Hill A.V. The Encyclopedia of Operations Management: A Field Manual and Glossary of Operations Management Terms and Concepts
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red tag – Relative Absolute Error (RAE)
The Encyclopedia of Operations Management Page 296
red tag – A lean manufacturing practice used in the 5S “sort” step.
The term “red tag” is used as a verb to describe the process of labeling parts, tools, furniture, measurement
instruments, office materials, books, magazines, scrap, etc., that are no longer needed. The term is also used as a
noun for the tag placed on an item to signal that the item should be disposed and how it should be disposed (e.g.,
used in another location, stored, recycled, sold, or discarded).
The sort step in the 5S process often finds many items in a work area that are not necessary for the job.
These items might have some value, but make the work area less visible. If an item might have some value, it is
red tagged to signal that it should be moved to the red tag area. If an item obviously has no value, it should be
discarded, with special care for hazardous materials. The items in the red tag area should be reviewed regularly
(e.g., every two weeks) by a cross-functional team of supervisors and engineers. Organizations often invite
employees to peruse the red tag area for items they could use in their own areas or buy for their personal use.
The result of a good red tag process is a more visible workplace, which is a main objective of lean thinking.
See 5S, cross-functional team, lean thinking, obsolete inventory, scrap.
re-engineering – See Business Process Re-engineering (BPR).
refurb – See refurbished.
refurbished – Products that have been returned by the customer, disassembled, repaired, tested, and repackaged for
sale; sometimes called refurb or refurbed products.
The refurbishing (remanufacturing) process often involves disassembly, replacement of some parts, and
reassembly. In some cases, these products are marked as “refurb” products and sold at a discount with a shorter
warranty. However, in some industries, refurb products are used interchangeably with new ones. Although this
might seem unethical, these firms are typically using components that have a very long MTBF (Mean Time
Between Failure), which means that this practice rarely affects product performance.
See remanufacturing.
regeneration – See Materials Requirements Planning (MRP).
regional sourcing – See sourcing.
regression – See linear regression.
reintermediation – See disintermediation.
Relative Absolute Error (RAE) – A forecasting performance metric that compares the actual forecast error to the
forecast error of a very simple forecasting model; defined mathematically as the mean of the absolute values of
the actual forecast errors divided by mean of the absolute values of the forecast errors from a naïve (simplistic)
forecasting model.
The RAE is the forecast error expressed as a percent of the error from a very simple forecasting model.
When this ratio is close to zero, the forecasting model is good; when this ratio is greater than one, the forecasting
model is worse than the naïve forecasting model.
Armstrong and Collopy (1992) proposed a simple RAE metric that compares the forecast errors against the
absolute error of a random walk forecast. A random walk uses the actual demand from the previous period as
the forecast for this period. The equation for the RAE using the random walk forecast as the basis of comparison
is
1
1
1
T
t
rw
t
t t
E
RAE
T D D
, where
t
E
is the forecast error in period t,
t
D
is the actual demand (sales) in period t,
and T is the number of values collected so far. The difference
1t t
D D
is the change in the demand from the
last period to this period.
One problem with this approach is that when the demand is constant for two successive periods (i.e.,
1
0
t t
D D
), the RAE
rw
will have a divide-by-zero problem. Also, when this difference is small, the RAE ratio
can be very large. Collopy and Armstrong (2006) suggest “Winsorizing” (bounding) the RAE in each period so
the ratio does not exceed some maximum value. Many authors suggest a bound of 1. For example, if the
demand is 0 and the forecast error is 20 units,
/
t t
E D
should be set to 1. This means that MAPE is defined in
the range (0, 100%).
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reliability − reorder point
Page 297 The Encyclopedia of Operations Management
A slightly more sophisticated approach is to generate the naïve forecast with a simple exponential smoothing
model where
0.1
. Mathematically, this is expressed as
1 1 2
0.1 0.9
t t t
SA D SA
, where
1t
SA
is the
smoothed average demand at the end of period t – 1 and is used as the naïve forecast for period t. One advantage
of this method is that the smoothed average will almost never be zero.
Collopy and Armstrong (2006) argue persuasively that the Mean Absolute Scaled Error (MASE) metric is
better than any RAE metric.
