Table of ContentsThe Operations Function Show
The Operations FunctionOperations Management, as a field, deals with the production of goods & services. It is defined as decision making in the operations function & integration of these decisions
with other functions. [Input: raw materials, energy, labor & capital] -> [Output] Operations create wealth in the global economy, & thus we cannot survive & prosper without them. Wealth creation occurs when the value of outputs in goods & services exceeds the cost of inputs used; to raise productivity [= output/input] output > input. Four Major Decision Responsibilities of Operations Management1. Process. Decisions on this category determine the physical process or facility used to produce the product or service & the associated workplace practices – a type of equipment, process flows, the layout of the facility, job design & workforce policies. Functional areas are concerned with a particular focus of responsibility or decision making in an organization. Seven Contemporary Themes in Operations(1) Services & manufacturing; (2) Customer-directed operations; (3) Lean Operations – concerned with eliminating waste (non-value adding) activities in every part of operations & the business; integration of operations with other functions; environmental concerns, SC management, & globalization of operations. Table of Contents Operations & SC Strategy“Creating an organization of highly motivated people is extremely hard to duplicate…” The strategy for the operations function must be linked to the business strategy & other functional strategies, leading to a consistent pattern of decisions, unique capability, & competitive advantage for the firm. Corporate Strategy – defines what business the company is pursuing. Business Strategy – defines how a particular business will compete. Four Elements of Operations Strategy1. Mission. Derived from the particular business strategy selected by the business unit.
3. Objectives
These objectives can work in concert if non-value-adding activities are removed from operations. One of the four objectives should be selected as an order winner; the others are order qualifiers. Order winner – an objective that will win orders from the customers in a particular segment that marketing has selected as the target market. Order Qualifier – acceptable levels of these objectives are needed to qualify to get the order. Policies. Indicate how the operation’s objectives will be achieved. It should be developed for each of the major decision areas (quality, process, inventory, capacity). Business StrategiesProduct imitator (operational excellence) – typical of a mature, price-sensitive market with a standardized product. [Standardization, superior processes] Operations CompetenceResources or capabilities that are difficult to imitate:
Resource-based view – advocates building strategy on resources that are rare, valuable, inimitable & non-substitutable consistent with a sustainable distinctive competence. In some situations the basis of competition is not the firm, but the entire Supply Chain. Supply Chain strategy is an extension of operations strategy that considers not only the firm but also the strategies of its Supply Chain partners. Table of Contents Product DesignProduct Design – refers to either a physical, manufactured product or service; result in the development of a business strategy. Strategies for New-Product IntroductionA. Market Pull. The market is the primary basis for determining the products a firm should make, with little regard for existing technology. “A firm should make what it can sell”. New-Product Development Process I. Concept Development. This phase is concerned with the idea generation & evaluation of alternative ideas for the new product. The physical product is NOT YET designed. The decision to proceed to the product design phase will ordinarily require top management approval. At the time of the approval a cross-functional team will be established, to actually design the new product. II. Product Design. Concerned with designing the physical new product. At the end of the product design phase, the firm has a set of product specifications & engineering drawings specified in sufficient detail that production prototypes can be built & tested. Process Design should take place simultaneously with product design. III. Pilot Production/Testing. Complex products require testing of production prototypes before they are actually put into production. To facilitate transition from design to production, an information package should be finalized that contains not only product specifications but also process design specifications, training procedures for operators & test results. Cross-Functional Design Concurrent Engineering – simultaneous development process; overlapping phases for product design instead of the sequential approach. Quality Function Deployment (QFD) – or “House of Quality”, tool for linking customer requirements as defined by the customer to technical specifications [connect customer attributes to engineering characteristics]; facilitates interfunctional cooperation between marketing, engineering & manufacturing. Design for Manufacturing (DFM) – approach that consists of two things: DFM removes unnecessary parts & makes the product easier to make. Value = Usefulness/Cost Cost – an absolute term & measures the
amount of resources used to produce the product. In value analysis: II. Modular Design – makes it possible to have relatively high product variety & low component variety at the same time. The core idea is to develop a series of basic product components, or modules that can be assembled into a large number of different products & considering only the combinations of options that have significant market demand. To the customer, it appears there are a great number of different products. To operations, there are only a limited number of basic components & processes. This makes it possible to produce more efficiently for larger volumes while also allowing standardization of processes & equipment. Table of Contents Process SelectionThese are in terms of Product Flow or Customer Type. The considerations required for process selection include the volume of the product & whether the product is standardized or customized. Process selection decisions are strategic in nature; it tends to be capital intensive & cannot be easily changed. Product Flow Characteristics (Line, Batch or Project)Same as the flow of materials, since materials are being converted into the product. A. Line Flow – linear sequence of operations like an assembly line; the product moves from one step to the next in a sequential manner from beginning to end. [Sequential flow, product layout] • Very efficient but very inflexible. It requires high volume of products that are standardized. At the same time, this makes it difficult to make
