Copyright 2014. Oxford University Press Southern Africa.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
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1
THIRD EDITION
Operation
Management
Kruger
Rampal
Maritz
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2
Copyright 2014. Oxford University Press Southern Africa.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
Table of contents
Part 1
Introduction to operations management
1
1.1
1.2
1.3
1.4
1.4.1
1.4.2
1.5
1.5.1
1.5.2
1.5.3
1.5.4
1.6
1.7
1.7.1
1.7.2
1.7.3
1.7.4
1.8
1.8.1
1.8.2
1.8.3
1.9
1.9.1
1.10
1.10.1
1.10.2
1.10.3
1.11
1.11.1
1.11.2
What is operations management?
Introduction
Importance of operations management
The development of operations management
The scope of operations management
Function
System
Levels in operations management
Strategy and strategic decisions
Strategic decision-making
Operational and tactical planning in the supply chain
Operational and tactical decisions
Characteristics
The relationship between the different functions within an organisation
The eight Ms of operations management
Operations
Finance
Marketing
Other departments or functions within an organisation
Servitisation
Types of service department found in organisations
The importance of operations departments to society as a whole
Differences between services and goods production
The characteristics of services
The three modes of operations management
Primary operations management
Secondary operations management
Tertiary operations management
Operations management structures
Decentralised systems
Centralised systems
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
2
2.1
2.2
2.2.1
Supply chain management
Introduction
Understanding the supply chain
The difference between the supply chain and supply chain management
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2.2.2
2.2.3
2.2.4
2.2.5
2.3
2.4
2.4.1
2.4.2
2.4.3
2.4.4
2.5
2.5.1
2.5.2
2.5.3
2.6
2.7
2.7.1
2.7.2
2.7.3
2.7.4
2.7.5
2.7.6
2.8
The importance of strategy in the supply chain
Improving and influencing performance in the supply chain
Drivers within the supply chain
Supply chain metrics
Designing the supply chain network
Demand and supply in the supply chain
Demand forecasting
Aggregate planning
Sales and operations planning
Coordination and management
Inventory in the supply chain
Economies of scale
Uncertainty
Product availability
Logistics and transportation in the supply chain
Other supply chain influences
Pricing and revenue management
E-business
Information technology (IT)
Stakeholders and partnerships
Sustainability
Globalisation
Supply chain challenges
Summary
Key terms
Review questions and activities
Case studies
References
Websites
Part 2
Operations principles
3
3.1
3.2
3.3
3.4
3.4.1
3.4.2
3.4.3
3.4.4
3.5
3.6
3.7
3.8
3.8.1
3.8.2
3.8.3
Design of goods and services
Introduction
Basis of competitiveness
The importance of the customer in product and service design
Product development
Product life cycle
Steps in product design and development
System, parameter, and tolerance design
Product development team
Robust design
Ensuring manufacturability and analysis of value
Generation of new product ideas
Product life cycle management
Managing reprocessing, restructuring or re-engineering change
Managing continuity and configuration management
Managing revision changes
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3.8.4
3.9
3.10
Focusing on customer satisfaction
Mass customisation
The future of the design process
Summary
Key terms
Review questions and activities
Case studies
References
Websites
YouTube™
4
4.1
4.2
4.3
4.4
4.4.1
4.4.2
4.4.3
4.4.4
4.5
4.5.1
4.5.2
4.5.3
4.6
4.6.1
4.6.2
4.6.3
4.7
4.7.1
4.7.2
4.8
4.8.1
4.9
4.9.1
Process design, strategy and management
Introduction
Understanding processes
Strategic process decisions
Process structures for manufacturing
Job process
Batch process
Line process
Continuous flow process
Strategies for manufacturing processes
Make to order strategy
Assemble to order strategy
Make to stock strategy
Process structures for service
Professional service process
Service shop process
Mass service process
Process performance measurement
Benchmarking
Process performance ratios
Business process re-engineering (BPR)
Development of the BPR methodology
Industrial engineering
Areas most commonly featuring industrial engineers
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
Part 3
Planning principles
5
5.1
5.2
Forecasting
Introduction
The uses of forecasts
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5.3
5.4
5.5
5.6
5.7
5.7.1
5.7.2
5.7.3
5.7.4
5.7.5
5.7.6
5.8
5.9
5.9.1
5.9.2
5.9.3
5.10
