Office of the Vice President for Academic Affairs
College of Business Administration
INSTRUCTIONAL MATERIALS FOR
BUMA 20013: OPERATIONS
MANAGEMENT (TQM)
COMPILED BY:
Prof. Reynaldo T. Barrera
PUP A. Mabini Campus, Anonas Street, Sta. Mesa, Manila 1016
Direct Line: 335-1730 | Trunk Line: 335-1787 or 335-1777 local 000
Website: www.pup.edu.ph | Email: inquire@pup.edu.ph
OPERATIONS MANAGEMENT | BUMA 20013
Introduction
Global competition has caused fundamental changes in the competitive environment of
manufacturing industries. Firms must develop strategic objectives which, upon achievement,
result in a competitive advantage in the market place. However, for almost all manufacturing
industries, an increased productivity and better overall efficiency of the production line are the
most important goals. Most industries would like to find the formula for the ultimate productivity
improvement strategy. Industries often suffer from the lack of a systematic and consistent
methodology. In particular the manufacturing world has faced many changes throughout the years
and as a result, the manufacturing industry is constantly evolving in order to stay ahead of
competition. Innovation is a necessary process for the continuous changes in order to contribute
to the economic growth in the manufacturing industry, especially to compete in the global market.
In addition to innovation as a mode for continued growth and change, there are many other
vehicles for growth in the manufacturing industry.
While operations management has been recognized as an important factor in a country’s
economic growth. The traditional view of manufacturing management is the concept of Production
Management with the focus on economic efficiency in manufacturing. Later the new name
Operations Management was identified, as service sector became more prominent. Rapid
changes in technology have posed numerous opportunities and challenges, which have resulted
in enhancement of manufacturing capabilities through new materials, facilities, techniques and
procedures. Hence, managing a service system has become a major challenge in the global
competitive environment. Operations Management has been a key element in the improvement
and productivity in business around the world. Operations Management leads the way for the
organizations to achieve its goals with minimum effort. Hence, the study of the subject at
undergraduate and postgraduate level has more significance.
OPERATIONS MANAGEMENT | BUMA 20013
TABLE OF CONTENTS
Contents
INTRODUCTION..................................................................................................................... 2
COURSE OUTCOMES ........................................................................................................... 6
LESSON 1 - INTRODUCTION TO OPERATIONS MANAGEMENT ....................................... 7
INTRODUCTION TO OPERATIONS MANAGEMENT ........................................................... 7
HISTORICAL DEVELOPMENT.............................................................................................. 8
MANUFACTURING VS. SERVICE .......................................................................................11
SUPPLY CHAIN ....................................................................................................................12
CONCEPT OF PRODUCTION ..............................................................................................13
ROLE OF THE OPERATIONS MANAGER ...........................................................................16
SYSTEMS APPROACH ........................................................................................................19
ETHICAL ISSUES IN OPERATIONS ....................................................................................19
COMPETITIVE, STRATEGY, AND PRODUCTIVITY ............................................................20
LESSON 2 – FORECASTING DEMAND ...............................................................................27
ELEMENTS OF A GOOD FORECAST .................................................................................27
STEPS IN THE FORECASTING PROCESS .........................................................................28
FORECASTING APPROACHES ..........................................................................................28
LESSON 3 - PRODUCT AND SERVICE DESIGN .................................................................36
REASONS DESIGN OR RE-DESIGN ...................................................................................36
LEGAL CONSIDERATIONS .................................................................................................37
LIFE CYCLE ASSESSMENT (LCA) .....................................................................................37
PRODUCT OR SERVICE LIFE STAGES ..............................................................................39
DESIGNING FOR MASS CUSTOMIZATION ........................................................................40
COMPONENT COMMONALITY ...........................................................................................43
RELIABILITY ........................................................................................................................45
LESSON 4 - PROCESS SELECTION AND LAYOUT DECISIONS .......................................47
PROCESS SELECTION........................................................................................................47
TECHNOLOGY FOR COMPETITIVE ADVANTAGE ............................................................48
FACILITIES LAYOUT ...........................................................................................................51
OPERATIONS MANAGEMENT | BUMA 20013
REPETITIVE PROCESSING .................................................................................................52
SERVICE LAYOUT ...............................................................................................................55
DESIGNING PROCESS LAYOUTS ......................................................................................57
LESSON 5 – DESIGN OF WORK SYSTEM……………………………………………………...62
QUALITY OF WORK LIFE ....................................................................................................59
JOB DESIGN ........................................................................................................................61
ERGONOMICS .....................................................................................................................63
METHODS ANALYSIS .........................................................................................................64
DEVELOPING WORK METHODS ........................................................................................66
WORK SAMPLING ...............................................................................................................67
LESSON 6 – LOCATION DECISIONS ..................................................................................69
THE NEED FOR LOCATION DECISIONS ............................................................................69
LOCATION DECISIONS: OBJECTIVES ...............................................................................69
LOCATION DECISION: GENERAL PROCEDURE ...............................................................70
GLOBAL LOCATION: FACILITATING FACTORS ...............................................................70
MANAGING GLOBAL OPERATIONS ..................................................................................71
GEOGRAPHIC INFORMATION SYSTEM (GIS) ...................................................................73
SERVICE AND RETAIL LOCATIONS ..................................................................................74
FACTOR RATING .................................................................................................................75
LESSON 7 – MANAGEMENT OF QUALITY .........................................................................77
QUALITY MANAGEMENT ....................................................................................................77
REACTIVE VS. PROACTIVE QUALITY ...............................................................................78
DIMENSIONS OF PRODUCT QUALITY ...............................................................................78
DIMENSIONS OF SERVICE QUALITY .................................................................................79
DETERMINANTS OF QUALITY............................................................................................79
COSTS OF QUALITY ...........................................................................................................80
ETHICS AND QUALITY ........................................................................................................80
TOTAL QUALITY MANAGEMENT .......................................................................................82
QUALITY CONTROL ............................................................................................................87
LESSON 8 – SUPPLY CHAIN MANAGEMENT ....................................................................91
SUPPLY CHAIN ....................................................................................................................91
SUPPLY CHAIN MANAGEMENT .........................................................................................92
FLOW MANAGEMENT .........................................................................................................93
GLOBAL SUPPLY CHAINS .................................................................................................93
OPERATIONS MANAGEMENT | BUMA 20013
PROCUREMENT ..................................................................................................................94
SUPPLIER MANAGEMENT ..................................................................................................96
INVENTORY MANAGEMENT ...............................................................................................97
LOGISTICS ...........................................................................................................................98
LESSON 9 – INVENTORY MANAGEMENT ........................................................................103
INVENTORY .......................................................................................................................103
INVENTORY COUNTING SYSTEMS ..................................................................................104
ABC CLASSIFICATION SYSTEM ......................................................................................105
CYCLE COUNTING ............................................................................................................105
WHEN TO REORDER .........................................................................................................109
FIXED-QUANTITY VS. FIXED-INTERVAL ORDERING......................................................112
LESSON 10 – AGGREGATE PLANNING ...........................................................................114
SALES AND OPERATIONS PLANNING ............................................................................114
TECHNIQUES FOR AGGREGATE PLANNING .................................................................118
AGGREGATE PLANNING IN SERVICES ..........................................................................119
DISAGGREGATING THE AGGREGATE PLAN .................................................................120
LESSON 11 – MATERIAL REQUIREMENTS PLANNING (MRP) AND ENTERPRISE
RESOURCE PLANNING (ERP) ...........................................................................................124
DEPENDENT DEMAND ......................................................................................................124
OVERVIEW OF MRP ..........................................................................................................125
MRP LOT SIZING RULES ..................................................................................................129
USING THE MRP ................................................................................................................129
CAPACITY REQUIREMENTS PLANNING .........................................................................132
ENTERPRISE RESOURCE PLANNING .............................................................................133
LESSON 12 – LEAN OPERATIONS ...................................................................................135
LEAN OPERATIONS: THE BEGINNING ............................................................................135
LEAN: BUILDING BLOCKS ...............................................................................................137
VALUE STREAM MAPPING ...............................................................................................143
TRANSITIONING TO LEAN SYSTEMS ..............................................................................143
LEAN SERVICES ...............................................................................................................144
FINAL EXAMINATION…………………………………………………………………………….152
COURSE GRADING SYSTEM……………………………………………………………………153
REFERENCES ...................................................................................................................146
OPERATIONS MANAGEMENT | BUMA 20013
Course Outcomes
•
•
•
•
•
Understand the application of managerial functions to effective and efficient operations
management
Understand the operative functions involve in operations management
Analyze operational problems and apply appropriate techniques to address them
Evaluate effective and efficient operational strategy applicable to different business
situations
Create an effective and efficient operational strategy to different business situations
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 1 - INTRODUCTION TO OPERATIONS MANAGEMENT
 OVERVIEW
Operation is that part of an organization, which is concerned with the transformation of a range
of inputs into the required output (services) having the requisite quality level. Management is the
process, which combines and transforms various resources used in the operations subsystem of
the organization into value added services in a controlled manner as per the policies of the
organization. The set of interrelated management activities, which are involved in manufacturing
certain products, is called as production management. If the same concept is extended to
services management, then the corresponding set of management activities is called as
operations management. (Kumar and Suresh, 2019)
 LEARNING OUTCOMES
After this lesson, students will be able to:
✓ Appreciate and learn the concept of operations management and the functions associated
with it.
✓ Describe the operations management for goods and services.
✓ Determine the challenges in achieving sustainable production while ensuring the
company’s ethical, and social responsibilities
 COURSE MATERIALS
Introduction to Operations Management
•
•
•
•
What is operations?
The part of a business organization that is responsible for producing goods or
services
How can we define operations management?
The management of systems or processes that create goods and/or provide
services.
Scope of Operations Management
The scope of operations management ranges across the organization.
The operations function includes many interrelated activities such as:
➢ Forecasting
➢ Capacity planning
➢ Scheduling
➢ Managing inventories
➢ Assuring quality
➢ Motivating employees
➢ Deciding where to locate facilities
➢ And more
Basic Functions of the Business Organization
Organization
Marketing
Operations
OPERATIONS MANAGEMENT | BUMA 20013
Finance
Marketing refers to activities a company undertakes to promote the buying or selling of a product
or service. Marketing includes advertising, selling, and delivering products to consumers or other
businesses. Some marketing is done by affiliates on behalf of a company. (Source:
Investopedia.com)
Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying general
management
principles
to
financial
resources
of
the
enterprise.
(Source:
Managementstudyguide.com)
Historical Development
Industrial Revolution
Pre-Industrial Revolution
•
•
➢ Craft production - System in which highly skilled workers use simple, flexible tools
to produce small quantities of customized goods
Some key elements of the industrial revolution
➢ Began in England in the 1770s
➢ Division of labor - Adam Smith, 1776
➢ Application of the “rotative” steam engine, 1780s
➢ Cotton Gin and Interchangeable parts - Eli Whitney, 1792
Management theory and practice did not advance appreciably during this period
Scientific Management
•
Movement was led by efficiency engineer, Frederick Winslow Taylor
➢ Believed in a “science of management” based on observation, measurement,
analysis and improvement of work methods, and economic incentives
➢ Management is responsible for planning, carefully selecting and training workers,
finding the best way to perform each job, achieving cooperate between
management and workers, and separating management activities from work
activities.
➢ Emphasis was on maximizing output
•
Scientific Management – contributors
➢ Frank Gilbreth - father of motion studies
➢ Henry Gantt - developed the Gantt chart scheduling system and recognized the
value of non-monetary rewards for motivating employees
➢ Harrington Emerson - applied Taylor’s ideas to organization structure
➢ Henry Ford - employed scientific management techniques to his factories
- Moving assembly line
- Mass production
OPERATIONS MANAGEMENT | BUMA 20013
Human Relations Movement
•
The human relations movement emphasized the importance of the human element in job
design
➢ Lillian Gilbreth
➢ Elton Mayo – Hawthorne studies on worker motivation, 1930
➢ Abraham Maslow – motivation theory, 1940s; hierarchy of needs, 1954
➢ Frederick Hertzberg – Two Factor Theory, 1959
➢ Douglas McGregor – Theory X and Theory Y, 1960s
➢ William Ouchi – Theory Z, 1981
Decision Models & Management Science
•
•
•
•
•
F.W. Harris – mathematical model for inventory management, 1915
Dodge, Romig, and Shewart – statistical procedures for sampling and quality control,
1930s
Tippett – statistical sampling theory, 1935
Operations Research (OR) Groups – OR applications in warfare
George Dantzig – linear programming, 1947
Influence of Japanese Manufacturers
•
Refined and developed management practices that increased productivity
➢ Credited with fueling the “quality revolution
➢ Just-in-Time production
OPERATIONS MANAGEMENT | BUMA 20013
Exhibit 1.1 Historical summary of operations management
Goods-service Continuum
•
Products are typically neither purely service- or purely goods-based.
Exhibit 1.2 Examples of Goods and Services
OPERATIONS MANAGEMENT | BUMA 20013
Manufacturing vs. Service
•
•
•
•
Manufacturing is characterized by tangible outputs (products). Consumption of outputs
at overtime. Jobs useless labor and more equipment, little customer contact, no customer
participation in the conversion process (in production). Sophisticated methods for
measuring production activities and resource consumption as product are made.
Service is characterized by intangible outputs. In addition, it possesses a potential for high
variability in quality of output. Production and consumption occur simultaneously. Jobs
use more labor and less equipment, direct consumer contact, frequent customer
participation in the conversion process. Elementary methods for measuring conversion
activities and resource consumption are used.
Manufacturing and Service Organizations differ chiefly because manufacturing is goodsoriented and service is act-oriented.
The following characteristics can be considered for distinguishing Manufacturing
Operations with Service Operations:
1. Tangible/Intangible nature of output
2. Production and consumption
3. Nature of work (job)
4. Degree of customer contact
5. Customer participation in conversion
6. Measurement of performance
7. Quality of output
8. Inventory accumulated.
Managing Services is Challenging
1. Jobs in services are often less structured than in manufacturing
2. Customer contact is generally much higher in services compared to manufacturing
3. In many services, worker skill levels are low compared to those of manufacturing
employees
4. Services are adding many new workers in low-skill, entry-level positions
5. Employee turnover is high in services, especially in low-skill jobs
6. Input variability tends to be higher in many service environments than in manufacturing
7. Service performance can be adversely affected by many factors outside of the manager’s
control (e.g., employee and customer attitudes)
OPERATIONS MANAGEMENT | BUMA 20013
Supply Chain
• Supply Chain – a sequence of activities and organizations involved in producing and
delivering a good or service.
Exhibit 1.3 Supply Chain Process
Elements of Supply Chain Management
•
Customers – what products/services do customers want
•
Forecasting – predicting timing and volume of customer demand
•
Design – incorporating customer wants, manufacturability, and time to market
•
Capacity planning – matching supply and demand
•
Processing – controlling quality, scheduling work
•
Inventory – meeting demand requirements while managing costs
•
Purchasing – evaluating potential suppliers, supporting the needs of operations on
purchased goods and services
•
Suppliers – monitoring supplier quality, on-time delivery, and flexibility; maintaining
supplier relations
•
Location – determining the location of facilities
•
Logistics – deciding how to best move information and materials
The Need for Managing the Supply Chain
•
In the past, organizations did little to manage the supply chain beyond their own
operations and immediate suppliers which led to numerous problems:
➢ Oscillating inventory levels
➢ Inventory stockouts
➢ Late deliveries
➢ Quality problems
OPERATIONS MANAGEMENT | BUMA 20013
Supply and Demand
Concept of Production
Production function is ‘the part of an organization, which is concerned with the
transformation of a range of inputs into the required outputs (products) having the requisite quality
level’.
Production is defined as ‘the step-by-step conversion of one form of material into another
form through chemical or mechanical process to create or enhance the utility of the product to the
user’. Thus, production is a value addition process. At each stage of processing, there will be
value addition.
Edwood Buffa defines production as ‘a process by which goods and services are created’.
Some examples of production are: manufacturing custom-made products like, boilers with a
specific capacity, constructing flats, some structural fabrication works for selected customers, etc.,
and manufacturing standardized products like, car, bus, motor cycle, radio, television, etc.
Production System
The production system is ‘that part of an organization, which produces products of an
organization. It is that activity whereby resources, flowing within a defined system, are combined
and transformed in a controlled manner to add value in accordance with the policies
communicated by management’.
OPERATIONS MANAGEMENT | BUMA 20013
A simplified production system is shown below:
Exhibit 1.4 Schematic Production System
•
•
Feedback - measurements taken at various points in the transformation process
Control - the comparison of feedback against previously established standards to
determine if corrective action is needed.