changes in the product itself or the volume of flow leading to inflexibility of operations. i. Mass Production – use of assembly lines to assemble discrete parts into a finished product. B. Batch Flow – production of the products in batches or lots. Each batch of the product flows from one operation/work center to another; can be used to make many different products. [Jumbled flow, process layout] Work Center – group of similar machines or processes used to make the product. C. Project Flow – used for unique or creative products; concerts, construction of buildings or large aircraft. Type of Customer OrderA. Make-to-Stock (MTS) – keyed to replenishment of inventory. [standard products] B. Make-to-Order (MTO) – keyed to customer orders. C. Assemble-to-Order (ATO) – hybrid
of MTS & MTO; builds up subassemblies in advance of demand & then puts them together at the last minute to satisfy customer demand [subassemblies is to MTS as final assembly is to MTO]. Four Factors that Influence Process Selection: Market Conditions, Capital Requirements, Labor & Technology Provides a dynamic view of the process selection decision by considering the life cycle of both products & processes. The strategy is defined by a patch on the matrix for particular combinations of products & process. The matrix helps provide coordination between marketing & operations decisions about products & processes, respectively. The diagonal of the matrix represents a match between the product & process. Focused OperationsArranging different products with different missions as plant-within-a-plant (PWP), which may sacrifice some economies of scale while doing a better job of meeting customer requirements & improving profitability. Used to separate products & processes that have different volume requirements or different levels of standardization. Mass CustomizationTraditional mass production is built on economies of scale, by means of a high-volume standardized product with few options while mass customization depends on economies of scope, high variety of products from a single process. It focuses on common processes rather than a common product. Customization at approximately the same cost as mass production. This is a stringent requirement & means that some products cannot be mass-customized because the cost would be higher. The Four Forms of Mass Customization are 1. Mass-customized services. Table of Contents Service Process DesignServices – produced & consumed simultaneously; intangible; most of which cannot be stored/transported; customers can introduce uncertainty. Service Recovery – ability to quickly compensate for the failure & restore, if possible, the service required by the customer. Service Guarantee – builds customer loyalty & clarifies exactly what the service process must provide; an assurance that the service provider will actually perform as promised. Moments of Truth – contact with a service system. Perceived Service = f(All previous moments of truth) For high-contact service systemsPotential inefficiency = f(degree of customer contact) Degree of contact – amount of time that the customer is in the system while the service is being produced. • Front room operations require intensive customer interaction, while backroom (low-contact services) operates more like the traditional factory. Service-Profit Chain. Customer loyalty is the key to profitability; indicates how customer satisfaction & loyalty along with employee satisfaction & loyalty are important to profitability External Service Value = Benefits the customer perceives – the cost incurred in obtaining the service Service MatrixDegree of interaction & customization – uncertainty & variety introduced into operations by customers. Degree of labor intensity – the amount of labor required in relation to capital utilized. Table of Contents Choice of TechnologyTechnology – application of knowledge to solve human problems Computer-Integrated Manufacturing (CIM)
Group Technology/Cellular Manufacturing – the process of classifying parts by families & subsequently dedicating production equipment to a specific family or families of parts. CAM thus involves designing the manufacturing process & tooling through the database. This can be accomplished by organizing batch manufacturing, & even some assembly lines, by cellular manufacturing. This speeds up the flow of the product & increases machine utilization. CIM should be implemented in stages under the guidance of a master plan. Economies of Scope – the ability to efficiently produce a variety of products rather than a large volume of standardized products. Technology investments should: (1) support a comprehensive technology strategy [integrated over time & help the firm achieve a competitive advantage], (2) meet financial objectives [the required ROI sets the minimum acceptable level that the technology strategy should meet or exceed] & (3) provide a socio-technical system [jointly choosing the jobs & technology at the same time]. Four Types of e-businesses: e-marketplace companies, e-service providers, e-retailers & wholesalers, & e-producers. Table of Contents Process-flow Analysis• The process view leads to the idea that a business is a set of horizontal processes that are interconnected with the objective of meeting customer needs. System – a collection of interrelated elements whose whole is greater than the sum of its parts. • The transformation system must be isolated from its environment by specifying the system boundary to separate the system under study from the larger system or organization. Little’s Law: I = T x R I =average number of things in the system (inventory) Throughput time – the time from when the product first starts being produced in the factory until it is finished & shipped. Capacity – the maximum rate of output of a process or the maximum flow rate that can be sustained over a period of time. Bottleneck – most constraining resource; smallest capacity; determines the capacity of the entire process. Flowchart Analysis (Process-Flow Analysis) – used to describe & improve the transformation process in business. A. Materials-Flow Analysis –