See exponential smoothing, forecast error metrics, Mean Absolute Deviation (MAD), Mean Absolute Percent
Error (MAPE), Mean Absolute Scaled Error (MASE), Thiel’s U, Winsorizing.
reliability – The probability that an item will continue to function at customer expectation levels during a specified
period of time under stated conditions.
Mathematically, reliability is expressed as one minus the cumulative distribution function (CDF). In other
words, ( ) ( ) ( )
s t
R
t P T t f s ds
, where T is a random variable that represents the life of the product (starting
at time zero) and f(t) is the density function for the time to failure.
See availability, bathtub curve, commonality, Design for Reliability (DFR), downtime, maintenance, Mean
Time Between Failure (MTBF), metrology, New Product Development (NPD), probability density function,
quality management, reliability engineering, Total Productive Maintenance (TPM).
reliability engineering – An engineering field and function that deals with the ability of a system, machine,
product, or component to perform required tasks under stated conditions for a specified period of time.
Reliability engineering practices include the design, specification, assessment, and achievement of product or
system reliability requirements. This involves aspects of prediction, evaluation, production, and demonstration.
See maintenance, reliability, Total Productive Maintenance (TPM).
Reliability-Centered Maintenance (RCM) – A maintenance approach that prioritizes machines and
maintenance activities to increase system reliability.
The seven basic questions for RCM are:
1. What are the functions and associated performance standards of the asset in its present operating context?
2. In what ways does it fail to fulfill its functions?
3. What causes each functional failure?
4. What happens when each failure occurs?
5. In what way does each failure matter?
6. What can be done to predict or prevent each failure?
7. What should be done if a suitable proactive task cannot be found?
RCM emphasizes the use of predictive maintenance techniques in addition to traditional preventive
measures. A well-run RCM program focuses scarce economic resources on the assets that would cause the most
disruption if they were to fail.
See maintenance, Total Productive Maintenance (TPM).
remanufacturing – The process of repairing, refurbishing, or disassembling products into reusable components.
Remanufacturing often involves breaking a product down into modules, disposing of modules, replacing
those that cannot be refurbished, repairing those that can, and then reassembling and testing the product.
Remanufacturing is being driven by both economic and environmental interests. In some countries,
remanufacturing is required by law. Examples of products that are often remanufactured include aircraft engines
(Chua, Scudder, & Hill 1993), diesel engines, and other expensive equipment.
See Design for Disassembly, green manufacturing, refurbished (refurb), reverse logistics.
reorder point – An inventory management policy that orders more inventory when the inventory position hits a
critical level called the reorder point; also called an order point system.
The graph below shows the reorder point system through two order cycles. Whenever the inventory position
(on-hand plus on-order minus allocated) goes below the reorder point, a new order is placed.
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repatriate – repositioning
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An order point system is a continuous review system, which means that it compares the inventory position
with the reorder point after every transaction. The standard equation for the reorder point is
D
R
L SS
,
where L is the constant planned leadtime,
D
is the average demand per period, and SS is the safety stock in
units. The safety stock is normally set to
D
SS z L
, where z is the safety factor, and
D
is the standard
deviation of demand per period. The safety stock entry explains how to select the safety factor z and the planned
leadtime L to achieve a user-specified service level.
The first term of the reorder point (
D
L
) is the expected (or forecasted) demand during leadtime, which
could be a moving average, a simple exponentially smoothed average, or a more sophisticated forecast that also
includes trend and seasonal factors. In contrast, the Time Phased Order Point (TPOP) system used in all MRP
systems uses the planned requirements (consumption) from higher-level assemblies to forecast (or plan) the
demand during leadtime. The second term of the reorder point is the safety stock.
See continuous review system, demand during leadtime, exponential smoothing, inventory management,
inventory position, leadtime, min-max inventory system, order cycle, order-up-to level, periodic review system,
safety stock, service level, Time Phased Order Point (TPOP), two-bin system.
repatriate – (1) To return to the country of birth, citizenship, or origin. (2) One who has been repatriated.
For example, a division of a multinational firm might need to repatriate funds to the firm’s headquarters.
See expatriate.
repetitive manufacturing – A production process with large lotsizes (long runs) of standard products.
The term “repetitive manufacturing” is often used in the context of a pull system.