The production system has the following characteristics:
1.
2.
3.
4.
Production is an organized activity, so every production system has an objective.
The system transforms the various inputs to useful outputs.
It does not operate in isolation from the other organization system.
There exists a feedback about the activities, which is essential to control and improve
system performance.
Transformation and Value Adding Activities
The objective of combining resources under controlled conditions is to transform them into
goods and services having a higher value than the original inputs. The transformation process
applied will be in the form of technology to the inputs. The effectiveness of the production factors
in the transformation process is known as productivity. The productivity refers to the ratio between
values of output per work hour to the cost of inputs. The firm’s overall ratio must be greater than
1, then we can say value is added to the product. Operations manager should concentrate
improving the transformation efficiency and to increase the ratio.
OPERATIONS MANAGEMENT | BUMA 20013
Exhibit 1.6 Schematic model for operations/production system
Operations Management Objectives
Objectives of Operations Management can be categorized into Customer Service and
Resource Utilization.
Customer Service. The first objective of operating systems is to utilize resources for the
satisfaction of customer wants. Therefore, customer service is a key objective of operations
management. The operating system must provide something to a specification, which can satisfy
the customer in terms of cost and timing. Thus, providing the ‘right thing at a right price at the right
time’ can satisfy primary objective.
These aspects of customer service – specification, cost and timing – are described for four
functions in Exhibit 1.7. They are the principal sources of customer satisfaction and must therefore
be the principal dimension of the customer service objective for operations managers.
Generally, an organization will aim reliably and consistently to achieve certain standards
and operations manager will be influential in attempting to achieve these standards. Hence, this
objective will influence the operations manager’s decisions to achieve the required customer
service.
Exhibit 1.7 Aspects of customer service
Resource Utilization. Another major objective of operating systems is to utilize resources
for the satisfaction of customer wants effectively. Customer service must be provided with the
achievement of effective operations through efficient use of resources. Inefficient use of resources
or inadequate customer service leads to commercial failure of an operating system.
Operations management is concerned essentially with the utilization of resources, i.e.
obtaining maximum effect from resources or minimizing their loss, underutilization or waste. The
OPERATIONS MANAGEMENT | BUMA 20013
extent of the utilization of the resources’ potential might be expressed in terms of the proportion
of available time used or occupied, space utilization, levels of activity, etc. Each measure indicates
the extent to which the potential or capacity of such resources is utilized. This is referred as the
objective of resource utilization.
Operations management is concerned with the achievement of both satisfactory customer
service and resource utilization. An improvement in one will often give rise to deterioration in the
other. Often both cannot be maximized, and hence a satisfactory performance must be achieved
on both objectives. All the activities of operations management must be tackled with these two
objectives in mind, and because of this conflict, operations managers will face many of the
problems. Hence, operations managers must attempt to balance these basic objectives.
The Exhibit 1.8 summarizes the twin objectives of operations management. The type of
balance established both between and within these basic objectives will be influenced by market
considerations, competitions, the strengths and weaknesses of the organization, etc. Hence, the
operations managers should make a contribution when these objectives are set.
Exhibit 1.8 The twin objectives of operations management
Role of the Operations Manager
The Operations Function consists of all activities directly related to producing goods or
providing services.
A primary function of the operations manager is to guide the system by decision making.
• System Design Decisions
• System Operation Decisions
System Design Decisions
• System Design
➢ Capacity
➢ Facility location
➢ Facility layout
➢ Product and service planning
➢ Acquisition and placement of equipment
•
These are typically strategic decisions that require
➢ long-term commitment of resources
➢ Determine parameters of system operation
Key Trends and Issues in Business
• E-Business & E-Commerce
• Management of Technology
• Globalization
• Management of Supply Chains
OPERATIONS MANAGEMENT | BUMA 20013
•
•
•
Outsourcing
Agility
Ethical Behavior
The Decline in Manufacturing Employment
• Productivity
- Increasing productivity allows companies to maintain or increase their output
using fewer workers
• Outsourcing
- Some manufacturing work has been outsourced to more productive companies
• A Statistical Artifact
- Manufacturers are increasingly using contract and temporary labor which no
longer show up in the statistics as manufacturing employment
Decision Making
• Most operations decisions involve many alternatives that can have quite different impacts
on costs or profits
• Typical operations decisions include:
➢ What: What resources are needed, and in what amounts?
➢ When: When will each resource be needed? When should the work be scheduled?
When should materials and other supplies be ordered?
➢ Where: Where will the work be done?
➢ How: How will he product or service be designed? How will the work be done?
How will resources be allocated?
➢ Who: Who will do the work?
General Approach to Decision Making
• Modeling is a key tool used by all decision makers
o Model - an abstraction of reality; a simplification of something.
o Common features of models:
▪ They are simplifications of real-life phenomena
▪ They omit unimportant details of the real-life systems they mimic so that
attention can be focused on the most important aspects of the real-life
system
Types of Models:
o Physical Models
▪ Look like their real-life counterparts
o Schematic Models
▪ Look less like their real-life counterparts than physical models
o Mathematical Models
▪ Do not look at all like their real-life counterparts
Understanding Models
Keys to successfully using a model in decision making
• What is its purpose?
• How is it used to generate results?
• How are the results interpreted and used?
• What are the model’s assumptions and limitations?
OPERATIONS MANAGEMENT | BUMA 20013
Benefits of Models
• Models are generally easier to use and less expensive than dealing with the real system
• Require users to organize and sometimes quantify information
• Increase understanding of the problem
• Enable managers to analyze “What if?” questions
• Serve as a consistent tool for evaluation and provide a standardized format for analyzing
a problem
• Enable users to bring the power of mathematics to bear on a problem.
Model Limitations
• Quantitative information may be emphasized at the expense of qualitative information
• Models may be incorrectly applied and the results misinterpreted
- This is a real risk with the widespread availability of sophisticated,
computerized models are placed in the hands of uninformed users.
• The use of models does not guarantee good decisions.
Quantitative Methods
A decision-making approach that frequently seeks to obtain a mathematically optimal
solution
• Linear programming
• Queuing techniques
• Inventory models
• Project models
• Forecasting techniques
• Statistical models
Metrics and Trade-Offs
Performance Metrics
- All managers use metrics to manage and control operations
• Profits
• Costs
• Productivity
• Forecast accuracy
•
Analysis of Trade-Offs
- A trade-off is giving up one thing in return for something else
• Carrying more inventory (an expense) in order to achieve a greater level of customer
service
Degree of Customization
Relative to other standardized products and services customized products:
• Tend to be more labor intensive
• Tend to be more time consuming
• Tend to require more highly-skilled people
• Tend to require more flexible equipment
• Have much lower volume of output
• Have higher price tags
OPERATIONS MANAGEMENT | BUMA 20013
Degree of customization has a significant influence on the entire organization
• Process selection
• Job design
• Affects marketing, sales, accounting, finance, and information systems
Establishing Priorities
1. In nearly all cases, certain issues or items are more important than others
2. Recognizing this allows managers to focus their attention to those efforts that will do the
most good
a. Pareto Phenomenon - a few factors account for a high percentage of occurrence
of some event(s)
i. The critical few factors should receive the highest priority
ii. This is a concept that is appropriately applied to all areas and levels of
management
Systems Approach
System - a set of interrelated parts that must work together
The business organization is a system composed of subsystems
▪ marketing subsystem
▪ operations subsystem
▪ finance subsystem
The systems approach
▪ Emphasizes interrelationships among subsystems
▪ Main theme is that the whole is greater than the sum of its parts
▪ The output and objectives of the organization take precedence over those of any one
subsystem
Ethical Issues in Operations
Ethical issues arise in many aspects of operations management:
➢ Financial statements
➢ Worker safety
➢ Product safety
➢ Quality
➢ The environment
➢ The community
➢ Hiring and firing workers
➢ Closing facilities
➢ Workers’ rights
OPERATIONS MANAGEMENT | BUMA 20013
Competitive, Strategy, and Productivity
Competitiveness:
How effectively an organization meets the wants and needs of customers relative to others that
offer similar goods or services
– Organizations compete through some combination of their marketing and operations
functions
• What do customers want?
• How can these customer needs best be satisfied?
Marketing’s Influence
• Identifying consumer wants and/or needs
• Pricing
• Advertising and promotion
Businesses Compete Using Operations
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Product and service design
Cost
Location
Quality
Quick response
Flexibility
Inventory management
Supply chain management
Service
Managers and workers
Why Some Organizations Fail
•
•
•
•
•
•
•
Neglecting operations strategy
Failing to take advantage of strengths and opportunities
Failing to recognize competitive threats
Too much emphasis in product and service design and not enough on improvement
Neglecting investments in capital and human resources
Failing to establish good internal communications and cooperation
Failing to consider customer wants and needs
OPERATIONS MANAGEMENT | BUMA 20013
Hierarchical Planning
Mission
Goals
Organizational Strategies
Functional Strategies
Tactics
Mission
• Mission
– The reason for an organization’s existence
• Mission statement
– States the purpose of the organization
– The mission statement should answer the question of “What business are we in?”
Goals
• The mission statement serves as the basis for organizational goals
• Goals
– Provide detail and the scope of the mission
• Goals can be viewed as organizational destinations
– Goals serve as the basis for organizational strategies
Strategies
• Strategy
– A plan for achieving organizational goals
• Serves as a roadmap for reaching the organizational destinations
– Organizations have
• Organizational strategies
– Overall strategies that relate to the entire organization
– Support the achievement of organizational goals and mission
• Functional level strategies
– Strategies that relate to each of the functional areas and that support
achievement of the organizational strategy
OPERATIONS MANAGEMENT | BUMA 20013
Tactics and Operations
• Tactics
– The methods and actions taken to accomplish strategies
– The “how to” part of the process
• Operations
– The actual “doing” part of the process
Core Competencies
• Core Competencies
The special attributes or abilities that give an
organization a competitive edge
• To be effective core competencies and strategies need to be aligned
Strategy Formulation
• Effective strategy formulation requires taking into account:
– Core competencies
– Environmental scanning
• SWOT
• Successful strategy formulation also requires taking into account:
– Order qualifiers
– Order winners
• Order qualifiers
– Characteristics that customers perceive as minimum standards of acceptability to be
considered as a potential purchase
• Order winners
– Characteristics of an organization’s goods or services that cause it to be perceived as
better than the competition
Environmental Scanning
• Environmental Scanning is necessary to identify
– Internal Factors
• Strengths and Weaknesses
– External Factors
• Opportunities and Threats
OPERATIONS MANAGEMENT | BUMA 20013
Key External Factors
•
•
•
•
•
•
Economic conditions
Political conditions
Legal environment
Technology
Competition
Markets
Key Internal Factors
•
•
•
•
•
•
•
Human Resources
Facilities and equipment
Financial resources
Customers
Products and services
Technology
Suppliers
Operations Strategy
• Operations strategy
– The approach, consistent with organization strategy, that is used to guide the
operations function.
Strategic OM Decision Areas
Decision Area
What the Decisions Affect
Product and service design
Costs, quality, liability, and environmental issues
Capacity
Cost, structure, flexibility
Process selection and layout
Costs, flexibility, skill level needed, capacity
Work design
Quality of work life, employee safety, productivity
Location
Costs, visibility
Quality
Ability to meet or exceed customer expectations
Inventory
Costs, shortages
OPERATIONS MANAGEMENT | BUMA 20013
Maintenance
Costs, equipment reliability, productivity
Scheduling
Flexibility, efficiency
Supply chains
Costs, quality, agility, shortages, vendor relations
Projects
Costs, new products, services, or operating systems
Quality-based strategy
– Strategy that focuses on quality in all phases of an organization
• Pursuit of such a strategy is rooted in a number of factors:
– Trying to overcome a poor-quality reputation
– Desire to maintain a quality image
– A part of a cost reduction strategy
Time-based strategies
– Strategies that focus on the reduction of time needed to accomplish tasks
• It is believed that by reducing time, costs are lower, quality is higher, productivity
is higher, time-to-market is faster, and customer service is improved
Time-Based Strategies
• Areas where organizations have achieved time reductions:
– Planning time
– Product/service design time
– Processing time
– Changeover time
– Delivery time
– Response time for complaints
Agile operations
– A strategic approach for competitive advantage that emphasizes the use of flexibility to
adapt and prosper in an environment of change
• Involves the blending of several core competencies:
– Cost
– Quality
– Reliability
– Flexibility
OPERATIONS MANAGEMENT | BUMA 20013
The Balanced Scorecard Approach
• A top-down management system that organizations can use to clarify their vision and
strategy and transform them into action
– Develop objectives
– Develop metrics and targets for each objective
– Develop initiatives to achieve objectives
– Identify links among the various perspectives
• Finance
• Customer
• Internal business processes
• Learning and growth
– Monitor results
The Balanced Scorecard
Productivity
– A measure of the effective use of resources, usually expressed as the ratio of output to
input
–
• Productivity measures are useful for
– Tracking an operating unit’s performance over time
– Judging the performance of an entire industry or country
Why Productivity Matters
• High productivity is linked to higher standards of living
– As an economy replaces manufacturing jobs with lower productivity service jobs, it is
more difficult to maintain high standards of living
• Higher productivity relative to the competition leads to competitive advantage in the
marketplace
– Pricing and profit effects
• For an industry, high relative productivity makes it less likely it will be supplanted by foreign
industry
OPERATIONS MANAGEMENT | BUMA 20013
Service Sector Productivity
• Service sector productivity is difficult to measure and manage because
– It involves intellectual activities
– It has a high degree of variability
• A useful measure related to productivity is process yield
Factors Affecting Productivity
•
•
•
•
•
Methods
Capital
Quality
Technology
Management
Improving Productivity
1.
2.
3.
4.
5.
6.
Develop productivity measures for all operations
Determine critical (bottleneck) operations
Develop methods for productivity improvements
Establish reasonable goals
Make it clear that management supports and encourages productivity improvement
Measure and publicize improvements
Don’t confuse productivity with efficiency.
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 2 – FORECASTING DEMAND
 OVERVIEW
In this chapter, we examine different types of forecasts and present a variety of forecasting
models. The purpose is to show that there are many ways for managers to forecast. We also
provide an overview of business sales forecasting and describe how to prepare, monitor, and
judge the accuracy of forecast. Good forecasts are an essential part of efficient service and
manufacturing operations.
 LEARNING OUTCOMES
After the end of this lesson, students will be able to:
✓ Apply the techniques in forecasting as a tool to operations strategy through critically
combining frameworks and use them where applicable.