reducing manufacturing throughput time (cycle time), the total time to order, manufacture & distribute a product from beginning to end; seeking to reduce waste in the process using a flow-process chart. B. Information-Flow Analysis – either (1) information is the product of the operation [clerical processing in offices] or (2) information flow is used for management & control processes [order entry, purchasing documents]. C. Service Blueprinting – or service flows, flowcharting for service operations; shows the cycle of service, how the customer and service provider interact at each step of the service delivery process.. Business Process Reengineering (BPR) – used for a radical redesign of processes. Four Principles of BPR: (1) organize around outcomes, not tasks; (2) have people who do the work process their own information; (3) put the decision point where the work is performed, & build control into the process; (4) eliminate unnecessary steps in the process. Table of Contents Supply Chain ManagementSupply Chain (SC) – a sequence of business processes & information that provides a product or service from suppliers through manufacturing and distribution to the ultimate customer. SC Management – planning, design & control of the flow of information & materials along with the SC in order to meet customer requirements in an efficient manner, now & in the future. According to systems thinking, all elements of the SC are interconnected & dependent on each other. The elements should be coordinated to achieve overall systems goals. The information feedback loop is critical to the effective management of SC. Distribution Channel – route from the producer forward (downstream) through the distributors to the customer. Demand Management – managing the demand for goods or services along with the SC. Demand can be managed through such mechanisms as products, pricing, promotion & distribution – tasks that are generally assigned to marketing. Logistics Management – inbound transportation & outbound distribution. Accelerator/Bullwhip Effect – as the demand change is magnified the further back you go in the SC; caused by replenishment lead times and information time lags; an additional consequence is the overshooting of the true demand. Possible Solutions: shorten replenishment cycle, provide better forecasting, increase coordination within & between organizations. SC Dynamics:
Coordination in the SC Functional Silos – separate departments that manage different aspects of the SC. Measuring SC Performance1. Delivery. On-time delivery – percentage of orders delivered complete & on the date requested by the customer.
3. Time. Total Replenishment Time = level of inventory divided by usage rate. 4. Flexibility. The maximum percentage of change in volume or product mix possible in a fixed period of time. 5. Cost. Total Delivered Cost – includes manufacturing, distribution, inventory carrying costs and accounts receivable carrying costs. The volume of flexibility of the SC is the minimum volume of flexibility of all participants since that will be the most constraining part of the SC, the bottleneck. The volume of flexibility = minimum (all participants’ volume flexibility) SC Strategies To identify the proper SC, companies should first sort their products into: b. Innovative Products – unpredictable demand & high-profit margins; they need flexible and fast SC to deal with uncertainty in demand. [SC Strategy: Flexible SC] Structural Changes – include capacity, facilities, process technology, and vertical integration; long-range in nature & require considerable capital. Infrastructure – people, organization, production & inventory control, information systems, & quality control systems; “soft side” of the SC. Reducing replenishment time is a major approach to SC improvement. Allows SC to react rapidly to real demand changes & reduces the inventory needed. I. Structural Improvement: to remove sources of uncertainty or time Five Forms of Structural Change of SC1. Forward & Backward Integration. Ownership within the SC; allows for control of the SC Total Vertical Integration – if one firm owns the entire SC.
3. Change the number & configuration of suppliers, factories, warehouses or retail sites. Infrastructure change is made within a given structure or configuration of the SC. II. Improvement in Infrastructure: to remove sources of uncertainty or time 1. Cross-functional teams. Often used to plan & control the master schedule for manufacturing; provide coordination across various departments & functions of a business. 2. Partnerships with suppliers & customers provide coordination across businesses just like cross-functional teams provide coordination within the business. It starts with a commitment by both firms to establish a long-term mutually beneficial business relationship. 3. Set-up time reduction. Making changes quickly once the machine is no longer running so that it can be put back into production as soon as possible. 4. Changes in information systems. Sales data from final customers are feedback through the SC. 5. Cross-docking – a
supplier’s shipments are taken from various docks at the warehouse when they arrive & transferred directly to a truck at another dock. The Internet and Supply Chains Two Fundamental Processes in all SC: 2. Order fulfillment. • E-procurement plays an important role in both the placement & fulfillment process; allows a company to interact electronically with its supplier through BtoB connections. Three Types of E-Procurement Services: Problems in E-Procurement: Virtual Corporation – produces a product or a service without facilities or people; it has no fixed assets on the balance sheet. Virtual SC – consists of at least one virtual company that coordinates all the activities of the SC. Table of Contents Independent-Demand InventoryInventory – is a stock of materials used to facilitate production or to satisfy customer demands; includes raw materials, work in process; & finished goods. Inventory vs.