See continuous flow, pull system.
replenishment leadtime – See purchasing leadtime, leadtime.
replenishment order – A purchase or manufacturing order used to resupply an item.
See continuous review system, demand during leadtime, fulfillment, safety stock, two-bin system, vendor
managed inventory (VMI).
repositioning – (a) Inventory context: Moving inventory to where it can better serve customers. (b) Transportation
context: Moving empty ocean containers to where they will more likely be needed. (c) Marketing context:
Changing the identity of a product relative to competing products.
Order
quantity
Q
Q
Reorder point
R
Demand
during
lead
time 1
Safety
stock SS
Leadtime 1
L
1
Order 1
placed
Order 2
placed
Order 3
placed
Order 1
received
Order 2
received
Time
Inventory on hand
d
2
Order cycle 1 Order cycle 2
d
1
Leadtime 1
L
2
Reorder point system
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request date − resource based view
Page 299 The Encyclopedia of Operations Management
See backhaul, deadhead, logistics.
request date – See job shop scheduling, respond to order (RTO), service level.
Request for Information (RFI) – See Request for Proposal (RFP).
Request for Proposal (RFP) – An invitation to prospective suppliers to submit a document that includes the
price, schedule, technical specifications, and additional supporting information.
The RFP specifies the required product or service and the due date and time. RFPs request information, such
as the technical specifications of the products and services, quantities, price, schedule, place of delivery, method
of shipment, packaging, instruction manual requirements, data requirements, training, support, technical
capabilities of the supplier, references (other customers), and financial information (so that financial stability of
the supplier can be evaluated).
A well-run RFP process informs prospective suppliers about the customer’s requirements, encourages them
to make their best offers, collects factual proposals from a number of suppliers, and uses an objective and
structured evaluation process to select the best supplier.
Similarly, many buyers submit a Request for Information (RFI) or a Request for Quotation (RFQ). An RFI
is used to find suppliers that can meet the specifications. A buyer uses an RFI to discover supplier capabilities
without having to reveal volume or service requirements. An RFP takes an RFI one step further by requesting
that the supplier bid on specific items defined by specification, quantities, delivery locations, packaging, method
of shipment, etc. An RFQ is used when a supplier is already familiar with the buyer’s requirements and the focus
is on price.
See
purchasing.
Request for Quotation (RFQ) – See Request for Proposal (RFP).
requisition – A purchasing term for a formal request for materials or services sent from an organizational unit to the
buying organization.
Requisitions are often used to replenish inventory, meet a particular customer need, conduct maintenance,
acquire consulting services, or meet some other need. They usually take the form of a document or electronic
record. Like purchase orders, requisitions specify a creation date, request date, requested items, and quantities;
but unlike purchase orders, requisitions usually leave pricing and vendor selection to the buying organization.
See purchase order (PO), purchasing.
reserve storage area – A warehousing term for an area used to store inventory that is used to replenish forward
pick areas; also called bulk storage, overflow storage, reserve locations, and backup storage.
See forward pick area, picking, slotting, warehouse.
resilience – The ability of an organization to reinvent business models and strategies as circumstances require.
A resilient organization has the power to prosper in almost any economic climate. To be resilient,
organizations need management systems that facilitate innovation and experimentation. According to Hamel and
Välikangas (2003, p. 62), “Battlefield commanders talk about getting inside the enemy’s decision cycle. If you
can retrieve, interpret, and act upon battlefield intelligence faster than your adversary you will be perpetually on
the offensive, acting rather than reacting. In an analogous way, one can think about getting inside a competitor’s
renewal cycle. Any company that can make sense of its environment, generate strategic options, and realign its
resources faster than its rivals will enjoy a decisive advantage. This is the essence of resilience. And it will
prove to be the ultimate competitive advantage in the age of turbulence when companies are being challenged to
change more profoundly, and more rapidly, than ever before.”
They argue that managers can reduce the time to recognize the need to change a business model in three
ways: (1) get first-hand evidence by visiting places where change happens first (e.g., talking to people under 18,
visiting a research lab), (2) filter out the “filterers” who have a vested interest in continued ignorance, and (3)
face up to the inevitability that your current strategy will decay.
See
agile manufacturing, Business Continuity Management (BCM), flexibility, robust, scalability, time-based
competition.
resource based view – A strategic point of view that firms can gain competitive advantage if and only if they have
superior resources and those resources are protected by barriers to entry; sometimes called RBV.