 COURSE MATERIALS
Forecasting
• Forecast – a statement about the future value of a variable of interest
– We make forecasts about such things as weather, demand, and resource availability
– Forecasts are an important element in making informed decisions
Two Important Aspects of Forecasts
• Expected level of demand
– The level of demand may be a function of some structural variation such as trend or
seasonal variation
• Accuracy
– Related to the potential size of forecast error
Features Common to All Forecasts
1. Techniques assume some underlying causal system that existed in the past will persist into
the future
2. Forecasts are not perfect
3. Forecasts for groups of items are more accurate than those for individual items
4. Forecast accuracy decreases as the forecasting horizon increases
Elements of a Good Forecast
The forecast:
• should be timely
• should be accurate
• should be reliable
• should be expressed in meaningful units
OPERATIONS MANAGEMENT | BUMA 20013
• should be in writing
• technique should be simple to understand and use
• should be cost effective
Steps in the Forecasting Process
1. Determine the purpose of the forecast
2. Establish a time horizon
3. Select a forecasting technique
4. Obtain, clean, and analyze appropriate data
5. Make the forecast
6. Monitor the forecast
Forecast Accuracy and Control
• Forecasters want to minimize forecast errors
– It is nearly impossible to correctly forecast real-world variable values on a regular basis
– So, it is important to provide an indication of the extent to which the forecast might
deviate from the value of the variable that actually occurs
• Forecast accuracy should be an important forecasting technique selection criterion
Forecast Accuracy and Control
• Forecasters want to minimize forecast errors
– It is nearly impossible to correctly forecast real-world variable values on a regular basis
– So, it is important to provide an indication of the extent to which the forecast might
deviate from the value of the variable that actually occurs
• Forecast accuracy should be an important forecasting technique selection criterion
• Forecast errors should be monitored
– Error = Actual – Forecast
– If errors fall beyond acceptable bounds, corrective action may be necessary
Forecasting Approaches
• Qualitative Forecasting
– Qualitative techniques permit the inclusion of soft information such as:
• Human factors
• Personal opinions
• Hunches
– These factors are difficult, or impossible, to quantify
• Quantitative Forecasting
– Quantitative techniques involve either the projection of historical data or the
OPERATIONS MANAGEMENT | BUMA 20013
development of associative methods that attempt to use causal variables to make a
forecast
– These techniques rely on hard data
Judgmental Forecasts
• Forecasts that use subjective inputs such as opinions from consumer surveys, sales staff,
managers, executives, and experts
– Executive opinions
– Salesforce opinions
– Consumer surveys
– Delphi method
Time-Series Forecasts
• Forecasts that project patterns identified in recent time-series observations
– Time-series - a time-ordered sequence of observations taken at regular time intervals
• Assume that future values of the time-series can be estimated from past values of the timeseries
Time-Series Behaviors
• Trend
• Seasonality
• Cycles
• Irregular variations
• Random variation
Trends and Seasonality
• Trend
– A long-term upward or downward movement in data
• Population shifts
• Changing income
• Seasonality
– Short-term, fairly regular variations related to the calendar or time of day
– Restaurants, service call centers, and theaters all experience seasonal demand
Cycles and Variations
• Cycle
– Wavelike variations lasting more than one year
• These are often related to a variety of economic, political, or even agricultural
conditions
OPERATIONS MANAGEMENT | BUMA 20013
• Random Variation
– Residual variation that remains after all other behaviors have been accounted for
• Irregular variation
– Due to unusual circumstances that do not reflect typical behavior
• Labor strike
• Weather event
Time-Series Forecasting - Naïve Forecast
• Naïve Forecast
– Uses a single previous value of a time series as the basis for a forecast
• The forecast for a time period is equal to the previous time period’s value
– Can be used when
• The time series is stable
• There is a trend
• There is seasonality
Time-Series Forecasting - Averaging
• These Techniques work best when a series tends to vary about an average
– Averaging techniques smooth variations in the data
– They can handle step changes or gradual changes in the level of a series
– Techniques
• Moving average
• Weighted moving average
• Exponential smoothing
Moving Average
• Technique that averages a number of the most recent actual values in generating a forecast
Moving Average
• As new data become available, the forecast is updated by adding the newest value and
dropping the oldest and then recomputing the the average
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• The number of data points included in the average determines the model’s sensitivity
– Fewer data points used-- more responsive
– More data points used-- less responsive
Weighted Moving Average
• The most recent values in a time series are given more weight in computing a forecast
– The choice of weights, w, is somewhat arbitrary and involves some trial and error
Exponential Smoothing
• A weighted averaging method that is based on the previous forecast plus a percentage of
the forecast error
Other Forecasting Methods - Focus
• Focus Forecasting
– Some companies use forecasts based on a “best current performance” basis
• Apply several forecasting methods to the last several periods of historical data
• The method with the highest accuracy is used to make the forecast for the
following period
• This process is repeated each month
Other Forecasting Methods - Diffusion
• Diffusion Models
– Historical data on which to base a forecast are not available for new products
• Predictions are based on rates of product adoption and usage spread from other
established products
• Take into account facts such as
– Market potential
– Attention from mass media
– Word-of-mouth
Techniques for Trend
• Linear trend equation
• Non-linear trends
– Parabolic trend equation
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– Exponential trend equation
– Growth curve trend equation
Techniques for Trend
• Linear trend equation
• Non-linear trends
– Parabolic trend equation
– Exponential trend equation
– Growth curve trend equation
Estimating slope and intercept
• Slope and intercept can be estimated from historical data
Trend-Adjusted Exponential Smoothing
• The trend adjusted forecast consists of two components
– Smoothed error
– Trend factor
Trend-Adjusted Exponential Smoothing
• Alpha and beta are smoothing constants
• Trend-adjusted exponential smoothing has the ability to respond to changes in trend
Techniques for Seasonality
• Seasonality is expressed in terms of the amount that actual values deviate from the average
value of a series
• Models of seasonality
– Additive
• Seasonality is expressed as a quantity that gets added or subtracted from the
time-series average in order to incorporate seasonality
– Multiplicative
• Seasonality is expressed as a percentage of the average (or trend) amount
which is then used to multiply the value of a series in order to incorporate
seasonality
OPERATIONS MANAGEMENT | BUMA 20013
Seasonal relatives
– The seasonal percentage used in the multiplicative seasonally adjusted forecasting
model
• Using seasonal relatives
– To deseasonalize data
• Done in order to get a clearer picture of the nonseasonal components of the data
series
• Divide each data point by its seasonal relative
– To incorporate seasonality in a forecast
• Obtain trend estimates for desired periods using a trend equation
• Add seasonality by multiplying these trend estimates by the corresponding
seasonal relative
Techniques for Cycles
• Cycles are similar to seasonal variations but are of longer duration
• Explanatory approach
– Search for another variable that relates to, and leads, the variable of interest
• Housing starts precede demand for products and services directly related to
construction of new homes
• If a high correlation can be established with a leading variable, it can develop an
equation that describes the relationship, enabling forecasts to be made
Associative Forecasting Techniques
– Home values may be related to such factors as home and property size, location,
number of bedrooms, and number of bathrooms
• Associative techniques are based on the development of an equation that
summarizes the effects of predictor variables
– Predictor variables - variables that can be used to predict values of
the variable of interest
Simple Linear Regression
• Regression - a technique for fitting a line to a set of data points
– Simple linear regression - the simplest form of regression that involves a linear
relationship between two variables
• The object of simple linear regression is to obtain an equation of a straight line
that minimizes the sum of squared vertical deviations from the line (i.e., the least
squares criterion)
OPERATIONS MANAGEMENT | BUMA 20013
Least Squares Line
Standard Error
• Standard error of estimate
– A measure of the scatter of points around a regression line
– If the standard error is relatively small, the predictions using the linear equation will
tend to be more accurate than if the standard error is larger
Correlation Coefficient
• Correlation
– A measure of the strength and direction of relationship between two variables
– Ranges between -1.00 and +1.00
• r , square of the correlation coefficient
2
– A measure of the percentage of variability in the values of y that is “explained” by the
independent variable
– Ranges between 0 and 1.00
Simple Linear Regression Assumptions
1.
Variations around the line are random
2.
Deviations around the average value (the line) should be normally distributed
3.
Predictions are made only within the range of observed values
Issues to consider:
• Always plot the line to verify that a linear relationships is appropriate
OPERATIONS MANAGEMENT | BUMA 20013
• The data may be time-dependent.
– If they are
• use analysis of time series
• use time as an independent variable in a multiple regression analysis
• A small correlation may indicate that other variables are important
Using Forecast Information
• Reactive approach
– View forecasts as probable future demand
– React to meet that demand
• Proactive approach
– Seeks to actively influence demand
•
•
•
Advertising
Pricing
Product/service modifications
– Generally requires either and explanatory model or a subjective assessment of the
influence on demand
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 3 - PRODUCT AND SERVICE DESIGN
 OVERVIEW
An effective product strategy links product decision with investment, market share, and
product life cycle, and defines the breadth of the production line. The objective of the product
decision is to develop and implement a product strategy that meets the demands of the
marketplace with a competitive advantage via differentiation, low cost, rapid response, or a
combination of these.
 LEARNING OUTCOME
At the end of this lesson, students will be able to:
✓ Critically reflect on the interrelatedness of the product and service design and
creatively combine theories to greatly contribute to successful operations strategy.
 COURSE MATERIALS
Product and Service Design
Reasons Design or Re-Design
• The driving forces for product and service design or redesign are market opportunities or
threats:
– Economic
– Social and Demographic
– Political, Liability, or Legal
– Competitive
– Cost or Availability
– Technological
Key Questions
• Is there a demand for it?
– Market size
– Demand profile
• Can we do it?
– Manufacturability - the capability of an organization to produce an item at an
acceptable profit
– Serviceability - the capability of an organization to provide a service at an acceptable
cost or profit
• What level of quality is appropriate?
– Customer expectations
– Competitor quality
– Fit with current offering
• Does it make sense from an economic standpoint?
– Liability issues, ethical considerations, sustainability issues, costs and profits
OPERATIONS MANAGEMENT | BUMA 20013
Legal Considerations
– Product liability
• The responsibility a manufacturer has for any injuries or damages caused by as
faulty product
• Some of the concomitant costs
– Litigation
– Legal and insurance costs
– Settlement costs
– Costly product recalls
– Reputation effects
– Uniform Commercial Code
• Under the UCC, products carry an implication of merchantability and fitness
Normative Behavior
• Produce designs that are consistent with the goals of the organization
– e.g., Do not compromise on quality, or cut corners, even in areas that are not apparent
to the customer
• Give customers the value they expect
• Make health and safety a concern
– Do not place employees, customers, or third parties at risk because of faulty products
and services
Sustainability
– Using resources in ways that do not harm ecological systems that support human
existence
• Key aspects of designing for sustainability
– Life cycle assessment
– Reduction of costs and materials used
– Re-using parts of returned products
– Recycling
Life Cycle Assessment (LCA)
• LCA
– The assessment of the environmental impact of a product or service throughout its
useful life
• Focuses on such factors as
– Global warming
– Smog formation
– Oxygen depletion
OPERATIONS MANAGEMENT | BUMA 20013
– Solid waste generation
• LCA procedures are part of the ISO 14000 environmental management
procedures
Reduce: Costs and Materials
• Value analysis
– Examination of the function of parts and materials in an effort to reduce the cost and/or
improve the performance of a product
– Common questions used in value analysis
• Could a less expensive part of material be used?
• Is the function necessary?
• Can the function of two or more parts be performed by a single part?
• Can a part be simplified?
• Could product specifications be relaxed?
• Could standard parts be substituted for non-standard parts?
Re-Use: Remanufacturing
• Remanufacturing
– Refurbishing used products by replacing worn-out or defective components
• Can be performed by the original manufacturer or another company
– Design for disassembly (DFD)
• Designing a product to that used products can be easily taken apart
Recycle
• Recycling
– Recovering materials for future use
• Applies to manufactured parts
• Also applies to materials used during production
– Why recycle?
• Cost savings
• Environmental concerns
• Environmental regulations
– Design for recycling (DFR)
• Product design that takes into account the ability to disassemble a used product
to recover the recyclable parts
OPERATIONS MANAGEMENT | BUMA 20013
Other Considerations
• Product or service life cycles
• Standardization
• Product or service reliability
• Product or service robustness
Product or service life stages
Standardization
– Extent to which there is an absence of variety in a product, service, or process
Advantages of Standardization
1. Fewer parts to deal with in inventory & manufacturing
2. Reduced training costs and time
3. More routine purchasing, handling and inspection procedures
4. Orders fillable from inventory
5. Opportunities for long production runs and automation
6. Need for fewer parts justifies increased expenditures on perfecting designs and improving
quality control procedures
Disadvantages of Standardization
1. Designs may be frozen with too many imperfections remaining.
2. High cost of design changes increases resistance to improvements
3. Decreased variety results in less consumer appeal.
OPERATIONS MANAGEMENT | BUMA 20013
Designing for Mass Customization
• Mass customization
– A strategy of producing basically standardized goods or services, but incorporating
some degree of customization in the final product or service
– Facilitating Techniques
• Delayed differentiation
• Modular design
Delayed Differentiation
• Delayed Differentiation
– The process of producing, but not quite completing, a product or service until customer
preferences are known
– It is a postponement tactic
• Produce a piece of furniture, but do not stain it; the customer chooses the stain
Modular Design
– A form of standardization in which component parts are grouped into modules that are
easily replaced or interchanged
• Advantages
–
easier diagnosis and remedy of failures
–
easier repair and replacement
–
simplification of manufacturing and assembly
• Disadvantages
–
Limited number of possible product configurations
–
Limited ability to repair a faulty module; the entire module must often
be scrapped
Reliability
– The ability of a product, part, or system to perform its intended function under a
prescribed set of conditions
– Failure
• Situation in which a product, part, or system does not perform as intended
– Normal operating conditions
• The set of conditions under which an item’s reliability is specified
Robust design
– A design that results in products or services that can function over a broad range of
conditions
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– Pertains to product as well as process design
• Consider the following automobiles:
– Ferrari 599
– Toyota Avalon
» Which is design is more robust?
Degree of Newness
• Product or service design changes:
– Modification of an existing product or service
– Expansion of an existing product line or service offering
– Clone of a competitor’s product or service
– New product or service
• The degree of change affects the newness of the product or service to the market and to the
organization
– Risks and benefits?
Phases in Design & Development
1. Idea generation
2. Feasibility analysis
3. Product specifications
4. Process specifications
5. Prototype development
6. Design review
7. Market test
8. Product introduction
9. Follow-up evaluation
Idea Generation
1. Supply-chain based
2. Competitor based
3. Research based
Supply-Chain Based
• Ideas can come from anywhere in the supply chain:
– Customers
– Suppliers
– Distributors
OPERATIONS MANAGEMENT | BUMA 20013
– Employees
– Maintenance and repair personnel
Competitor-Based
• By studying how a competitor operates and its products and services, many useful ideas
can be generated
• Reverse engineering
– Dismantling and inspecting a competitor’s product to discover product improvements
Research Based
• Research and Development (R&D)
– Organized efforts to increase scientific knowledge or product innovation
– Basic research
• Has the objective of advancing the state of knowledge about a subject without
any near-term expectation of commercial applications
– Applied research
• Has the objective of achieving commercial applications
– Development
• Converts the results of applied research into useful commercial applications.
• Research and Development (R&D)
– Organized efforts to increase scientific knowledge or product innovation
– Basic research
• Has the objective of advancing the state of knowledge about a subject without
any near-term expectation of commercial applications
– Applied research
• Has the objective of achieving commercial applications
– Development
• Converts the results of applied research into useful commercial applications.
Concurrent Engineering
• Concurrent engineering
– Bringing engineering design and manufacturing personnel together early in the design
phase
• Also may involve marketing and purchasing personnel
• Views of suppliers and customers may also be sought
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Computer-Aided Design (CAD)
• CAD
– Product design using computer graphics
– Advantages
•
increases productivity of designers, 3 to 10 times
•
creates a database for manufacturing information on product specifications
•
provides possibility of engineering and cost analysis on proposed designs
– CAD that includes finite element analysis (FEA) can significantly reduce time to market
•
Enables developers to perform simulations that aid in the design, analysis, and
commercialization of new products
Production Requirements
• Designers must take into account production capabilities
– Equipment
– Skills
– Types of materials
– Schedules
– Technologies
Manufacturability
– Ease of fabrication and/or assembly
– It has important implications for
• Cost
• Productivity
• Quality
DFM and DFA
• Design for manufacturing (DFM)
– The designing of products that are compatible with an organization’s abilities
• Design for assembly (DFA)
– Design that focuses on reducing the number of parts in a product and on assembly
methods and sequence
Component Commonality
• When products have a high degree of similarity in features and components, a part can be
used in multiple products
• Benefits:
– Savings in design time
OPERATIONS MANAGEMENT | BUMA 20013
– Standard training for assembly and installation
– Opportunities to buy in bulk from suppliers
– Commonality of parts for repair
– Fewer inventory items must be handled
The House of Quality
The House of Quality Sequence
Kano Model
• Basic quality
– Refers to customer requirements that have only limited effect on customer satisfaction
if present, but lead to dissatisfaction if absent
• Performance quality
– Refers to customer requirements that generate satisfaction or dissatisfaction in
proportion to their level of functionality and appeal
• Excitement quality
– Refers to a feature or attribute that was unexpected by the customer and causes
excitement
OPERATIONS MANAGEMENT | BUMA 20013
Service Design Definitions
• Service
– Something that is done to, or for, a customer
• Service delivery system
– The facilities, processes, and skills needed to provide a service
• Product bundle
– The combination of goods and services provided to a customer
Service Design
• Begins with a choice of service strategy, which determines the nature and focus of the
service, and the target market
– Key issues in service design
• Degree of variation in service requirements
• Degree of customer contact and involvement
Service Blueprint
Reliability
• Reliability
– The ability of a product, part, or system to perform its intended function under a
prescribed set of conditions
– Reliability is expressed as a probability:
• The probability that the product or system will function when activated
• The probability that the product or system will function for a given length of time
OPERATIONS MANAGEMENT | BUMA 20013
Availability
• Availability
– The fraction of time a piece of equipment is expected to be available for operation
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 4 - PROCESS SELECTION AND LAYOUT DECISIONS
 OVERVIEW
Layout is one of the key decisions that determines the long-run efficiency of operations.
