This could improve the efficiency of the plant, increasing its total capacity.

Assume we take the losses from the crystallization stage and convert them to superheated liquid, which must be again re-introduced into the crystallization stage. We introduce a “Re-processing machine” with a capacity of 20 T/Hr. The process flow diagram is illustrated below: (10marks)

Nwankwo Kanu is Chief Investment Officer at a leading hedge fund in Africa. While his fund has been performing well, the contagion and fear in capital markets is getting to his investors. This is leading to huge redemptions from his fund. He must plan to meet these redemptions at the lowest costs. Kanu, a UCD Alum, recalls some quantitative methods he learned at Operations Management back at UCD, and suggests this method to his economic team to estimate these redemptions and predict that over the course of the next month, the expected redemptions will be US$ 300m. The coefficient of variation of this estimate is 0.333 standard deviation US$ 100m. Unfortunately, all Kanu's hedge fund assets are illiquid and cannot be disposed for the next year. He must thus go to the capital markets to raise additional funds. He has two sources of financing that he is planning to use simultaneously:

 
Source 1: Borrow from the government sponsored TARP (The-Augmentation-of-Rich-People) program. This facility charges a usurious 25% annual rate of interest. Further, it can be availed only if a request is made far in advance.

Source 2: Alternatively, when TARP funding comes short, you can borrow from the overnight credit markets. You can use this facility anytime and it provides funding immediately. Unfortunately, the rate of interest charged is 40% per annum.

i) How much money would you borrow from the TARP funds? (8 marks)
ii) What are your annualized capital costs if you employ the solution prescribed in (a)? (6 marks)
iii) Abou Abed, one of Kanu's classmates at UCD is in exactly the same financial position with Kanu. While he runs an identical fund, most of his clients are located in the beautiful downtown Beirut. He calls Kanu up and proposes merging the two funds. He somewhat remembers the Operations class and suggests that merging would reduce the above mentioned capital costs for both funds. 
Do you agree? Justify your answer in no more than 100 words. (4 marks)
iv) The crisis is getting worse. The overnight credit markets have now completely frozen up. Kanu no longer cares about minimizing the capital costs. All he cares about is the odds of survival, or the probability that the fund will not be able to meet redemptions. What is the minimum amount of money Kanu needs to borrow from TARP funds to ensure that he will be able to meet all redemption requests with a 95% probability? (8 marks)