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Resource Requirements Planning (RRP) – response time
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A firm’s unique combination of resources and organizational capabilities create the potential for competitive
advantage to the extent to which they are valuable, rare, inimitable (hard to imitate), and non-substitutable. The
resource based view holds that these resources and capabilities are the foundation of a firm’s strategy, the
primary source of the firm’s profit, and the only stable basis of the firm’s identity (Wu, Melnyk, & Flynn 2010).
See core competence, operations strategy.
Resource Requirements Planning (RRP) – A process used to check higher-level plans to ensure that sufficient
resources are available; also called resource planning.
RRP is done at the product family/aggregate unit level before the master schedule is updated to ensure that
the production plan does not exceed the available capacity.
See Business Requirements Planning (BRP), capacity, Capacity Requirements Planning (CRP), Master
Production Schedule (MPS), product family, production planning, Rough Cut Capacity Planning (RCCP), Sales
& Operations Planning (S&OP).
respond to order (RTO) – A customer interface strategy that postpones one or more value-adding activities in the
supply chain until after the customer order has been received.
The term “respond to order” was coined by this author to describe assemble to order (ATO), make to order
(MTO), engineer to order (ETO), and other customer interface systems that support customization. The
following table contrasts the make to stock (MTS) strategy with the three main RTO strategies.
RTO strategy Concept Inventory Customer leadtime Examples
Make to stock
(MTS)
Standard products
built to forecast and
inventoried well
before demand.
Large finished goods
inventory. Usually
also has WIP and
raw materials.
Only the delivery
time to get finished
goods to the
customer.
Medical devices,
many consumer
products.
Assemble to
order (ATO)
Standard modules
assembled in
response to a
customer order.
Inventory of
modules. Usually
also has WIP and
raw materials.
Only the assembly
and delivery time.
Dell computer ATO
computers.
Pack to order is a
special case.
Make to order
(MTO)
Raw materials are
transformed into a
final product in
response to a
customer order.
Usually inventories
of raw materials. It
is possible to
implement with
almost no inventory.
Fabrication,
assembly, delivery,
and possibly
purchased raw
material leadtime.
Customized
clothing, injection-
molded parts. Print
on demand is a
special case.
Engineer to
order (ETO)
A design is
developed and
produced in response
to a customer order.
Potentially no
inventory. Might
inventory standard
components and raw
materials.
Design, fabrication,
assembly, and
delivery time.
Custom home
construction,
customer circuit
boards.
Source: Professor Arthur V. Hill
Similar RTO customer interface strategies include:
• Build to order (BTO) – Another name for make to order (MTO) or assemble to order (ATO). See
Gunasekaran and Ngai (2005) for an article on BTO.
• Configure to order (CTO) – A customer interface strategy that adjusts parameters or adds modules to a
product in response to a customer order.
• Pack to order – A customer interface strategy that collects components and packs them in a box or some
other shipping container in response to a customer order.
• Print on demand – A customer interface strategy that prints books, manuals, and other materials in response
to a customer order rather than creating an inventory of printed materials. This is commonly called “Print-
on-Demand” in the publishing industry.
The service level entry presents metrics for all types of RTO strategies.
See assemble to order (ATO), build to order (BTO), configure to order (CTO), customer leadtime, engineer
to order (ETO), fabrication, flexibility, make to order (MTO), make to stock (MTS), mass customization,
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response time − Return on Net Assets (RONA)
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operations strategy, order-to-cash, pack to order, postponement, print on demand, push-pull boundary, service
level, standard products.
response time – The time between a request and the satisfaction of that request.
In the field service context, response time is usually defined as the time from the initial customer request for
service until the technician appears at the customer site. In some cases, the technician might be delayed in
getting to a machine after arriving at the site due to building security and walking time. Some field service
organizations offer response time guarantees.
See field service, service guarantee.
responsibility charting – See RACI Matrix.
restocking charge – See buy-back contract.
Results-Only Work Environment (ROWE) – An employment policy co-created at Best Buy by Cali Ressler
and Jodi Thompson that allows workers to choose when and where they work provided they achieve their
required goals.