Layout has numerous strategic implications because it establishes an organization’s
competitive priorities in regard to capacity, processes, flexibility, and cost, as well as quality
of work life, customer contact, and image. An effective layout can help an organization achieve
a strategy that supports differentiation, low cost, or response.
 LEARNING OUTCOMES
After the end of this lesson, students will be able to:
✓ Demonstrate ability to discuss different lay out decisions and the underlying factors
of considering them.
✓ Appreciate the importance of process strategies in producing quality products and
services
✓ Critically reflect of existing theories concerning process design and creatively
combine and generate frameworks & tools to use them where applicable.
 COURSE MATERIALS
Process Selection and Facilities Layout
Process Selection
• Process selection
– Refers to the deciding on the way production of goods or services will be organized
– It has major implications for
• Capacity planning
• Layout of facilities
• Equipment
• Design of work systems
Process Selection and System Design
OPERATIONS MANAGEMENT | BUMA 20013
Process Strategy
• Key Aspects of Process Strategy:
– Capital Intensity
• The mix of equipment and labor that will be used by the organization
– Process flexibility
• The degree to which the system can be adjusted to changes in processing
requirements due to such factors as
– Product and service design changes
– Volume changes
– Changes in technology
Technology
• Technology
– The application of scientific discoveries to the development and improvement of
products and services and operations processes
• Technological Innovation
– The discovery and development of new or improved products, services, or processes
for producing or providing them
Kinds of Technology
• Operations Management is concerned with:
– Product and service technology
• Discovery and development of new products and services
– Process technology
• Methods, procedures, and equipment used to produce goods and provide
services
– Information technology
• The science and use of computers and other electronic equipment to store,
process, and send information
Technology for Competitive Advantage
• Technological advances can lead to competitive advantage
– Product technology
• Increased market share and profits
– Processing technology
• Improved quality
• Lower costs
• Higher productivity
• Expanded processing capabilities
OPERATIONS MANAGEMENT | BUMA 20013
Process Selection
1.
Variety
–
2.
How much?
Equipment flexibility
–
3.
To what degree?
Volume
–
Expected output?
Types of Processing
OPERATIONS MANAGEMENT | BUMA 20013
Product-Process Matrix
Process Choice Effects
Product and Service Profiling
• Process selection involves
– Substantial investment in equipment
– Has a very specific influence on layout
• Product or service profiling
– Linking key product or service requirements to process capabilities
– Key dimensions relate to
• Range of products or services that will be processed
• Expected order sizes
• Pricing strategies
• Expected frequency of schedule changes
• Order-winning requirements
OPERATIONS MANAGEMENT | BUMA 20013
Automation
– Machinery that has sensing and control devices that enable it to operate automatically
• Fixed automation
• Programmable automation
• Flexible automation
Automation Questions
1.
What level of automation is appropriate?
2.
How would automation affect system flexibility?
3.
How can automation projects be justified?
4.
How should changes be managed?
5.
What are the risks of automating?
6.
What are the likely effects of automating on:
–
Market share
–
Costs
–
Quality
–
–
Customer satisfaction
Labor relations
–
Ongoing operations
Facilities Layout
• Layout
– the configuration of departments, work centers, and equipment, with particular
emphasis on movement of work (customers or materials) through the system
– Facilities layout decisions arise when:
• Designing new facilities
• Re-designing existing facilities
The Need for Layout Planning
• Inefficient operations
– High cost
– Bottlenecks
• Accidents or safety hazards
• Changes in product or service design
• Introduction of new products or services
OPERATIONS MANAGEMENT | BUMA 20013
The Need for Layout Planning
• Changes in output volume or product mix
• Changes in methods or equipment
• Changes in environmental or other legal requirements
• Morale problems
Layout Design Objectives
• Basic Objective
– Facilitate a smooth flow of work, material, and information through the system
• Supporting objectives
– Facilitate product or service quality
– Use workers and space efficiently
– Avoid bottlenecks
– Minimize material handling costs
– Eliminate unnecessary movement of workers or material
– Minimize production time or customer service time
– Design for safety
Basic Layout Types
•Product layouts
•Process layouts
•Fixed-Position layout
•Combination layouts
Repetitive Processing
Product Layouts
• Product layout
– Layout that uses standardized processing operations to achieve smooth, rapid, highvolume flow
-
Used for Repetitive Processing Repetitive or Continuous
OPERATIONS MANAGEMENT | BUMA 20013
Product Layout: Advantages
• High rate of output
• Low unit cost
• Labor specialization
• Low material handling cost per unit
• High utilization of labor and equipment
• Established routing and scheduling
• Routine accounting, purchasing, and inventory control
Product Layout: Disadvantages
• Creates dull, repetitive jobs
• Poorly skilled workers may not maintain equipment or quality of output
• Fairly inflexible to changes in volume or product or process design
• Highly susceptible to shutdowns
• Preventive maintenance, capacity for quick repair and spare-parts inventories are necessary
expenses
• Individual incentive plans are impractical
Non-repetitive Processing: Process Layouts
• Process layouts
– Layouts that can handle varied processing requirements
Process Layout: Advantages
• Can handle a variety of processing requirements
• Not particularly vulnerable to equipment failures
• General-purpose equipment is often less costly than the specialized equipment used in
product layouts
• It is possible to use individual incentive plans
OPERATIONS MANAGEMENT | BUMA 20013
Process Layout: Disadvantages
• In-process inventory costs can be high
• Challenging routing and scheduling
• Equipment utilization rates are low
• Material handling slow and inefficient
• Complexities often reduce span of supervision
• Special attention for each product or customer
• Accounting and purchasing are more involved
Fixed Position Layouts
• Fixed Position layout
– Layout in which the product or project remains stationary, and workers, materials, and
equipment are moved as needed
Combination Layouts
• Some operational environments use a combination of the three basic layout types:
– Hospitals
– Supermarket
– Shipyards
• Some organizations are moving away from process layouts in an effort to capture the
benefits of product layouts
– Cellular manufacturing
– Flexible manufacturing systems
Flexible Manufacturing System (FMS)
• FMS
– A group of machines designed to handle intermittent processing requirements and
produce a variety of similar products
OPERATIONS MANAGEMENT | BUMA 20013
• Includes supervisory computer control, automatic material handling, and robots
or other automated processing equipment
• It is a more automated version of cellular manufacturing
Computer Integrated Manufacturing (CIM)
• CIM
– A system for linking a broad range of manufacturing activities through an integrated
computer system
• Activities include
– Engineering design
– FMS
– Purchasing
– Order processing
– Production planning and control
Service Layout
• Service layouts can be categorized as: product, process, or fixed position
• Service layout requirements are somewhat different due to such factors as:
– Degree of customer contact
– Degree of customization
• Common service layouts:
– Warehouse and storage layouts
– Retail layouts
– Office layouts
Line Balancing
• Line balancing
– The process of assigning tasks to workstations in such a way that the workstations
have approximately equal time requirements
– Why is line balancing important?
1.
It allows us to use labor and equipment more efficiently.
2.
To avoid fairness issues that arise when one workstation must work harder
than another.
Cycle Time
• Cycle time
– The maximum time allowed at each workstation to complete its set of tasks on a unit
– Cycle time also establishes the output rate of a line
OPERATIONS MANAGEMENT | BUMA 20013
Cycle Time and Output Rate
How Many Workstations are Needed?
• The required number of workstations is a function of
– Desired output rate
– Our ability to combine tasks into a workstation
• Theoretical minimum number of stations
Precedence Diagram
• Precedence diagram
– A diagram that shows elemental tasks and their precedence requirements
Assigning Tasks to Workstations
• Some Heuristic (Intuitive) Rules:
– Assign tasks in order of most following tasks
• Count the number of tasks that follow
– Assign tasks in order of greatest positional weight.
• Positional weight is the sum of each task’s time and the times of all following
tasks.
OPERATIONS MANAGEMENT | BUMA 20013
Line Balancing Procedure
Measuring Effectiveness
• Balance delay (percentage of idle time)
– Percentage of idle time of a line
• Efficiency
– Percentage of busy time of a line
Designing Process Layouts
• The main issue in designing process layouts concerns the relative placement of the
departments
• Measuring effectiveness
– A major objective in designing process layouts is to minimize transportation cost,
distance, or time
Information Requirements
• In designing process layouts, the following information is required:
– A list of departments to be arranged and their dimensions
– A projection of future workflows between the pairs of work centers
– The distance between locations and the cost per unit of distance to move loads
between them
– The amount of money to be invested in the layout
– A list of any special considerations
– The location of key utilities, access and exit points, etc.
OPERATIONS MANAGEMENT | BUMA 20013
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 5 – DESIGN OF WORK SYSTEM
 OVERVIEW
By reasonable quality of work life, we mean a job that is not only reasonably safe and for
which the pay is equitable but that also achieves an appropriate level of both physical and
psychological requirements. Mutual commitment means that both management and employee
strive to meet common objectives. Mutual trust is reflected in reasonable, documented
employment policies that are honestly and equitably implemented to the satisfaction of both
management and employee. When management has a genuine respect for its employees and
their contributions to the firm, establishing a reasonable quality of work life and mutual trust is not
difficult.
This chapter is devoted to showing how operations managers can achieve human resource
strategy.
 LEARNING OUTCOMES
After the end of this lesson, students will be able to:
✓ Discuss the importance of the role of human resources in delivering effective and
efficient operations through job design and work measurement
✓ Appreciate and explain the labor standards that the company should look into
considerations
 COURSE MATERIALS
Quality of Work Life
• Quality of work life affects workers’ overall sense of well-being and contentment, but also
their productivity
• Important aspects of quality of work life:
– How a worker gets along with co-workers
– Quality of management
– Working conditions
– Compensation
• Quality of work life affects workers’ overall sense of well-being and contentment, but also
their productivity
• Important aspects of quality of work life:
– How a worker gets along with co-workers
– Quality of management
– Working conditions
– compensation
OPERATIONS MANAGEMENT | BUMA 20013
Working Conditions
Compensation
• It is important for organizations to develop suitable compensation plans for their employees
• Compensation approaches
– Time-based systems
– Output-based systems
– Incentive systems
– Knowledge-based systems
Compensation Systems
• Time-based system
– Compensation based on time an employee has worked during the pay period
• Output-based (incentive) system
– Compensation based on amount of output an employee produced during the pay
period
Incentive Plan Success
• To obtain maximum benefit from an incentive plan, it should be
1.
Accurate
2.
Easy to apply
3.
Consistent
4.
Easy to understand
5.
Fair
•
There should also be an obvious relationship between effort and reward, and
no limit on earnings
Individual and Group Incentive Plans
• Individual incentive plans
– Straight piecework
OPERATIONS MANAGEMENT | BUMA 20013
• Worker’s pay is a direct linear function of his or her output
• Minimum wage legislation has reduced their popularity
– Base rate + bonus
• Worker is guaranteed a base rate, tied to an output standard, that serves as a
minimum
• A bonus is paid for output above the standard
• Group incentive plans
– Tend to stress sharing of productivity gains with employees
Knowledge-Based Pay Systems
• Knowledge-based pay
– A pay system used by organizations to reward workers who undergo training that
increases their skills
– Three dimensions:
• Horizontal skills
– Reflect the variety of tasks the worker is capable of performing
• Vertical skills
– Reflect the managerial skills the worker is capable of
• Depth skills
– Reflect quality and productivity results
Management Compensation
• Many organizations used to reward managers based on output
• New emphasis is being placed on other factors of performance
– Customer service
– Quality
• Executive pay is increasingly being tied to the company or division for which the executive is
responsible
Job Design
• Job design
– The act of specifying the contents and methods of jobs
• What will be done in a job?
• Who will do the job?
• How the job will be done?
• Where the job will be done?
– Objectives
• Productivity
• Safety
• Quality of work life
OPERATIONS MANAGEMENT | BUMA 20013
Job Design Success
• Job design success factors:
– Carried out by personnel with appropriate training and background
– Consistent with the goals of the organization
– In written form
– Understood and agreed to by both management and employees
Designing Work Systems
• Efficiency vs. Behavioral approaches to job design
– Specialization
• Motivation
• Teams
• Ergonomics
• Methods analysis
• Motion studies
• Working conditions
Efficiency vs. Behavioral Job Design
• Efficiency School
– Emphasizes a systematic, logical approach to job design
– A refinement of Frederick Winslow Taylor’s scientific management concepts
• Behavioral School
– Emphasizes satisfaction of needs and wants of employees
Specialization
• Specialization
– Work that concentrates on some aspect of a product or service
OPERATIONS MANAGEMENT | BUMA 20013
Motivation
• Motivation is a key factor in many aspects of work life
– Influences quality and productivity
– Contributes to the work environment
• Trust is an important factor that affects motivation
Teams
• Teams take a variety of forms:
– Short-term team
• Formed to collaborate on a topic or solve a problem
– Long-term teams
• Self-directed teams
– Groups empowered to make certain changes in their work processes
• Benefits of teams
– Higher quality
– Higher productivity
– Greater worker satisfaction
• Team problems
– Some managers feel threatened
– Conflicts between team members
Ergonomics
• Ergonomics (human factors)
– The scientific discipline concerned with the understanding of interactions among
human and other elements of a system
• Three domains of ergonomics
– Physical (repetitive movements, layout, health, safety)
OPERATIONS MANAGEMENT | BUMA 20013
– Cognitive (mental workload, decision making, HCI, and work stress)
– Organizational (communication, teamwork, work design, and telework)
Methods Analysis
• Methods Analysis
– Analyzing how a job gets done
– It begins with an analysis of the overall operation
– It then moves from general to specific details of the job concentrating on
• Workplace arrangement
• Movement of workers and/or materials
The Need for Methods Analysis
• The need for methods analysis can arise from a variety of sources
– Changes in tools and equipment
– Changes in product design or introduction of new products
– Changes in materials and procedures
– Government regulations or contractual agreements
– Accidents or quality problems
Methods Analysis Procedure
1.
Identify the operation to be studied, and gather relevant data
2.
Discuss the job with the operator and supervisor to get their input
3.
Study and document the present methods
4.
Analyze the job
5.
Install the new methods
6.
Follow up implementation to assure improvements have been achieved
Guidelines for Selecting a Job to Study
• Consider jobs that:
– Have a high labor content
– Are done frequently
– Are unsafe, tiring, unpleasant, and/or noisy
– Are designated as problems
•
•
Quality problems
Processing bottlenecks
OPERATIONS MANAGEMENT | BUMA 20013
Analyzing the Job: Flow Process Charts
• Flow process chart
– Chart used to examine the overall sequence of an operation by focusing on
movements of the operator or flow of materials
Analyzing the Job: Worker-Machine Chart
• Worker machine chart
– Chart used to determine portions of a work cycle during which an operator and
equipment are busy or idle
OPERATIONS MANAGEMENT | BUMA 20013
Motion Study
• Motion study
– Systematic study of the human motions used to perform an operation
• Motion Study Techniques
– Motion study principles– guidelines for designing motion-efficient work procedures
– Analysis of therbligs– basic elemental motions into which a job can be broken down
– Micromotion study– use of motion pictures and slow motion to study motions that
otherwise would be too rapid to analyze
– Charts– activity or process charts, simo charts (simultaneous motions)
Developing Work Methods
• In developing work methods that are motion efficient, the analyst attempts to
– Eliminate unnecessary motions
– Combine activities
– Reduce fatigue
– Improve the arrangement of the workplace
– Improve the design of tools and equipment
Work Measurement
• Work measurement is concerned with how long it should take to complete a job.
• It is not concerned with either job content or how the job is to be completed since these are
considered a given when considering work measurement.
• Commonly used work measurement techniques
– Stopwatch time study
– Historical times
– Predetermined data
– Work sampling
Standard Time
• Standard time
– The amount of time it should take a qualified worker to complete a specified task,
working at a sustainable rate, using given methods, tools and equipment, raw material
inputs, and workplace arrangement.
Stopwatch Time Study
• Used to develop a time standard based on observations of one worker taken over a number
of cycles.
OPERATIONS MANAGEMENT | BUMA 20013
• Basic steps in a time study:
1.
Define the task to be studied and inform the worker who will be studied
2.
Determine the number of cycles to observe
3.
Time the job, and rate the worker’s performance
4.
Compute the standard time
Historical Times
• Standard Elemental Times are derived from a firm’s own historical time study data.
– Over time, a file of accumulated elemental times that are common to many jobs will be
collected.
– In time, these standard elemental times can be retrieved from the file, eliminating the
need to go through a new time study to acquire them.
Procedure:
1.
Analyze the job to identify the standard elements.
2.
Check the file for elements that have historical times and record them. Use time
studies to obtain others, if necessary.