Capacity Purpose of Inventories 1. To protect against uncertainties – like finished goods are maintained to absorb changes in demand without immediately changing production [Safety Stocks]. Inventory Cost Structures Three Components: 4. Stockout Costs – reflect the economic consequences of running out of stock. Independent versus Dependent Demand Independent Demand – influenced by market conditions outside the control of operations [“independent of operations”]; like finished goods inventory & spare parts inventory • Customer-oriented; order point system Replenishment Philosophy. As the stock is used, it is replenished in order to have materials on-hand for customers. Thus, as inventory begins to run-out, an order is triggered for more material & the inventory is replenished. Dependent Demand – related for the demand of other items & is not independently determined by the market; exhibits on-again, off-again pattern when production is scheduled in lots; like raw materials & work in process inventories. Requirements Philosophy. The amount of stock ordered is based on requirements for higher-level items. More material is ordered only as required by the need for other higher-level or end items. Total Cost = Ordering Costs + Carrying Costs • Ordering & carrying costs are offsetting; one increases while the other decreases Handling Random Demands: Stock Position (or Available Stock) = On-hand + On-order material A. Fixed-Order Quantity System Decision Rule (Q System): Continually review the stock position, when it drops to the reorder point, R a fixed quantity, Q is ordered. Reorder Point = Mean demand over the lead time + safety stock B. Fixed-Order Point System Decision Rule (P System): Review the stock position at fixed periodic intervals, P. An amount equal to target inventory, T minus the stock position is ordered at each review. Service Level – the percentage of customer demands satisfied from inventories. ABC Inventory Concept – based on the “significant few & insignificant many”; or the 80-20 rule. Table of Contents Facilities & Aggregate PlanningCapacity – maximum output that can be produced over a given period. Nominal or Effective Capacity – obtained by subtracting downtime for maintenance, shift breaks & equipment utilization that decreases the theoretical capacity available Facilities Decisions – place physical constraints on the amount that can be produced, & they require investment of scarce capital; involve all organizational functions & are often made at the highest corporate level Important Considerations: Predicted demand, cost of facilities, likely behavior of competitors, business strategy & international considerations Elements of Facilities Strategy A. Amount of Capacity. Capacity Cushion = Capacity – Average Demand Positive: for expanding market, cost of building & overcapacity > cost of running out of capacity B. Size of Units/Facilities. Economies of Scale. Based on the notion that large units are more economical because fixed costs can be spread over more units of production. Diseconomies of Scale. Facilities get larger for several reasons – communications, coordination and control costs increase in large bureaucratic organizations; cost of complexity and confusion.
(1) Preempt the competition or (2) Wait and see will work best if the follower has superior marketing channels or technology. D. Type of Facilities. Four types of facility choices: 1. Product-focused – produce one family or type of product, usually for a large market; used when scale economies are high, transportation costs are low. II. Aggregate Planning – matching supply & demand for output over the medium time range (6-12months). Planning is done for a single overall measure of output or, at the most, a few aggregated product categories. • The aim is to set the overall output level in the near to medium future in the face of fluctuating or uncertain demand. • Basic Strategies: Table of Contents Material Requirements PlanningMaster schedule – specifies the end items or output of the production function; contains specific product configurations or final assembly part numbers. • Using MRP, the master schedule is exploded (through the BOM) into purchase orders for raw materials & shop orders for scheduling the factory. Process Explosion – determine all parts & components needed to make a specified number of final product units Three Principal Inputs: master schedule, BOM, & inventory records. • MRP is an information system used to plan & control the manufacturing function in terms of products, orders, parts, production levels & inventories. • MRP uses a requirements philosophy – parts are ordered only as required by the master schedule. The MRP logic assumes that parts are available exactly when they are needed to support the production plan. Three Principal Functions of MRP: Different Types of MRP: 1. Type I: An inventory control system (order launching) – does not include the capacity planning & shop-floor control modules Bill of Materials (BOM) – is a structured list of all materials or parts needed to produce a particular finished product, assembly, subassembly, manufactured part or purchased part. Ways of Handling Uncertainty on Operating an MRP System: safety stock, safety lead time, safety capacity Table of Contents Just-In-Time Systems & Lean Thinking• JIT is an approach that seeks to eliminate all sources of waste in production activities by providing the right part at the right place at the right time. Seven