ROWE is a radical experiment designed to provide unparalleled freedom for employees to decide when,
where, and how much they work (Ressler & Thompson, 2010). With ROWE, jobs are not defined in terms of
showing up for work but rather in terms of the required outcomes. ROWE empowers individual workers to
decide how they will achieve results. Workers are often not even required to attend meetings in person.
Although this program began only for salaried employees, it has been extended to hourly workers. Salaried
employees are only required to work as much time as it takes to complete their goals. Hourly employees,
however, have to work a set number of hours to comply with U.S. labor regulations, but they can still choose
when they work.
Potential benefits of ROWE Potential problems of ROWE
Happier employees and greater productivity.
Greater loyalty to the company.
Lower employee turnover and less hiring expense.
Potential better work/life balance.
Better relationships with family and friends.
More focused and energized work.
More focus on results.
Sometimes difficult to measure work outcomes.
Blurred distinction between work and personal time.
Concern that some people might be lazy.
Some people might work too much.
Potential for stress and conflict.
May be harder to manage.
Potentially less collaborative culture.
Source: Professor Arthur V. Hill
The developers’ website is http://gorowe.com.
See human resources, job design, productivity.
retrospective validation – See process validation.
Return Goods Authorization (RGA) – See Return Material Authorization (RMA).
return logistics – See reverse logistics.
Return Material Authorization (RMA) – A document or electronic record provided by a supplier that gives a
customer authority to return a product; also called Return Goods Authorization (RGA).
An RMA gives a customer permission to return a product for credit, repair, or disposal. The RMA gives the
receiving location information about the product and instructions on how to process the return.
See buy-back contract, receiving, return to vendor, reverse logistics.
Return on Assets (ROA) – A financial measure of a company’s after-tax profitability relative to its total assets.
ROA is calculated as (net income)/(total assets).
See financial performance metrics.
Return on Capital Employed (ROCE) – A measure of how effectively a firm is using its capital.
ROCE is calculated as EBIT divided by capital employed, where EBIT is earnings before interest and taxes
and capital employed is total assets less current liabilities.
See financial performance metrics.
Return on Investment (ROI) – The rate of return of an investment over some time period.
ROI is calculated as net income divided by total assets.
See financial performance metrics.
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Return on Net Assets (RONA) – rework
The Encyclopedia of Operations Management Page 302
Return on Net Assets (RONA) – A measure of the productivity of a company’s invested capital regardless of the
amount of financial leverage employed.
RONA is calculated as profit after tax divided by fixed assets plus working capital, where working capital is
defined as current assets minus current liabilities.
See DuPont Analysis, financial performance metrics.
return to vendor – Purchased material found to be defective during receiving inspection or the production process
and then designated to be returned to the supplier for credit or replacement.
For example, a regional dairy company found that some of its ice cream cartons were defective after it started
the manufacturing process. The company immediately informed the carton supplier of the problem and then later
charged the relevant costs to the supplier, including the cost of the cartons, the cost of the ice cream lost in the
process, and the lost labor and machine capacity.
See buy-back contract, Return Material Authorization (RMA), reverse logistics.
revenue center – An accounting term for an area of responsibility that is only held accountable for its sales.
Revenue centers are almost always customer-facing organizations, such as the sales organization.
See cost center, investment center, profit center.
revenue management – See yield management.
revenue sharing contract – See buy-back contract.
reverse auction – An auction in which a buyer submits requests for quotations from suppliers for goods or services.
The buyer calls for bids for something that it needs to buy, and the suppliers quote the price and volume at
which they are willing to supply the good or service.
For example, General Electric invites a group of qualified suppliers to participate in an electronic auction
with a clearly defined date and product specification. At the time of the auction, participating bidders assemble
at a common Internet site and bid for the General Electric contract.
See Dutch auction, e-auction, e-business, e-procurement, purchasing, sniping.
reverse engineering – The process of dismantling and studying a competitor’s product to understand the strengths
and weaknesses of the design to support the design effort for a similar product.
Reverse engineering can be used to better understand product technologies, materials, process technologies,
assembly methods, and suppliers. Reverse engineering is a legal competitive strategy if the product is obtained
legally and so long as no patents, trademarks, or copyrights are violated.
See New Product Development (NPD), technology transfer.
reverse logistics – The management of the flow of warranty returns, products, salvage, and waste from the
customer back to the supplier; also called return logistics.