3.
Modify the file times if necessary.
4.
Sum the elemental times to obtain the normal time, and factor in allowances to
obtain the standard time.
Predetermined Time Standards
• Predetermined time standards involve the use of published data on standard elemental
times.
• Developed in the 1940s by the Methods Engineering Council.
• The MTM tables are based on extensive research of basic elemental motions and
times.
• To use this approach, the analyst must divide the job into its basic elements (reach,
move, turn, etc.) measure the distances involved, and rate the difficulty of the
element, and then refer to the appropriate table of data to obtain the time for that
element
Work Sampling
• Work sampling is a technique for estimating the proportion of time that a worker or machine
spends on various activities and idle time.
– work sampling does not require timing an activity or involve continuous observation
OPERATIONS MANAGEMENT | BUMA 20013
of the activity
– Uses:
1. ratio-delay studies which concern the percentage of a worker’s time that
involves unavoidable delays or the proportion of time a machine is idle.
2. analysis of non-repetitive jobs.
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 6 – LOCATION DECISIONS
 OVERVIEW
Firms throughout the world are using the concepts and techniques of this lesson to address
the location decision because location greatly affects both fixed and variable costs Location has
a major impact on the overall risk and profit of the company.
This chapter illustrates techniques organization use to locate plants, warehouses, store, and
office.
 LEARNING OUTCOME
After the end of this lesson, students will be able to:
✓ Appreciate and discuss the importance of strategic location in operations management
 COURSE MATERIALS
The Need for Location Decisions
• Location decisions arise for a variety of reasons:
– Addition of new facilities
• As part of a marketing strategy to expand markets
• Growth in demand that cannot be satisfied by expanding existing facilities
• Depletion of basic inputs requires relocation
• Shift in markets
• Cost of doing business at a particular location makes relocation attractive
Location Decisions: Strategically Important
• Location decisions:
– Are closely tied to an organization’s strategies
• Low-cost
• Convenience to attract market share
– Effect capacity and flexibility
– Represent a long-term commitment of resources
– Effect investment requirements, operating costs, revenues, and operations
– Impact competitive advantage
– Importance to supply chains
Location Decisions: Objectives
• Location decisions are based on:
– Profit potential or cost and customer service
– Finding a number of acceptable locations from which to choose
OPERATIONS MANAGEMENT | BUMA 20013
– Position in the supply chain
• End: accessibility, consumer demographics, traffic patterns, and local customs
are important
• Middle: locate near suppliers or markets
• Beginning: locate near the source of raw materials
– Web-based retail organizations are effectively location independent
– Supply chain management issues such as supply chain configuration
• Centralized vs. decentralized distribution
Location: Options
• Existing companies generally have four options available in location planning:
1.
Expand an existing facility
2.
Add new locations while retaining existing facilities
3.
4.
Shut down one location and move to another
Do nothing
Location Decision: General Procedure
• Steps:
1.
Decide on the criteria to use for evaluating location alternatives
2.
Identify important factors, such as location of markets or raw materials
3.
Develop location alternatives
4.
a.
Identify the country or countries for location
b.
Identify the general region for location
c.
Identify a small number of community alternatives
d.
Identify the site alternatives among the community alternatives
Evaluate the alternatives and make a decision
Global Location: Facilitating Factors
• Two key factors have contributed to the attractiveness of globalization:
– Trade Agreements such as
• North American Free Trade Agreement (NAFTA)
• General Agreement on Tariffs and Trade (GATT)
• U.S.-China Trade Relations Act
• EU and WTO efforts to facilitate trade
– Technology
• Advances in communication and information technology
OPERATIONS MANAGEMENT | BUMA 20013
Global Location: Benefits
• A wide range of benefits have accrued to organizations that have globalized operations:
– Markets
– Cost savings
– Legal and regulatory
– Financial
– Other
Global Location: Disadvantages
• There are a number of disadvantages that may arise when locating globally:
– Transportation costs
– Security costs
– Unskilled labor
– Import restrictions
– Criticism for locating out-of-country
Global Location: Risks
• Organizations locating globally should be aware of potential risk factors related to:
– Political instability and unrest
– Terrorism
– Economic instability
– Legal regulation
– Ethical considerations
– Cultural differences
Managing Global Operations
• Managerial implications for global operations:
– Language and cultural differences
• Risk of miscommunication
• Development of trust
• Different management styles
• Corruption and bribery
– Level of technology and resistance to technological change
– Domestic personnel may resist locating, even temporarily
OPERATIONS MANAGEMENT | BUMA 20013
Location: Identifying a Country
Location: Identifying a Region
• Primary regional factors:
– Locating near the raw materials
• Necessity
• Perishability
• Transportation costs
– Locating near of markets
• As part of a profit-oriented company’s competitive strategy
• So not-for-profits can meet the needs of their service users
• Distribution costs and perishability
– Labor factors
• Cost of labor
• Availability of suitably skilled workers
• Wage rates in the area
• Labor productivity
• Attitudes toward work
• Whether unions pose a serious potential problem
– Other factors
• Climate and taxes may play an important role in location decisions
OPERATIONS MANAGEMENT | BUMA 20013
Geographic Information System (GIS)
• GIS
– A computer-based tool for collecting, storing, retrieving, and displaying demographic
data on maps
– Aids decision makers in
• Targeting market segments
• Identifying locations relative to their market potential
• Planning distribution networks
– Portraying relevant information on a map makes it easier for decision makers to
understand
Location: Identifying a Community
• Many communities actively attempt to attract new businesses they perceive to be a good fit
for the community
• Businesses also actively seek attractive communities based on such factors such as:
– Quality of life
– Services
– Attitudes
– Taxes
– Environmental regulations
– Utilities
– Development support
Location: Identifying a Site
• Primary site location considerations are
– Land
– Transportation
– Zoning
– Other restrictions
Multiple Plant Manufacturing Strategies
• Organizing operations
– Product plant strategy
• Entire products or product lines are produced in separate plants, and each plant
usually supplies the entire domestic market
– Market area plant strategy
• Plants are designated to serve a particular geographic segment of the market
• Plants produce most, if not all, of a company’s products
OPERATIONS MANAGEMENT | BUMA 20013
– Process plant strategy
• Different plants focus on different aspects of a process
– automobile manufacturers – engine plant, body stamping plant, etc.
• Coordination across the system becomes a significant issue
– General-purpose plant strategy
• Plants are flexible and capable of handling a range of products
Service and Retail Locations
• Considerations:
– Nearness to raw materials is not usually a consideration
– Customer access is a
• Prime consideration for some: restaurants, hotels, etc.
• Not an important consideration for others: service call centers, etc.
– Tend to be profit or revenue driven, and so are
• Concerned with demographics, competition, traffic/volume patterns, and
convenience
Evaluating Location Alternatives
• Common techniques:
– Locational cost-volume-profit analysis
– Factor rating
– Center of gravity method
– Transportation model
Locational Cost-Profit-Volume Analysis
• Locational Cost-Profit-Volume Analysis
– Technique for evaluating location choices in economic terms
– Steps: 1. Determine the fixed and variable costs for each alternative
2. Plot the total-cost lines for all alternatives on the same graph
3. Determine the location that will have the lowest total cost (or highest profit)
for the expected level of output
Locational Cost-Profit-Volume Analysis
• Assumptions
1.
Fixed costs are constant for the range of probable output
2.
Variable costs are linear for the range of probably output
3.
The required level of output can be closely estimated
4.
Only one product is involved
OPERATIONS MANAGEMENT | BUMA 20013
Locational Cost-Profit-Volume Analysis
• For a cost analysis, compute the total cost for each alternative location:
Factor Rating
• Factor Rating
– General approach to evaluating locations that includes quantitative and qualitative
inputs
Procedures:
1.
2.
3.
4.
5.
6.
Determine which factors are relevant
Assign a weight to each factor that indicates its relative importance compared with
all other factors.
•
Weights typically sum to 1.00
Decide on a common scale for all factors, and set a minimum acceptable score if
necessary
Score each location alternative
Multiply the factor weight by the score for each factor, and sum the results for each
location alternative
Choose the alternative that has the highest composite score, unless it fails to meet
the minimum acceptable score
Center of Gravity Method
• Center of Gravity Method
– Method for locating a distribution center that minimizes distribution costs
• Treats distribution costs as a linear function of the distance and the quantity
shipped
• The quantity to be shipped to each destination is assumed to be fixed
• The method includes the use of a map that shows the locations of destinations
– The map must be accurate and drawn to scale
• A coordinate system is overlaid on the map to determine relative locations
OPERATIONS MANAGEMENT | BUMA 20013
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 7 – MANAGEMENT OF QUALITY
 OVERVIEW
Quality is an issue that affects an entire organization. To create a quality good or service
operations managers need to know what the customer expect.
A successful quality strategy begins with an organizational culture that fosters quality, followed
by an understanding of the principles of quality, and then engaging employees in the necessary
activities to implement quality. When these things are done well, the organization typically
satisfies its customers and obtain a competitive advantage.
 LEARNING OUTCOMES
At the end of this lesson, students will be able to:
✓ Discuss and appreciate the importance of quality to the whole organization
✓ Demonstrate ability to create scenarios where specific tool is applicable
✓ Make appropriate recommendations for ethical decision making relative to productions
and operations management
 COURSE MATERIALS
Quality Management
• Quality
– The ability of a product or service to consistently meet or exceed customer
expectations
• Prior to the 1970s and 1980s, quality was not a focal point of U.S. companies
• Foreign competition, due in part to a focus on quality, was able to capture
significant shares of U.S. markets
• Since the 1980s, quality has been increasingly embraced by U.S. executives
Quality Contributors
• Walter Shewart
– “Father of Statistical Quality Control”
– Control charts
– Variance reduction
• W. Edwards Deming
– Special vs. common cause variation
– The 14 points
• Joseph Juran
– Quality Control Handbook, 1951
– Viewed quality as fitness-for-use
– Quality trilogy– quality planning, quality control, quality improvement
OPERATIONS MANAGEMENT | BUMA 20013
• Armand Feigenbaum
– Quality is a “total field”
– The customer defines quality
• Philip B. Crosby
– Zero defects
– Quality is Free, 1979
• Kaoru Ishikawa
– Cause-and-effect diagram
– Quality circles
– Recognized the internal customer
• Genichi Taguchi
– Taguchi loss function
• Taiichi Ohno and Shigeo Shingo
– Developed philosophy and methods of kaizen
Reactive vs. Proactive Quality
• Quality Assurance
– Reactive
– Emphasis is on finding and correcting defects before they reach the market
• Strategic Approach
– Proactive
– Focuses on preventing mistakes from occurring
– Greater emphasis on customer satisfaction
– Involves all manager and workers in a continuing effort to improve quality
Dimensions of Product Quality
• Performance– main characteristics of the product
• Aesthetics– appearance, feel, smell, taste
• Special features– extra characteristics
• Conformance– how well the product conforms to design specifications
• Reliability– consistency of performance
• Durability– the useful life of the product
• Perceived quality– indirect evaluation of quality
• Serviceability– handling of complaints or repairs
OPERATIONS MANAGEMENT | BUMA 20013
Dimensions of Service Quality
• Convenience– the availability and accessibility of the service
• Reliability– ability to perform a service dependably, consistently, and accurately
• Responsiveness– willingness to help customers in unusual situations and to deal with
problems
• Time– the speed with which the service is delivered
• Assurance– knowledge exhibited by personnel and their ability to convey trust and
confidence
• Courtesy– the way customers are treated by employees
• Tangibles– the physical appearance of facilities, equipment, personnel, and communication
materials
• Consistency– the ability to provide the same level of good quality repeatedly
Assessing Service Quality
• Audit service to identify strengths and weaknesses
• In particular, look for discrepancies between:
1.
Customer expectations and management perception of those expectations
2.
Management perceptions customer expectations and service-quality specifications
3.
Service quality and service actually delivered
4.
Customers’ expectations of the service provider and their perceptions of provider
delivery
Determinants of Quality
• Quality of design
– Intention of designers to include or exclude features in a product or service
• Quality of conformance
– The degree to which goods or services conform to the intent of the designers
• Ease-of-Use and user instructions
– Increase the likelihood that a product will be used for its intended purpose and in such
a way that it will continue to function properly and safely
• After-the-sale service
– Taking care of issues and problems that arise after the sale
The Consequences of Poor Quality
• Loss of business
• Liability
• Productivity
• Costs
OPERATIONS MANAGEMENT | BUMA 20013
Benefits of Good Quality
• Enhanced reputation for quality
• Ability to command higher prices
• Increased market share
• Greater customer loyalty
• Lower liability costs
• Fewer production or service problems
• Higher profits
Responsibility for Quality
• Everyone in the organization has some responsibility for quality, but certain areas of the
organization are involved in activities that make them key areas of responsibility:
• Top management
• Design
• Procurement
• Production/operations
• Quality assurance
• Packaging and shipping
• Marketing and sales
• Customer service
Costs of Quality
• Failure Costs - costs incurred by defective parts/products or faulty services.
– Internal Failure Costs
• Costs incurred to fix problems that are detected before the product/service is
delivered to the customer.
– External Failure Costs
• All costs incurred to fix problems that are detected after the product/service is
delivered to the customer
• Appraisal Costs
– Costs of activities designed to ensure quality or uncover defects
• Prevention Costs
– All TQ training, TQ planning, customer assessment, process control, and quality
improvement costs to prevent defects from occurring
Ethics and Quality
• Substandard work
– Defective products
– Substandard service
– Poor designs
OPERATIONS MANAGEMENT | BUMA 20013
– Shoddy workmanship
– Substandard parts and materials
Having knowledge of this and failing to correct and report it in a timely manner is
unethical.
Quality Awards
▪
▪
▪
Deming Prize
EFQM Excellence Award
Baldrige Award
Baldrige Criteria
I.
Leadership (120 points)
– Senior leadership
– Governance and social responsibilities
II.
Strategic planning (85 points)
– Strategy development
– Strategy deployment
III.
IV.
Customer and market focus (85 points)
– Customer and market knowledge
– Customer relationships and satisfaction
Measurement, Analysis, and Knowledge Management (90 points)
– Measurement, analysis, and improvement of organizational performance
– Management of information, information technology, and knowledge
V.
VI.
Workforce focus (90 points)
– Workforce engagement
– Workforce environment
Process management (85 points)
– Work systems design
– Work process management and improvement
VII.
Results (450 points)
– Product and service outcomes
– Customer-focused outcomes
– Financial and market outcomes
– Workforce-focused outcomes
– Process effectiveness outcomes
– Leadership outcomes
OPERATIONS MANAGEMENT | BUMA 20013
Quality Certification
International Organization for Standardization
• ISO 9000
– Set of international standards on quality management and quality assurance, critical to
international business
• ISO 14000
– A set of international standards for assessing a company’s environmental performance
• ISO 24700
– Pertains to the quality and performance of office equipment that contains reused
components
•
ISO 9000: 2000
– Quality Principles:
• Principle 1 Customer focus
• Principle 2 Leadership
• Principle 3 Involvement of people
• Principle 4 Process approach
• Principle 5 System approach to management
• Principle 6 Continual improvement
• Principle 7 Factual approach to decision making
• Principle 8 Mutually beneficial supplier relationships
Total Quality Management
• A philosophy that involves everyone in an organization in a continual effort to improve
quality and achieve customer satisfaction.
TQM Approach
1.
Find out what the customer wants
2.
Design a product or service that meets or exceeds customer wants
3.
Design processes that facilitate doing the job right the first time
4.
Keep track of results
5.
Extend these concepts throughout the supply chain
TQM Elements
1.
Continuous improvement
2.
Competitive benchmarking
3.
4.
Employee empowerment
Team approach
5.
Decision based on fact, not opinion
OPERATIONS MANAGEMENT | BUMA 20013
6.
Knowledge of tools
7.
Supplier quality
8.
Champion
9.
Quality at the source
10.
Suppliers are partners in the process
Continuous Improvement
• Continuous Improvement
– Philosophy that seeks to make never-ending improvements to the process of
converting inputs into outputs
– Kaizen
• Japanese word for continuous improvement.