Wastes: (1) Overproduction, (2) Waiting Time, (3) Transportation – double/triple movement of materials, (4) Processing – poor design or inadequate maintenance; (5) Inventory; (6) Motion – wasted movement; (7) Defects Elements of JIT: The objective of JIT is to produce parts in a lot size of one. Lot size depends on the trade-off between carrying & setup costs. Production is leveled to create a uniform workload on all work centers that support the final assembly. Setup time is reduced as much as possible, ideally to zero [quick changeover]. Multi-function workers are required; cross-training is needed as well as greater coordination & teamwork. The layout of the plant is much different since inventory is held on the shop floor & not put in a storeroom between processes. Quality is absolutely essential – not only do defects produce waste, but
they can also grind the production process to a halt. o JIT system is designed to expose errors & get them corrected, rather than covering them up with inventory. The objective of JIT is to improve ROI by increases in revenues, cost reduction & less investment. Problem-solving activities by management & workers drive the whole system – built on the philosophy of constant improvement. Inventory is viewed as the root of all evil. Kanban System – signal the need for more parts & to ensure that those parts are produced in time to support subsequent assembly. Two Types of
Cards: production cards & withdrawal (move) cards.
MRP vs. JIT (Internal Perspective) a. For pure repetitive manufacturing situations, use JIT or MRP Type I Lean Thinking (External Perspective) Elements: (1) Specify a value from the customers’ point of view; (2) Create a value stream map & remove waste; (3) Flow the product or service through the system; (4) Pull the product or service from the customer; (5) Strive for perfection. Table of Contents Quality ManagementQuality – meeting or exceeding customer requirements now & in the future Continuous improvement – reducing the variability in all processes & introducing new products when needed. Dimensions of Quality: 1. Quality of Design – determined by market research, design
concept, & specifications Service Quality (SERVQUAL – as a popular measure) Five Perceptual Measures: 1. Tangibles – appearance of the company’s physical facilities, equipment, & personnel Planning for Quality: Quality attributes -> Measure Quality -> Standards -> Testing Program -> Find & correct causes of poor quality -> Continuous improvement Poka-yoke – “mistake proofing” – to design a product & process so it is impossible to make mistakes or if the error cannot be prevented from occurring, it should be made easy to detect; example: microwave (won’t start if the door is open) ISO9000 Standards – specifies that a company must have a quality system in place, including procedures, policies & training to provide quality that consistently meets customer requirements. Malcolm Baldrige Award – Total Quality System – given to at most two companies in each of the categories: manufacturing, service & small business extended to education & health care organizations. Criteria: (1) Leadership; (2) Strategic Planning; (3) Customer & Market Focus; (4) Measurement, Analysis & Knowledge Management; (5) Human Resource Focus; (6) Process Management; & (7) Business Results. Quality & Financial Performance Components of the Cost of Quality: 1. Control Costs – related to activities that remove defects in the
production stream: (a) prevention costs; (b) by appraisal or by inspection Continuous Improvement – to reduce variability of products or processes; use tools like Pareto Analysis, Cause & Effect Diagrams Six Sigma – systematic method for process improvement that often uses the following steps: 1. Define. The process is selected for improvement & the project charter is specified. BUSINESS LIFE CYCLE Table of Contents What type of decisions are operational decisions?Operational decisions are short-term decisions that are made generally weekly, daily, or hourly, focusing mainly on the details of operations, day-to-day resource allocation, details of inventory control, and delivery routing, to ensure the efficiency of operations and an optimized flow of products along the biomass- ...
What are the types of decisions taken in operations management?The 10 decisions of operations management. Goods and services.. Quality management.. Process and capacity design.. Location.. Layout design and strategy.. Human resources and job design.. Supply chain management.. Inventory.. What are the decisions to be made in relation to operations?These include scheduling employees or equipment use, what products to purchase from suppliers, executing a billing calculation for a patient, and determining how much inventory to keep are only some of the examples of operational decisions.
What is decision making in operations management?Decision-Making in. Operations Management. Ray Wild. An operating system utilises resources to convert inputs into outputs in the form of goods or services. Conventionally, operations manage- ment is defined as the task of designing, establishing, planning, runn- ing, controlling, maintaining and improving such systems ...
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