Reverse logistics returns materials to a manufacturer, distribution center, repair center, or disposal site to be
reused, serviced, repaired, recycled, re-manufactured, or disposed. The materials can be either hazardous or non-
hazardous. In some cases, firms integrate their forward and reverse logistics activities.
For example, 3M has its field service technicians manage the return of hazardous circuit boards for
refurbishing or proper disposal. Likewise, Volkswagen takes back old cars to recycle and reuse some seat
materials. Interest in reverse logistics is driven by both environmental concerns and cost-saving opportunities.
Many order management systems have reverse logistic modules that allow service reps to create Return
Merchandise Authorizations (RMAs) to send to customers so items can be brought back into the retailer’s
supply chain and tracked appropriately.
See distribution, field service, green manufacturing, logistics, remanufacturing, Return Material
Authorization (RMA), return to vendor, upstream.
revision control – See version control.
revision level – See version control.
rework – Any activity that attempts to fix, correct, or repair an unacceptable product or service.
In manufacturing, rework is often required to fix units that had defects in the manufacturing process. If
rework cannot be done or is unsuccessful, the defective units are usually scrapped.
In the lean philosophy, rework is waste, because it adds cost, reduces capacity, takes up space, etc. Lean
consultants are fond of saying that any word that starts with the letters “re” is evil. For example, readjust,
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RFID − risk sharing contract
Page 303 The Encyclopedia of Operations Management
reassemble, rebuild, recalibrate, recertify, recheck, recount, recreate, redo, reenter, reinstall, reopen, repack,
repair, repeat, replan, reprint, resend, reset, reship, resort, restart, restate, retell, retest, retrace, return, retype,
revisit, and rework are almost always wasteful. However, many “re” words are also good in operations. For
example, record, recycle, redeem, reduce, refill, refine, relax, relate, remember, remove, repair, repent, replace,
replenish, respect, and reuse.
See 8 wastes, hidden factory, lean thinking, Overall Equipment Effectiveness (OEE), prevention, process
map, scrap.
RFID – See Radio Frequency Identification (RFID).
RFP – See Request for Proposal.
Richards Curve – See logistic curve.
right of first refusal – A purchasing practice where a buyer’s favored supplier sees bids of all other participating
suppliers before announcing its own.
Elmaghraby, Goyal, and Pilehvar (2010) found that this practice has both qualitative and quantitative
benefits for the buyer when the buyer has a second auction in the near future with the same participating
suppliers. This outcome depends on the suppliers managing the information generated in the first auction to
optimize the joint outcome of both auctions.
See purchasing.
risk – A source of danger.
The term “risk” is often used synonymously with “probability,” but in professional risk assessments, risk
takes into account both the probability of a negative event with how harmful that event might be. An event is
said to be of high risk only if the probability and the impact are both high.
See http://en.wikipedia.org/wiki/Risk for a good summary on this topic.
See Failure Mode and Effects Analysis (FMEA), risk assessment, risk mitigation.
risk assessment – The identification and evaluation of nearly all possible causes (modes) of failure.
For each possible failure mode, a thorough risk assessment considers (1) what can fail, (2) how likely is it to
fail, and (3) the economic and social consequences of a failure. The Failure Model and Effects Analysis (FMEA)
entry describes this process in more detail.
See decision tree, Failure Mode and Effects Analysis (FMEA), fault tree analysis, risk, risk management, risk
mitigation.
risk management – The assessment and mitigation of risk.
See Occupational Safety and Health Administration (OSHA), risk assessment, risk mitigation, safety.
risk mitigation – Actions taken to reduce the probability or lessen the impact of an adverse event.
Ideally, risk mitigation completely prevents an adverse event. However, when total prevention is not
possible, it is important to (a) reduce the probability of the event and (b) reduce the impact of the event if it does
occur. Risk mitigation also planning how the recovery should be implemented.
See error proofing, Failure Mode and Effects Analysis (FMEA), fault tree analysis, risk, risk assessment, risk
management, safety.
risk sharing contract – An agreement between
two parties to engage in a transaction where the
payment is based on uncertain results.