Quality at the Source
• The philosophy of making each worker responsible for the quality of his or her work
– “Do it right” and “If it isn’t right, fix it”
Six Sigma
• Six Sigma
– A business process for improving quality, reducing costs, and increasing customer
satisfaction
– Statistically
• Having no more than 3.4 defects per million
– Conceptually
• Program designed to reduce defects
• Requires the use of certain tools and techniques
Lean Six Sigma
• Lean Six Sigma
– A balanced approach to process improvement that integrates principles from lean
operation and statistical tools for variation reduction from six sigma to achieve speed
and quality
– An approach that is equally applicable to products and services
• Early application in service support functions of General electric and Caterpillar
Finance
OPERATIONS MANAGEMENT | BUMA 20013
Obstacles to Implementing TQM
• Obstacles include:
– Lack of company-wide definition of quality
– Lack of strategic plan for change
– Lack of customer focus
– Poor inter-organizational communication
– Lack of employee empowerment
– View of quality as a “quick fix”
– Emphasis on short-term financial results
– Inordinate presence of internal politics and “turf” issues
– Lack of strong motivation–
– Lack of time to devote to quality initiatives
– Lack of leadership
PDSA Cycle
• Plan-Do-Study-Act (PDSA) Cycle
– Plan
• Begin by studying and documenting the current process.
• Collect data on the process or problem
• Analyze the data and develop a plan for improvement
• Specify measures for evaluating the plan
– Do
• Implement the plan, document any changes made, collect data for analysis
– Study
• Evaluate the data collection during the do phase
• Check results against goals formulated during the plan phase
– Act
• If the results are successful, standardize the new method and communicate it to
the relevant personnel
• Implement training for the new method
• If unsuccessful, revise the plan and repeat the process
OPERATIONS MANAGEMENT | BUMA 20013
Problem Solving
Process Improvement
• Process Improvement
– A systematic approach to improving a process
OPERATIONS MANAGEMENT | BUMA 20013
Basic Quality Tools
Quality Circles
• Quality Circles
– Groups of workers who meet to discuss ways of improving products or processes
• Less structured and more informal than teams involved in continuous
improvement
• Quality circle teams have historically had relatively little authority to make any but
the most minor changes
– Work best when decisions are based on consensus
• Methods:
– List reduction
– Balance sheet approach
– Paired comparisons
OPERATIONS MANAGEMENT | BUMA 20013
Benchmarking Process
• Identify a critical process that needs improving
• Identify an organization that excels in this process
• Contact that organization
• Analyze the data
• Improve the critical process
5W2H
Quality Control
Phases of Quality Assurance
• Inspection
– An appraisal activity that compares goods or services to a standard
OPERATIONS MANAGEMENT | BUMA 20013
– Inspection issues:
1.
How much to inspect and how often?
2.
At what points in the process to inspect?
3.
Whether to inspect in a centralized or on-site location?
4.
Whether to inspect attributes or variables?
How Much to Inspect?
Where to Inspect in the Process?
• Typical Inspection Points:
– Raw materials and purchased parts
– Finished products
– Before a costly operation
– Before an irreversible process
– Before a covering process
Centralized vs. On-Site Inspection
• Effects on cost and level of disruption are a major issue in selecting centralized vs. on-site
inspection
– Centralized
• Specialized tests that may best be completed in a lab
– More specialized testing equipment
– More favorable testing environment
– On-Site
• Quicker decisions are rendered
• Avoid introduction of extraneous factors
• Quality at the source
Statistical Process Control (SPC)
• identifies special causes of variation and seeks corrective action
OPERATIONS MANAGEMENT | BUMA 20013
– Quality of Conformance
• A product or service conforms to specifications
• A tool used to help in this process:
– SPC
• Statistical evaluation of the output of a process
• Helps us to decide if a process is “in control” or if corrective action is needed
Process Variability
• Two basic questions: concerning variability:
1.
Are the variations random?
• Process control
2.
Given a stable process, is the inherent variability of the process within a range that
conforms to performance criteria
• Process capability
• Variation
– Random (common cause) variation:
• Natural variation in the output of a process, created by countless minor factors
– Assignable (special cause) variation:
• A variation whose cause can be identified
Control Process
• Sampling and corrective action are only a part of the control process
• Steps required for effective control:
– Define
– Measure
– Compare
– Evaluate
– Correct
– Monitor
OPERATIONS MANAGEMENT | BUMA 20013
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 8 – SUPPLY CHAIN MANAGEMENT
 OVERVIEW
Supply Chain Management (SCM) is the systemic, strategic coordination of the traditional
business functions within a particular company and across businesses within the supply chain for
the purpose of improving the long-term performance of the individual companies and the supply
chain as a whole. A supply chain consists of all parties involved, directly or indirectly in fulfilling a
customer request. The supply chain not only includes the manufacturer and the supplier but also
transporters, warehouses, retailers, and customers themselves. Within each organization, such
as a manufacturer, the supply chain includes all the functions involved in receiving and filling a
customer request. A typical supply chain may involve a variety of stages.
 LEARNING OUTCOMES
After this lesson, students will be able to:
✓ Discuss the importance of supply chain in operations management
✓ Demonstrate ability to relate logistics, supply chain to operations management
✓ Discuss the theories related to supply chain and logistics management
✓ Formulate strategies in selecting and maintaining suppliers
 COURSE MATERIALS
Supply Chain
• Supply Chain:
– the sequence of organizations - their facilities, functions, and activities - that are
involved in producing and delivering a product or service
– Sometimes referred to as value chains
Facilities
• The sequence of the supply chain begins with basic suppliers and extends all the way to the
final customer
– Warehouses
– Factories
– Processing centers
– Distribution centers
– Retail outlets
– Offices
Functions and Activities
• Supply chain functions and activities
– Forecasting
– Purchasing
OPERATIONS MANAGEMENT | BUMA 20013
– Inventory management
– Information management
– Quality assurance
– Scheduling
– Production and delivery
– Customer service
Typical Supply Chains
Supply Chain Management
• Supply Chain Management (SCM)
– The strategic coordination of business functions within a business organization and
throughout its supply chain for the purpose of integrating supply and demand
management
• SCM Managers
– People at various levels of the organization who are responsible for managing supply
and demand both within and across business organizations.
– Involved with planning and coordinating activities
• Sourcing and procurement of materials and services
OPERATIONS MANAGEMENT | BUMA 20013
• Transformation activities
• Logistics
Key SCM Issues
• The goal of SCM is to match supply to demand as effectively and efficiently as possible
• Key issues:
– Determining appropriate levels of outsourcing
– Managing procurement
– Managing suppliers
– Managing customer relationships
– Being able to quickly identify problems and respond to them
– Managing risk
Flow Management
• Three types of flow management
– Product and service flow
• Involves movement of goods and services from suppliers to customers as well as
handling customer service needs and product returns
– Information flow
• Involves sharing forecasts and sales data, transmitting orders, tracking
shipments, and updating order status
– Financial flow
• involves credit terms, payments, and consignment and title ownership
arrangements
Global Supply Chains
• Global supply chains
– Product design often uses inputs from around the world
– Some manufacturing and service activities are outsourced to countries where labor
and/or materials costs are lower
– Products are sold globally
• Complexities
– Language and cultural differences
– Currency fluctuations
– Political instability
– Increasing transportation costs and lead times
– Increased need for trust amongst supply chain partners
OPERATIONS MANAGEMENT | BUMA 20013
Procurement
• The purchasing department is responsible for obtaining the materials, parts, and supplies
and services needed to produce a product or provide a service.
• The goal of procurement
– Develop and implement purchasing plans for products and services that support
operations strategies
Duties of purchasing
• Identifying sources of supply
• Negotiating contracts
• Maintaining a database of suppliers
• Obtaining goods and services
• Managing supplies
Purchasing Interfaces
The Purchasing Cycle
The main steps:
1.
Purchasing receives the requisition
2.
Purchasing selects a supplier
3.
Purchasing places, the order with a vendor
4.
Monitoring orders
5.
Receiving orders
OPERATIONS MANAGEMENT | BUMA 20013
Ethics in Purchasing
• E-business
–
the use of electronic technology to facilitate business transactions
–
Applications include
• Internet buying and selling
• E-mail
• Order and shipment tracking
• Electronic data interchange
• Product and service promotion
• Provide information about products and services
Advantages of E-Business
• Companies can:
– Have a global presence
– Improve competitiveness and quality
– Analyze customer interests
– Collect detailed information
– Shorten supply chain response times
– Realize substantial cost savings
• Also allows the:
– Creation of virtual companies
– Leveling of the playing field for small companies
OPERATIONS MANAGEMENT | BUMA 20013
E-Business Order Fulfillment Problems
• Customer expectations
– Order quickly 🡪 Quick delivery
• Demand variability creates order fulfillment problems
• Sometimes Internet demand exceeds an organization’s ability to fulfill orders
• Inventory
– Outsourcing order fulfillment
• Loss of control
– Build large warehouses
• Internal holding costs
Supplier Management
• Choosing suppliers
– Supplier audits
– Supplier certification
• Supplier relationship management
• Supplier partnerships
– CPFR
– Strategic partnering
Choosing Suppliers
• Vendor analysis
– Evaluating the sources of supply in terms of price, quality, reputation, and service
Supplier Audits and Certification
• Supplier audit
– A means of keeping current on suppliers’ production (or service) capabilities, quality
and delivery problems and resolutions, and performance on other criteria
• Supplier certification
– Involves a detailed examination of a supplier’s policies and capabilities
– The process verifies the supplier meets or exceeds the requirements of a buyer
Supplier Relationship Management
• Type of relationship is often governed by the duration of the trading relationship
Short-term- oftentimes involves competitive bidding; minimal interaction
Medium-term- often involves an ongoing relationship
Long-term- often involves greater cooperation that evolves into a partnership
OPERATIONS MANAGEMENT | BUMA 20013
Contrasting Supplier Relationships
CFPR
• Collaborative Forecasting, Planning, and Replenishment (CFPR)
– A supply chain initiative that focuses on information sharing among supply chain
trading partners in planning, forecasting, and inventory
Inventory Management
• Inventory issues in SCM
– Inventory location
• Centralized inventories
• Decentralized inventories
– Inventory velocity
• The speed at which goods move through a supply chain
– The bullwhip effect
• Inventory oscillations that become increasingly larger looking backward through
the supply chain
The Bullwhip Effect
• Variations in demand cause inventory fluctuations to fluctuate and get out of control
– Inventory fluctuation can be magnified by
• Periodic ordering
• Reactions to shortages
• Forecast inaccuracies
• Order batching
• Sales incentives and promotions
• Liberal product return policies
– Results in
• Higher costs
• Lower customer satisfaction
OPERATIONS MANAGEMENT | BUMA 20013
Mitigating the Bullwhip Effect
• Good supply chain management can overcome the bullwhip effect
– Strategic buffering
• Holding inventory at a distribution center rather than at retail outlets
– Replenishment based on need
• Vendor-managed inventory
– Vendors monitor goods and replenish retail inventories when supplies are low
Order Fulfillment
• Order fulfillment
– The process involved in responding to customer orders
– Often a function of the degree of customization required
• Common approaches
– Engineer-to-order (ETO)
– Make-to-order (MTO)
– Assemble-to-order (ATO)
– Make-to-stock (MTS)
Logistics
• Logistics
– Refers to the movement of materials and information within a facility and to incoming
and outgoing shipments of goods and materials in a supply chain
OPERATIONS MANAGEMENT | BUMA 20013
Movement Within a Facility
Incoming and Outgoing Shipments
• Traffic management
– Overseeing the shipment of incoming and outgoing goods
• Handles schedules and decisions on shipping method and times, taking into
account:
– Costs of shipping alternatives
– Government regulations
– Needs of the organization
– Shipping delays or disruptions
RFID
• Radio frequency identification (RFID)
– A technology that uses radio waves to identify objects, such as goods in supply chains
– Similar to barcodes but
• Are able to convey much more information
• Do not require line-of-sight for reading
• Do not need to be read one at a time
– Types:
• Active
• Passive
OPERATIONS MANAGEMENT | BUMA 20013
3-PL
• Third-party logistics (3-PL)
– The outsourcing of logistics management
– Includes
• Warehousing and distribution
Managing Returns
• Reverse Logistics
– The process of transporting returned items
• Products are returned to companies or third-party handlers for a variety of reasons and in a
variety of conditions
– Elements of return management
• Gatekeeping
– Screening returned goods to prevent incorrect acceptance of goods
• Avoidance
– Finding ways to minimize the number of items that are returned
Creating an Effective Supply Chain
• It begins with strategic sourcing
– Analyzing the procurement process to lower costs by reducing waste and non-valueadded activities, increase profits, reduce risks, and improve supplier performance
– There must be
• Trust
• Effective communication
– Information velocity
• Event management capability
• Performance metrics
Challenges
• Barriers to integration of organizations
• Getting top management on board
• Dealing with trade-offs
• Small businesses
• Variability and uncertainty
• Response time
OPERATIONS MANAGEMENT | BUMA 20013
Trade-Offs
• Lot-size-inventory trade-off
– Large lot sizes yield benefits in terms of quantity discounts and lower annual setup
costs, but it increases the amount of safety stock (and inventory carrying costs) carried
by suppliers
• Inventory-transportation costs
– Suppliers prefer to ship full truckloads instead of partial loads to spread shipping costs
over as many units as possible. This leads to greater holding costs for customers
– Cross-docking
• A technique whereby goods arriving at a warehouse from a supplier are
unloaded from the supplier’s truck and loaded onto outbound truck, thereby
avoiding warehouse storage
• Lead time-transportation costs
– Suppliers like to ship in full loads, but waiting for sufficient orders and/or production to
achieve a full load may increase lead time
• Product variety-inventory
– Greater product variety usually means smaller lot sizes and higher setup costs, as well
as higher transportation and inventory management costs
– Delayed differentiation
• Production of standard components and subassemblies which are held until late
in the process to add differentiating features
• Cost-customer service
– Producing and shipping in large lots reduces costs, but increases lead time
– Disintermediation
• Reducing one or more steps in a supply chain by cutting out one or more
intermediaries
OPERATIONS MANAGEMENT | BUMA 20013
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 9 – INVENTORY MANAGEMENT
 OVERVIEW
Inventory management is the supervision of non-capitalized assets, or inventory, and stock
items. As a component of supply chain management, inventory management supervises the flow
of goods from manufacturers to warehouses and from these facilities to point of sale. A key
function of inventory management is to keep a detailed record of each new or returned product
as it enters or leaves a warehouse or point of sale.
Organizations from small to large businesses can make use of inventory management to
manage their flow of goods. There are numerous inventory management techniques, and using
the correct one can lead to providing the correct goods, at the correct amount, place and time.
Inventory control is a separate area of inventory management that is concerned with
minimizing the total cost of inventory while maximizing the ability to provide customers with
products in a timely manner. In some countries, the two terms are used as synonyms.
 LEARNING OUTCOMES
After the end of this lesson, students will be able to:
✓ Appreciate and discuss the importance of managing inventory
✓ Discuss the different models and critically analyze their applicability
 COURSE MATERIALS
Inventory
– A stock or store of goods
• Independent demand items
– Items that are ready to be sold or used
Types of Inventory
• Raw materials and purchased parts
• Work-in-process
• Finished goods inventories or merchandise
• Maintenance and repairs (MRO) inventory, tools and supplies
• Goods-in-transit to warehouses or customers (pipeline inventory)
Inventory Functions
• Inventories serve a number of functions such as:
1.
To meet anticipated customer demand
2.
To smooth production requirements
3.
To decouple operations
4.
To protect against stockouts
OPERATIONS MANAGEMENT | BUMA 20013
5.
To take advantage of order cycles
6.
To hedge against price increases
7.
To permit operations
8.
To take advantage of quantity discounts
Inventory Management
• Management has two basic functions concerning inventory:
1.
Establish a system for tracking items in inventory
2.
Make decisions about
• When to order
• How much to order
Effective Inventory Management
• Requires:
1.
A system keeps track of inventory
2.
A reliable forecast of demand
3.
Knowledge of lead time and lead time variability
4.
Reasonable estimates of
•
holding costs
5.
•
ordering costs
•
shortage costs
A classification system for inventory items
Inventory Counting Systems
• Periodic System
– Physical count of items in inventory made at periodic intervals
• Perpetual Inventory System
– System that keeps track of removals from inventory continuously, thus monitoring
current levels of each item
• Two-bin system
– Two containers of inventory; reorder
when the first is empty
Inventory Counting Technologies
• Universal product code (UPC)
– Bar code printed on a label that has information about the item to which it is attached
OPERATIONS MANAGEMENT | BUMA 20013
• Radio frequency identification (RFID) tags
– A technology that uses radio waves to identify objects, such as goods in supply chains
Demand Forecasts and Lead Time
• Forecasts
– Inventories are necessary to satisfy customer demands, so it is important to have a
reliable estimate of the amount and timing of demand
• Lead time
– Time interval between ordering and receiving the order
• Point-of-sale (POS) systems
– A system that electronically records actual sales
– Such demand information is very useful for enhancing forecasting and inventory
management
ABC Classification System
• A-B-C approach
– Classifying inventory according to some measure of importance, and allocating control
efforts accordingly
– A items (very important)
• 10 to 20 percent of the number of items in inventory and about 60 to 70 percent
of the annual dollar value
– B items (moderately important)
– C items (least important)
• 50 to 60 percent of the number of items in inventory but only about 10 to 15
percent of the annual dollar value
Cycle Counting
• Cycle counting
– A physical count of items in inventory
OPERATIONS MANAGEMENT | BUMA 20013
• Cycle counting management
– How much accuracy is needed?
• A item: ± 0.2 percent
• B items: ± 1 percent
• C items: ± 5 percent
– When should cycle counting be performed?
– Who should do it?
How Much to Order: EOQ Models
• The basic economic order quantity model
• The economic production quantity model
• The quantity discount model
Basic EOQ Model
• The basic EOQ model is used to find a fixed order quantity that will minimize total annual
inventory costs
• Assumptions
– Only one product is involved
– Annual demand requirements are known
– Demand is even throughout the year
– Lead time does not vary
– Each order is received in a single delivery
– There are no quantity discounts
OPERATIONS MANAGEMENT | BUMA 20013
Total Annual Cost
Goal: Total Cost Minimization
Deriving EOQ
• Using calculus, we take the derivative of the total cost function and set the derivative (slope)
equal to zero and solve for Q.
• The total cost curve reaches its minimum where the carrying and ordering costs are equal.
OPERATIONS MANAGEMENT | BUMA 20013
Economic Production Quantity (EPQ)
• Assumptions
– Only one product is involved
– Annual demand requirements are known
– Usage rate is constant
– Usage occurs continually, but production occurs periodically
– The production rate is constant
– Lead time does not vary
– There are no quantity discounts
EPQ: Inventory Profile
EPQ – Total Cost
EPQ
OPERATIONS MANAGEMENT | BUMA 20013
Quantity Discount Model
• Quantity discount
– Price reduction offered to customers for placing large orders
Quantity Discounts
When to Reorder
• Reorder point
– When the quantity on hand of an item drops to this amount, the item is reordered.
– Determinants of the reorder point
1.
2.
The rate of demand
The lead time
OPERATIONS MANAGEMENT | BUMA 20013
3.
The extent of demand and/or lead time variability
4.
The degree of stockout risk acceptable to management
Reorder Point: Under Certainty
Safety Stock
• As the amount of safety stock carried increases, the risk of stockout decreases.
– This improves customer service level
• Service level
– The probability that demand will not exceed supply during lead time
– Service level = 100% - Stockout risk
How Much Safety Stock?
• The amount of safety stock that is appropriate for a given situation depends upon:
1.
The average demand rate and average lead time
2.
Demand and lead time variability
3.
The desired service level
OPERATIONS MANAGEMENT | BUMA 20013
Reorder Point
Reorder Point: Demand Uncertainty
Reorder Point: Lead Time Uncertainty
How Much to Order: FOI
• Fixed-order-interval (FOI) model
– Orders are placed at fixed time intervals
• Reasons for using the FOI model
– Supplier’s policy may encourage its use
– Grouping orders from the same supplier can produce savings in shipping costs
– Some circumstances do not lend themselves to continuously monitoring inventory
position
OPERATIONS MANAGEMENT | BUMA 20013
Fixed-Quantity vs. Fixed-Interval Ordering
FOI Model
OI* represents the optimal time between orders. Time-frame of interest is an appropriate period
(e.g., days or weeks). This is usually based on the time-frame expressed by the average
demand rate, d-bar.
Single-Period Model
• Single-Period Model
– Model for ordering perishables and other items with limited useful lives
OPERATIONS MANAGEMENT | BUMA 20013
– Shortage cost
• Generally, the unrealized profit per unit
• Cshortage = Cs = Revenue per unit – Cost per unit
– Excess cost
• Different between purchase cost and salvage value of items left over at the end
of the period
• Cexcess = Ce = Cost per unit – Salvage value per unit
Single-Period Model
• The goal of the single-period model is to identify the order quantity that will minimize the
long-run excess and shortage costs
• Two categories of problem:
– Demand can be characterized by a continuous distribution
– Demand can be characterized by a discrete distribution
Stocking Levels
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 10 – AGGREGATE PLANNING
 OVERVIEW
Aggregate planning is the process of developing, analyzing, and maintaining a preliminary,
approximate schedule of the overall operations of an organization. The aggregate plan generally
contains targeted sales forecasts, production levels, inventory levels, and customer backlogs.
This schedule is intended to satisfy the demand forecast at a minimum cost. Properly done,
aggregate planning should minimize the effects of shortsighted, day-to-day scheduling, in which
small amounts of material may be ordered one week, with an accompanying layoff of workers,
followed by ordering larger amounts and rehiring workers the next week. This longer-term
perspective on resource use can help minimize short-term requirements changes with a resulting
cost savings.
 LEARNING OUTCOMES
After the end of this lesson, students will be able to:
➢ Discuss aggregate planning and the planning levels?
➢ Discuss the planning sequence.
➢ Discuss the three planning strategies.
➢ Identify the advantages and disadvantages of Chase Approach?
 COURSE MATERIALS
Aggregate planning
– Intermediate-range capacity planning that typically covers a time horizon of 2 to 18
months
– Useful for organizations that experience seasonal, or other variations in demand
– Goal:
• Achieve a production plan that will effectively utilize the organizations’ resources
to satisfy demand
Sales and Operations Planning
• Some organizations use the term sales operations and planning rather than aggregate
planning
– Sales and operation planning
• Intermediate-range planning decisions to balance supply and demand,
integrating financial and operations planning
• Since the plan affects functions throughout the organization, it is typically
prepared with inputs from sales, finance, and operations
OPERATIONS MANAGEMENT | BUMA 20013
Planning Levels
The Planning Sequence
Aggregation
• The plan must be in units of measurement that can be understood by the firm’s nonoperations personnel
• Aggregate units of output per month
• Dollar value of total monthly output
• Total output by factory
• Measures that relate to capacity such as labor hours
Dealing with Variation
• Most organizations use rolling 3, 6, 9- and 12-month forecasts
– Forecasts are updated periodically, rather than relying on a once-a-year forecast
• Strategies to counter variation:
– Maintain a certain amount of excess capacity to handle increases in demand
– Maintain a degree of flexibility in dealing with changes
• Hiring temporary workers
• Using overtime
– Wait as long as possible before committing to a certain level of supply capacity
OPERATIONS MANAGEMENT | BUMA 20013
• Schedule products or services with known demands first
• Wait to schedule other products until their demands become less uncertain
Overview of Aggregate Planning
Demand and Supply
• Aggregate planners are concerned with the
– Demand quantity
• If demand exceeds capacity, attempt to achieve balance by altering capacity,
demand, or both
– Timing of demand
• Even if demand and capacity are approximately equal, planners still often have to
deal with uneven demand within the planning period
Aggregate Planning Inputs
• Resources
– Workforce/production rates
– Facilities and equipment
• Demand forecast
• Policies
– Workforce changes
– Subcontracting
– Overtime
– Inventory levels/changes
– Back orders
• Costs
– Inventory carrying
– Back orders
– Hiring/firing
– Overtime
– Inventory changes
– subcontracting
OPERATIONS MANAGEMENT | BUMA 20013
Aggregate Planning Outputs
• Total cost of a plan
• Projected levels of
– Inventory
– Output
– Employment
– Subcontracting
– Backordering
Aggregate Planning Strategies
• Proactive
– Alter demand to match capacity
• Reactive
– Alter capacity to match demand
• Mixed
– Some of each
Demand Options
• Pricing
– Used to shift demand from peak to off-peak periods
– Price elasticity is important
• Promotion
– Advertising and other forms of promotion
• Back orders
– Orders are taken in one period and deliveries promised for a later period
• New demand
Supply Options
• Hire and lay off workers
• Overtime/slack time
• Part-time workers
• Inventories
• Subcontracting
OPERATIONS MANAGEMENT | BUMA 20013
Aggregate Planning Pure Strategies
• Level capacity strategy:
– Maintaining a steady rate of regular-time output while meeting variations in demand by
a combination of options:
• inventories, overtime, part-time workers, subcontracting, and back orders
• Chase demand strategy:
– Matching capacity to demand; the planned output for a period is set at the expected
demand for that period.
Chase Approach
• Capacities are adjusted to match demand requirements over the planning horizon
– Advantages
• Investment in inventory is low
• Labor utilization in high
– Disadvantages
• The cost of adjusting output rates and/or workforce levels
Level Approach
• Capacities are kept constant over the planning horizon
• Advantages
– Stable output rates and workforce
• Disadvantages
– Greater inventory costs
– Increased overtime and idle time
– Resource utilizations vary over time
Techniques for Aggregate Planning
• General procedure:
1. Determine demand for each period
2. Determine capacities for each period
3. Identify company or departmental policies that are pertinent
4. Determine unit costs
5. Develop alternative plans and costs
6. Select the plan that best satisfies objectives. Otherwise return to step 5.
OPERATIONS MANAGEMENT | BUMA 20013
Trial-and-Error Techniques
• Trial-and-error approaches consist of developing simple table or graphs that enable
planners to visually compare projected demand requirements with existing capacity
• Alternatives are compared based on their total costs
• Disadvantage of such an approach is that it does not necessarily result in an optimal
aggregate plan
Trial-and-Error Technique Assumptions
• The regular output capacity is the same in all periods
• Cost is a linear function composed of unit cost and number of units
• Plans are feasible
• All costs are associated with a decision option can be represented by a lump sum
• Cost figures can be reasonably estimated and are constant for the planning period
• Inventories are built up and drawn down at a uniform rate throughout each period
• Backlogs are treated as if they exist the entire period
Cumulative Graph
Mathematical Techniques
• Linear programming models
• Simulation models
– Computerized models that can be tested under different scenarios to identify
acceptable solutions to problems
Aggregate Planning in Services
• Hospitals:
– Aggregate planning used to allocate funds, staff, and supplies to meet the demands of
patients for their medical services
• Airlines:
– Aggregate planning in this environment is complex due to the number of factors
involved
– Capacity decisions must take into account the percentage of seats to be allocated to
various fare classes in order to maximize profit or yield
OPERATIONS MANAGEMENT | BUMA 20013
• Restaurants:
– Aggregate planning in high-volume businesses is directed toward smoothing the
service rate, determining workforce size, and managing demand to match a fixed
capacity
– Can use inventory; however, it is perishable
• The resulting plan in services is a time-phased projection of service staff requirements
• Aggregate planning in manufacturing and services is similar, but there are some key
differences related to:
1.
Demand for service can be difficult to predict
2.
Capacity availability can be difficult to predict
3.
Labor flexibility can be an advantage in services
4.
Services occur when they are rendered
Yield Management
• Yield management
– An approach to maximizing revenue by using a strategy of variable pricing; prices are
set relative to capacity availability
• During periods of low demand, price discounts are offered
• During periods of peak demand, higher prices are charged
• Users of yield management include
– Airlines, restaurants, hotels, restaurants
Disaggregation
Aggregate Plan → Disaggregation → Master Schedule
Disaggregating the Aggregate Plan
• Master schedule:
– The result of disaggregating an aggregate plan
– Shows quantity and timing of specific end items for a scheduled horizon
The heart of production planning and control
– It determines the quantity needed to meet demand from all sources
– It interfaces with
• Marketing
• Capacity planning
• Production planning
• Distribution planning
– Provides senior management with the ability to determine whether the business plan
and its strategic objectives will be achieved
OPERATIONS MANAGEMENT | BUMA 20013
The Master Scheduler
• The master scheduler’s duties:
– Evaluating the impact of new orders
– Providing delivery dates for orders
– Deals with problems
• Evaluating the impact of production or delivery delays
• Revising master schedule when necessary because of insufficient supplies or
capacity
• Bring instances of insufficient capacity to the attention of relevant personnel so
they can participate in resolving conflicts
The Master Scheduling Process
Master Scheduling Process
• The master production schedule (MPS) is one of the primary outputs of the master
scheduling process
– Once a tentative MPS has been developed, it must be validated
• Rough cut capacity planning (RCCP) is a tool used in the validation process
– Approximate balancing of capacity and demand to test the feasibility of a master
schedule
– Involves checking the capacities of production and warehouse facilities, labor, and
vendors to ensure no gross deficiencies exist that will render the MPS unworkable
MPS – Forecasts and Customer Orders
OPERATIONS MANAGEMENT | BUMA 20013
MPS – Projected On Hand
Determining MPS and Projected On Hand
Adding MPS and Projected On Hand to the MPS
OPERATIONS MANAGEMENT | BUMA 20013
Available to Promise
Time Fences
Period
1
2
3
“Frozen”
(firm or
fixed)
4
“slushy”
(somewhat
firm )
5
6
7
8
9
“liquid”
(open)
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 11 – MATERIAL REQUIREMENTS PLANNING (MRP) AND
ENTERPRISE RESOURCE PLANNING (ERP)
 OVERVIEW
Most manufacturers use an organizational system called material requirements planning
(MRP). MRP is software that allows for the planning, scheduling, and overall control of materials
used in the manufacturing process. Others use an enterprise resource planning (ERP) system
instead. In addition to meeting material requirements, ERP systems integrate organizational
needs such as accounting, marketing, human resources, and supply chain management.
When we look at ERPs/MRPs and which type of software is better for manufacturing
companies, there are many factors to consider. In this lesson we’ll explore the top differences
between MRP versus ERP. Then, we’ll take a look at how to assess which system your
organization requires at this stage in time.
 LEARNING OUTCOMES
After the end of this lesson, students will be able to:
✓ Discuss the elements of Material Requirements Planning
✓ Illustrate and discuss the application of Material Requirements Planning
 COURSE MATERIALS
MRP and ERP
Dependent Demand
• Dependent demand
– Demand for items that are subassemblies or component parts to be used in the
production of finished goods.
– Dependent demand tends to be sporadic or “lumpy”
• Large quantities are used at specific points in time with little or no usage at other
times
OPERATIONS MANAGEMENT | BUMA 20013
Dependent vs Independent Demand
•Material requirements planning (MRP):
– A computer-based information system that translates master schedule requirements
for end items into time-phased requirements for subassemblies, components, and raw
materials.
– The MRP is designed to answer three questions:
1.
What is needed?
2.
3.
How much is needed?
When is it needed?
Overview of MRP
OPERATIONS MANAGEMENT | BUMA 20013
MRP Inputs: Master Schedule
• Master schedule:
– One of three primary inputs in MRP; states which end items are to be produced, when
these are needed, and in what quantities.
– Managers like to plan far enough into the future so they have reasonable estimates of
upcoming demands
– The master schedule should cover a period that is at least equivalent to the cumulative
lead time
– Cumulative lead time
» The sum of the lead times that sequential phases of a process
require, from ordering of parts or raw materials to completion
of final assembly.
MRP Inputs: Bill of Materials
• Bill of Materials (BOM)
– A listing of all of the raw materials, parts, subassemblies, and assemblies needed to
produce one unit of a product
– Product structure tree
• A visual depiction of the requirements in a bill of materials, where all components
are listed by levels
Product Structure Tree
OPERATIONS MANAGEMENT | BUMA 20013
Low-level coding
– Restructuring the bill of material so that multiple occurrences of a component all
coincide with the lowest level at which the component occurs
MRP Inputs: Inventory Records
• Inventory records
– Includes information on the status of each item by time period, called time buckets
• Information about
– Gross requirements
– Scheduled receipts
– Expected amount on hand
• Other details for each item such as
– Supplier
– Lead time
– Lot size
– Changes due to stock receipts and withdrawals
– Canceled orders and similar events
Assembly Time Chart
OPERATIONS MANAGEMENT | BUMA 20013
MRP Record
Gross requirements
• Total expected demand
Scheduled receipts
• Open orders scheduled to arrive
Projected Available
• Expected inventory on hand at the beginning of each time period
Net requirements
• Actual amount needed in each time period
Planned-order receipts
• Quantity expected to receive at the beginning of the period offset by lead time
Planned-order releases
•
Planned amount to order in each time period
MRP: Development
• The MRP is based on the product structure tree diagram
• Requirements are determined level by level, beginning with the end item and working down
the tree
– The timing and quantity of each “parent” becomes the basis for determining the timing
and quantity of the children items directly below it.