The table on the right presents an interesting
example of a risk sharing agreement (a revenue
sharing agreement) between Blockbuster (a north
American video rental chain) and the video
manufacturers. In this example, Blockbuster
pays a lower up-front charge, but gets more
DVDs to rent. In exchange, the manufacturer
gets a share of Blockbuster’s rental revenue.
Cachon and Lariviere (2005) compared
revenue sharing to a number of other supply
Video store revenue sharing (risk sharing) contract example
Traditional Cooperative
Number of DVDs purchased 10 30
Price per DVD $60 $9
Purchase cost $600 $270
Number of rentals 300 500
Total rental revenue $900 $1500
Retailer’s share of rental revenue $900 (100%) $750 (50%)
Retailer’s profit $300 $480
Supplier’s share of rental revenue $0 (0%) $750 (50%)
Supplier’s total revenues $600 $1,020
Supplier’s cost @$10/DVD $100 $300
Supplier’s profit $500 $720
Total supply chain profit $800 $1200
Adapted from Cachon and Lariviere (2001)
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Robinson-Patman Act – Rough Cut Capacity Planning (RCCP)
The Encyclopedia of Operations Management Page 304
chain contracts, such as buy-back contracts, price-discount contracts, quantity-flexibility contracts, sales-rebate
contracts, franchise contracts, and quantity discounts and found that revenue sharing is equivalent to buy-backs
in the newsvendor case and equivalent to price discounts in the price-setting newsvendor case. They also
identified several limitations of revenue sharing, which explain why it is not prevalent in all industries.
See buy-back contract, fixed price contract, purchasing, quantity discount, service guarantee, supply chain
management.
Robinson-Patman Act – See antitrust laws.
robotics – The science, development, and application of self-contained, programmable, multifunctional electronic,
electric, or mechanical devices called robots that can function without human intervention and can augment
humans in their work.
Robots combine artificial intelligence software, mechanical manipulators, sensors, controllers, and
computers to provide programmable automation. Czech writer Karel Čapek introduced the word “robot” in his
play R.U.R. (Rossuum’s Universal Robots) in 1921. The word “robot” comes from the Czech word “robota,”
which means “compulsory labor.” The word was popularized by science fiction writer Isaac Asimov.
See Artificial Intelligence (AI), Automated Guided Vehicle (AGV), automation.
robust – (a) Hard to break; (b) Useful in a wide variety of situations; (c) Useful in the presence of high variation;
sometimes called fault tolerant or error-proof; antonym: error-prone.
Robust design: A component or product design is said to be “robust” if it (1) can be used in a wide variety
of products, (2) can be adapted to new requirements, (3) is reliable, sturdy, and almost never breaks (i.e., resilient
and error resistant) in the presence of environmental variation, or (4) can be produced in the presence of variation
without defects. Points (1) and (2) support part commonality.
Robust process: A process is said to be “robust” if it (1) can be used for a wide variety of products, (2) can
adapt to new requirements, and (3) can withstand a wide variety of stresses and almost never fails (i.e., is error
resistant).
See Business Process Management (BPM), commonality, Design of Experiments (DOE), durability, error
proofing, Failure Mode and Effects Analysis (FMEA), maintenance, mass customization, Mean Absolute
Deviation (MAD), operations performance metrics, operations strategy, process, resilience, Taguchi methods.
rolled throughput yield – See yield.
Root Cause Analysis (RCA) – A tool used to identify the contributors to an adverse event (or events) after the
fact.
Unlike Failure Mode and Effects Analysis (FMEA), RCA is usually conducted after an adverse event
rather than before. The purpose of RCA is to identify what caused the event and then improve the system so the
problem does not reoccur. As the name implies, the goal is to track down and fix the root cause (or the system of
causes) of the problem, not simply deal with the symptoms of the problem.
RCA is fundamental to all process improvement programs. Many tools are useful in RCA. The 5 Whys
and Pareto analysis are particularly useful starting points. Causal maps, C&E Diagrams, and fishbone
diagrams go beyond the 5 Whys approach. These tools can be facilitated with a Nominal Group Technique
(NGT) and affinity diagrams. If enough data is available, linear regression analysis and graphical tools, such as
scatter diagrams, can often help identify the potential “problem drivers.” The end result of RCA should be an
action plan for fixing the system of causes of the problem.
The causal map entry argues that the term “root cause” can be misleading, because most problems have more
than one cause. In fact, most problems have a system of causes that need to be understood, prioritized, and
managed.
See 5 Whys, affinity diagram, C&E Diagram, causal map, error proofing, Failure Mode and Effects Analysis
(FMEA), fault tree analysis, impact wheel, issue tree, learning organization, Nominal Group Technique (NGT),
Pareto Chart, Pareto’s Law, scatter diagram, sentinel event, service recovery.
root cause tree – A causal map that begins with the undesired effect and tracks back to root causes.
A root cause tree is very closely related to causal maps, C&E Diagrams, and fault trees. Root cause trees
usually put the undesired effect (the problem) at the top of the page, identify the main causes of the problem
below it, and then identify the causes for each cause below that.
See C&E Diagram, causal map, fault tree analysis.
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Page 305 The Encyclopedia of Operations Management
root mean squared error (RMSE) – See mean squared error (MSE).
Rough Cut Capacity Planning (RCCP) – A process that checks if enough capacity is available to achieve a
given Master Production Schedule (MPS).
The Rough Cut Capacity Planning (RCCP) process converts the Master Production Schedule (MPS) into a
requirements plan for a few key resources using a bill of resources. If the required resources (the load) exceed
the available resources (the capacity), production planners must find additional capacity or lower the load.
Some consultants use the term “rough cut capacity planning” to describe the process of checking the capacity
for the highest-level production plan. However, according to the APICS Dictionary and other sources,
Resource Requirements Planning (RRP) is used to compare load and capacity for the production plan (also
known as the aggregate production plan), and RCCP is used to compare load and capacity for the MPS.
See bill of resources, Business Requirements Planning (BRP), capacity, Capacity Requirements Planning
(CRP), Master Production Schedule (MPS), production planning, Resource Requirements Planning (RRP), Sales
& Operations Planning (S&OP).
routing – The sequence of manufacturing steps (operations) required to make an item.
Whereas the bill of material (BOM) defines which items are required to make a product, the routing
defines the sequence of operations required to make each item (material, part number, item number, or SKU).
Each operation is usually identified by a sequence number, workcenter, operation effectivity date, standard setup
time, and standard run time per part. The routing information may also include tooling, special labor and
machine resources, alternate routings or operations, and other specifications. Materials Requirements Planning
(MRP), Capacity Resources Planning (CRP), and Manufacturing Execution Systems (MES) use routing
information for planning purposes.
The primary routing defines the normal sequence of operations used to assemble or manufacture an item
and therefore is normally used for capacity planning and standard cost estimation. The alternate routing is a
sequence of steps used when the primary routing is not viable due to machine downtime or congestion.
See bill of material (BOM), Capacity Requirements Planning (CRP), leadtime, Manufacturing Execution
System (MES), Materials Requirements Planning (MRP), operation, run time, shop floor control, shop packet,
Theory of Constraints (TOC), workcenter.
R-squared – See correlation, linear regression.
RTO – See respond to order (RTO).
run chart – A simple graph that displays data in time sequence; also known as a runs chart, time series graph, time
series plot, trend chart, run-sequence plot, line graph, and run diagram.
The x-axis for a run chart is either time or the observation number. The y-axis is an output (performance)
metric for a process. The mean or median of the performance variable is often included in the graph to show a
horizontal reference line.
A run chart can be used to monitor a process to check for changes in the mean or trend and also to check for
outliers. Unlike a control chart, the y variable for a run chart usually represents a single observation rather than a
sample statistic (such as the mean or range of a sample) and does not show control limits.
See control chart, outlier, scatter diagram, seven tools of quality.
run time – The time required to produce a single part or product.
The total time for an operation is the setup time plus the batch size (lotsize) times the run time. The total
time for an order is the sum of the operation times for all operations in the routing. The planned leadtime for an
order should include queue time. In the queuing theory context, the average run time is called the average
service time.
See Economic Lot Scheduling Problem (ELSP), leadtime, queuing theory, routing, setup time, touch time.
running setup – See external setup.
runs test – A statistical test that checks if a sequence of values is sequentially (serially) independent.
The runs test is a non-parametric statistics test used to answer questions about a time series such as:
Is this sequence data generated from a random process? If the sequence is truly random, it should
change directions fairly often, but not too often.