– The “children” items then become the “parent” items for the next level, and so on
MRP Considerations
• Safety Stock
– Theoretically, MRP systems should not require safety stock
– Variability may necessitate the strategic use of safety stock
• A bottleneck process or one with varying scrap rates may cause shortages in
downstream operations
OPERATIONS MANAGEMENT | BUMA 20013
• Shortages may occur if orders are late or fabrication or assembly times are
longer than expected
• When lead times are variable, the concept of safety time is often used
– Safety time
» Scheduling orders for arrival or completions sufficiently ahead
of their need that the probability of shortage is eliminated or
significantly reduced
MRP Lot Sizing Rules
– Lot-for-Lot (L4L) ordering
• The order or run size is set equal to the demand for that period
• Minimizes investment in inventory
• It results in variable order quantities
• A new setup is required for each run
– Economic Order Quantity (EOQ)
• Can lead to minimum costs if usage of item is fairly uniform
– This may be the case for some lower-level items that are common to
different ‘parents’
– Less appropriate for ‘lumpy demand’ items because inventory
remnants often result
– Fixed Period Ordering
• Provides coverage for some predetermined number of periods
Using the MRP
• Pegging
– The process of identifying the parent items that have generated a given set of material
requirements for an item
• Backflushing
– Exploding an end item’s BOM to determine the quantities of the components that were
used to make the item
Updating the System
• An MRP is not a static document
– As time passes
• Some orders get completed
• Other orders are nearing completion
• New orders will have been entered
• Existing orders will have been altered
– Quantity changes
– Delays
– Missed deliveries
OPERATIONS MANAGEMENT | BUMA 20013
MRP Outputs: Primary
• Primary Outputs
– Planned orders
• A schedule indicating the amount and timing of future orders
– Order releases
• Authorizing the execution of planned orders
– Changes
• Revisions of the dates or quantities, or the cancellation of orders
MRP Outputs: Secondary
• Secondary Outputs
– Performance-control reports
• Evaluation of system operation, including deviations from plans and cost
information
– Planning reports
• Data useful for assessing future material requirements
– Exception reports
• Data on any major discrepancies encountered
MRP in Services
• Food catering service
– End item 🡪 catered food
– Dependent demand 🡪 ingredients for each recipe, i.e., bill of materials
• Hotel renovation
– Activities and materials “exploded” into component parts for cost estimation and
scheduling
MRP Benefits
• Enables managers to easily
– determine the quantities of each component for a given order size
– To know when to release orders for each component
– To be alerted when items need attention
• Additional benefits
– Low levels of in-process inventories
– The ability to track material requirements
– The ability to evaluate capacity requirements
– A means of allocating production time
– The ability to easily determine inventory usage via backflushing
OPERATIONS MANAGEMENT | BUMA 20013
MRP Requirements
• To implement an effective MRP system requires:
– A computer and the necessary software to handle computations and maintain records
– Accurate and up-to-date
• Master schedules
• Bills of materials
• Inventory records
– Integrity of data files
MRP II
• Manufacturing resources planning (MRP II)
– Expanded approach to production resource planning, involving other areas of the firm
in the planning process and enabling capacity requirements planning
• Most MRP II systems have the capability of performing simulation to answer a
variety of “what if” questions so they can gain a better appreciation of available
options and their consequences
MRP II: Overview
Closed Loop MRP
• When MRP II systems began to include feedback loops, they were referred to as closed
loop MRP
• Closed Loop MRP
– Systems evaluate a proposed material plan relative to available capacity
OPERATIONS MANAGEMENT | BUMA 20013
– If a proposed plan is not feasible, it must be revised
• This evaluation is referred to as capacity requirements planning
Capacity Requirements Planning
• Capacity requirements planning (CRP)
– The process of determining short-range capacity requirements.
– Inputs to capacity requirement planning
• Planned-order releases for the MPR
• Current shop loading
• Routing information
• Job time
– Key outputs
• Load reports for each work center
System Stability
• Stability in short-term plans is very important
– Without stability, changes in order quantity and/or timing can render material
requirements plans virtually useless
– System nervousness refers to how a system might react to changes
• Sometimes the reaction can be greater than the original change
Time Fences
• Time fences
– Series of time intervals during which order changes are allowed or restricted
• The nearest fence is most restrictive
• The farthest fence is least restrictive
OPERATIONS MANAGEMENT | BUMA 20013
Using MRP to Assist in CRP
Load Reports
• Load reports
– Department or work center reports that compare known and expected future capacity
requirements with projected capacity availability.
Enterprise Resource Planning
• Enterprise resource planning (ERP)
– ERP was the next step in an evolution that began with MRP and evolved into MRPII
– ERP, like MRP II, typically has an MRP core
– Represents an expanded effort to integration financial, manufacturing, and human
resources on a single computer system
– ERP systems are composed of a collection of integrated modules
OPERATIONS MANAGEMENT | BUMA 20013
Overview of ERP Software Modules
ERP Considerations
• How can ERP improve a company’s business performance?
• How long will an ERP implementation project take?
• How will ERP affect current business processes?
• What is the ERP total cost of ownership?
• What are the hidden costs of ERP ownership?
 ACTIVITIES/ASSESSMENT
OPERATIONS MANAGEMENT | BUMA 20013
LESSON 12 – LEAN OPERATIONS
 OVERVIEW
Most manufacturers use an organizational system called material requirements planning
(MRP). MRP is software that allows for the planning, scheduling, and overall control of materials
used in the manufacturing process. Others use an enterprise resource planning (ERP) system
instead. In addition to meeting material requirements, ERP systems integrate organizational
needs such as accounting, marketing, human resources, and supply chain management.
When we look at ERPs/MRPs and which type of software is better for manufacturing
companies, there are many factors to consider. In this lesson we’ll explore the top differences
between MRP versus ERP. Then, we’ll take a look at how to assess which system your
organization requires at this stage in time.
 LEARNING OUTCOMES
After the end of this lesson, students will be able to:
✓ Discuss how operations management maximize customer value through JIT – The Toyota
Production System and Lean Operations
✓ Discuss the strategic importance of reliability in operations management
 COURSE MATERIALS
• Lean operation
– A flexible system of operation that uses considerably less resources than a traditional
system
• Tend to achieve
– Greater productivity
– Lower costs
– Shorter cycle times
– Higher quality
Lean Operations: The Beginning
• Lean operations began as lean manufacturing, also known as JIT in the mid-1900s
• Developed by Taiichi Ohno and Shigeo Ohno of Toyota
– Focus was on eliminating all waste from every aspect of the process
• Waste is viewed as anything that interfered with, or did not add value to, the
process of producing automobiles
Lean Systems: Basic Elements
• Lean systems have three basic elements:
– A system that is
OPERATIONS MANAGEMENT | BUMA 20013
1.
Demand driven
2.
3.
Focused on waste reduction
Has a culture dedicated to excellence and continuous improvement
Lean: Ultimate Goal
• The ultimate goal:
– A balanced system
• One that achieves a smooth, rapid flow of materials through the system to match
supply to customer demand
Goals and building blocks of lean systems
Lean: Supporting Goals
• The degree to which lean’s ultimate goal is achieved depends upon how well its supporting
goals are achieved:
1.
Eliminate disruptions
2.
Make the system flexible
3.
Eliminate waste, especially excess inventory
Waste
• Waste
– Represents unproductive resources
– Seven sources of waste in lean systems:
1.
Inventory
2.
Overproduction
3.
Waiting time
OPERATIONS MANAGEMENT | BUMA 20013
4.
Unnecessary transporting
5.
Processing waste
6.
Inefficient work methods
7.
Product defects
Kaizen
• The kaizen philosophy for attacking waste is based upon these ideas:
1.
Waste is the enemy and to eliminate waste it is necessary to get the hands dirty
2.
Improvement should be done gradually and continuously; the goal is not big
improvements done intermittently
3.
Everyone should be involved
4.
Kaizen is built on a cheap strategy, and it does not require spending great sums on
technology or consultants
5.
It can be applied everywhere
6.
It is supported by a visual system
7.
It focuses attention where value is created
8.
It is process oriented
9.
It stresses that the main effort for improvement should come from new thinking and a
new work style
10.
The essence of organizational learning is to learn while doing
Lean: Building Blocks
• Product design
• Process design
• Personnel/organizational elements
• Manufacturing planning and control
Building Blocks: Product Design
• Four elements of product design important for lean systems:
1.
Standard parts
2.
Modular design
3.
Highly capable systems with quality built in
4.
Concurrent engineering
• Eight aspects of process design that are important for lean systems:
1.
Small lot sizes
2.
Setup time reduction
3.
Manufacturing cells
4.
Quality improvement
OPERATIONS MANAGEMENT | BUMA 20013
5.
Production flexibility
6.
A balanced system
7.
Little inventory storage
8.
Fail-safe methods
Process Design: Small Lot Sizes
• In the lean philosophy, the ideal lot size is one
• Benefits of small lot size
– Reduced in-process inventory
• Lower carrying costs
• Less storage space is necessary
– Inspection and rework costs are less when problems with quality do occur
– Less inventory to ‘work off’ before implementing product improvements
– Increased visibility of problems
– Permits greater flexibility in scheduling
– Increased ease of balancing operations
Process Design: Setup Time Reduction
• Small lot sizes and changing product mixes require frequent setups
• Unless these are quick and relatively inexpensive, they can be prohibitive
• Setup time reduction requires deliberate improvement efforts
– Single-minute exchange of die (SMED)
• A system for reducing changeover time
– Group technology may be used to reduce setup time by capitalizing on similarities in
recurring operations
Process Design: Manufacturing Cells
• One characteristic of lean production systems is multiple manufacturing cells
• Benefits include
– Reduced changeover times
– High equipment utilization
– Ease of cross-training workers
Process Design: Quality Improvement
• Quality defects during the process can disrupt operations
• Autonomation (jidoka)
– Automatic detection of defects during production
• Two mechanisms are employed
OPERATIONS MANAGEMENT | BUMA 20013
– One for detecting defects when they occur
– Another for stopping production to correct the cause of the defects
Process Design: Work Flexibility
• Guidelines for increasing flexibility
– Reduce downtime due to changeovers by reducing changeover time
– Use preventive maintenance on key equipment to reduce breakdowns and downtime
– Cross-train workers so they can help when bottlenecks occur or other workers are
absent
– Use many small units of capacity; many small cells make it easier to shift capacity
temporarily and to add or subtract capacity
– Use off-line buffers. Store infrequently used safety stock away from the production
area
– Reserve capacity for important customers
Process Design: Balanced System
• Takt time
– The cycle time needed to match customer demand for final product
– Sometimes referred to as the heartbeat of a lean system
• Takt time is often set for a work shift
• Procedure:
1.
2.
3.
Determine the net time available per shift
If there is more than one shift per day, multiply the net time by the
number of shifts
Compute the takt time by dividing the net available time by
demand
Process Design: Inventory Storage
• Lean systems are designed to minimize inventory storage
– Inventories are buffers that tend to cover up recurring problems that are never resolved
• partly because they are not obvious
• partly because the presence of inventory makes them seem less serious
OPERATIONS MANAGEMENT | BUMA 20013
Process Design: Fail-Safe Methods
• Poka-yoke (Fail safing)
– Building safeguards into a process to reduce or eliminate the potential for errors during
a process
Building Blocks: Personnel/Organizational
• Five personnel/organizational elements that are important for lean systems:
– Workers as assets
– Cross-trained workers
– Continuous improvement
– Cost accounting
– Leadership/project management
Personnel/Organizational: Workers as Assets
• Workers as assets
– Well-trained and motivated workers are the heart of the lean system
• They are given greater authority to make decisions, but more is expected of them
Personnel/Organizational: Cross-Trained Workers
• Cross-trained workers
– Workers are trained to perform several parts of a process and operate a variety of
machines
• Facilitates flexibility
• Helps in line balancing
Personnel/Organizational: Continuous Improvement
• Continuous improvement
– Workers in lean systems have greater responsibility for quality, and they are expected
to be involved in problem solving and continuous improvement
– Lean workers receive training in
• Statistical process control
• Quality improvement
• Problem solving
OPERATIONS MANAGEMENT | BUMA 20013
Personnel/Organizational: Cost Accounting
• Cost accounting
– Activity-based costing
• Allocation of overhead to specific jobs based on their percentage of activities
Personnel/Organizational: Leadership
• Leadership/project management
– Managers are expected to be leaders and facilitators, not order givers
– Lean systems encourage two-way communication between workers and managers
Building Blocks: MPC
• Seven elements of manufacturing planning and control (MPC) are particularly important for
lean system:
1.
Level loading
2.
Pull systems
3.
4.
Visual systems
Limited work-in-process (WIP)
5.
Close vendor relationships
6.
7.
Reduced transaction processing
Preventive maintenance and housekeeping
• Lean systems place a strong emphasis on achieving stable, level daily mix schedules
1. MPS – developed to provide level capacity loading
2. Mixed model scheduling
•
Three issues need to be resolved
–
–
–
What is the appropriate product sequence to use?
How many times should the sequence be repeated daily?
How many units of each model should be produced in each cycle?
MPC: Communication
• Communication moves backward through the system from station to station
– Each workstation (customer) communicates its need for more work to the preceding
workstation (supplier)
• Assures that supply equals demand
– Work moves “just in time” for the next operation
OPERATIONS MANAGEMENT | BUMA 20013
• Flow of work is coordinated
• Accumulation of excessive inventories is avoided
MPC: Pull Systems
• Push system
– Work is pushed to the next station as it is completed
• Pull system
– A workstation pulls output from the preceding workstation as it is needed
– Output of the final operation is pulled by customer demand or the master schedule
– Pull systems are not appropriate for all operations
• Large variations in volume, product mix, or product design will undermine the
system
MPC: Visual Systems
• Kanban
– Card or other device that communicates demand for work or materials from the
preceding station
• Kanban is the Japanese word meaning “signal” or “visible record”
– Paperless production control system
– Authority to pull, or produce, comes
from a downstream process.
Ideal number of kanban cards
MPC: Limited WIP
• Benefits of lower WIP
– Lower carrying costs
– Increased flexibility
– Aids scheduling
OPERATIONS MANAGEMENT | BUMA 20013
– Saves costs of scrap and rework if there are design changes
– Lower cycle-time variability
MPC: Close Vendor Relationships
• Lean systems typically have close relationships with vendors
– They are expected to provide frequent, small deliveries of high-quality goods
• A key feature of many lean systems is the relatively small number of suppliers used
MPC: Reduced Transaction Processing
• Lean systems seek to reduce costs associated with the ‘hidden factory’:
– Logistical transactions
– Balancing transactions
– Quality transactions
– Change transactions
Value Stream Mapping
• Value stream mapping
– A visual tool to systematically examine the flows of materials and information
• Its purpose is to help identify waste and opportunities for improvement
• Data collected:
– Times
– Distances traveled
– Mistakes
– Inefficient work methods
– Waiting times
– Information flows
Transitioning to Lean Systems
• Make sure top management is committed and that they know what will be required
• Decide which parts will need the most effort to convert
• Obtain support and cooperation of workers
• Begin by trying to reduce setup times while maintaining the current system
• Gradually convert operations, begin at the end and work backwards
• Convert suppliers to JIT
• Prepare for obstacles
OPERATIONS MANAGEMENT | BUMA 20013
Obstacles to Conversion
• Management may not be fully committed or willing to devote the necessary resources to
conversion
• Workers/management may not be cooperative
• It can be difficult to change the organizational culture to one consistent with the lean
philosophy
• Suppliers may
resist
Lean Services
• In service the focus is often on the time needed to perform the service because speed is
often the order winner
• Lean benefits can be achieved in the following ways:
– Eliminate disruptions
– Make system flexible
– Reduce setup and lead times
– Eliminate waste
– Minimize WIP
– Simplify the process
JIT II
• JIT II:
• A supplier representative works right in the company’s plant, making sure there is an
appropriate supply on hand
• It is often referred to as vendor managed inventory (VMI)
OPERATIONS MANAGEMENT | BUMA 20013
 ACTIVITIES/ASSESSMENT
Course Grading System
OPERATIONS MANAGEMENT | BUMA 20013
Class Standing
•
Quizzes
•
Attendance
•
Recitation
•
Projects/Assignments/Seatwork/Special Report
Midterm / Final Examinations
Midterm Grade + Final Term Grade
2
=
70%
30%
100%
FINAL GRADE
References
•
•
Operations Management by S. Anil Kumar & N. Suresh (2009)
Principles of Operations Management, 9thEd., by Jay Heizer and Barry Render (2001)
OPERATIONS MANAGEMENT | BUMA 20013