Features common to all forecasts
Time horizons for doing forecasts
Requirements of an accurate forecast
Forecasting steps
Important situational factors to be considered
Accuracy and cost
The availability of data
Time span of the forecast
Nature of goods and services to be forecast
Changes in the market
Use or decision factors
Reasons for ineffective forecasts
Approaches to forecasting
Qualitative approach to forecasting
Quantitative approach to forecasting
Associative forecasting techniques
Monitoring the forecast
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
6
6.1
6.2
6.2.1
6.2.2
6.2.3
6.2.4
6.2.5
6.3
6.3.1
6.3.2
6.3.3
6.3.4
6.3.5
6.3.6
6.3.7
6.3.8
6.4
6.4.1
6.4.2
6.4.3
Inventory management
Introduction
The nature and importance of holding inventory
Reasons for holding inventory
Objective function of inventory control
Inventory types
Control and turnover of inventory
Methods utilised to reduce stocks
Requirements for effective inventory management
Counting systems for inventory
Forecasting demand and information regarding lead time
Costs incurred when inventory is carried
Classification systems for inventory
Need for accurate inventory records
Cycle counting
How to control service inventory
Advantages and disadvantages of holding inventory
Economic order quantity models
The basic economic order quantity model
Economic production quantity model
Classification systems for inventory model
Summary
Key terms
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Review questions and activities
Case study
References
Websites
7
7.1
7.2
7.3
7.3.1
7.3.2
7.3.3
7.4
7.4.1
7.4.2
7.4.3
7.5
7.6
7.6.1
7.6.2
7.7
7.7.1
7.7.2
7.8
7.8.1
7.8.2
7.9
7.9.1
7.9.2
7.10
7.10.1
7.10.2
7.10.3
7.10.4
7.10.5
7.10.6
Material requirements planning
Introduction
MRP objectives
Dependent demand requirements
Management of demand
Management of customer orders
Order variation
Inputs required for an MRP system
Input 1: the MPS
Input 2: the bill of materials structure
Input 3: accurate inventory records
The structure of an MRP system
Outputs derived from an MRP system
Primary reports
Secondary reports
Other aspects of MRP
Safety stock
Lot sizes
Management of an MRP system
Dynamics of MRP
Material requirements planning and JIT
Advantages and disadvantages of using an MRP system
Benefits derived from using an MRP system
Disadvantages of MRP systems
Enterprise resource planning
The evolution of ERP systems
The goal of ERP
Advantages of an ERP system
Disadvantages of an ERP system
Why ERP systems sometimes fail
The impact of electronic commerce
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
8
8.1
8.2
8.3
8.3.1
Capacity planning
Introduction
Critical capacity decisions
Capacity measurement
Types of capacity measurement
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8.3.2
8.4
8.4.1
8.4.2
8.4.3
8.4.4
8.4.5
8.5
8.6
8.7
8.7.1
8.7.2
8.8
Measuring effectiveness, efficiency, and load of capacity
Establishing capacity
Facility issues
Goods and service issues
Process issues
Employee issues
Operational issues
Strategy formulation for capacity planning
Capacity needs prediction
Constraint management
Barriers to the implementation of the TOC methodology
Drum, buffer and rope (DBR)
Developing alternative capacity plans
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
9
9.1
9.1.1
9.2
9.3
9.4
9.4.1
9.4.2
9.5
9.5.1
9.5.2
9.5.3
9.5.4
9.6
9.6.1
9.6.2
9.6.3
9.6.4
9.6.5
9.6.6
9.7
9.8
9.9
9.9.1
9.9.2
9.10
9.10.1
9.10.2
Aggregate planning
Introduction
Aggregate planning in service organisations
Aggregate planning concepts
Variables in aggregate planning strategies
Options available in managing an aggregate plan
Capacity options
Demand options
Strategies for uneven demand
Most popular strategies
A chase strategy
A level strategy
Combining pure strategies
Costs prevalent in aggregate planning
Employment and dismissal costs
Back ordering and stock-out costs
Subcontracting cost
Overtime and idle time cost
Inventory carrying cost
Part-time labour cost
Aggregate planning strategies: advantages, disadvantages, and uses
Choosing a strategy
Aggregate planning methods
Trial-and-error method
Mathematical methods
Aggregate planning in a service environment
Service demand management strategies
Service supply management strategies
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Summary
Key terms
Review questions and activities
Case study
References
Websites
10
10.1
10.2
10.3
10.4
10.4.1
10.4.2
10.4.3
10.5
10.6
10.6.1
10.6.2
10.7
10.8
10.9
Short-term scheduling
Introduction
The importance of short-term scheduling
Scheduling criteria
The influence of supply and demand on scheduling
Supply uncertainty
Demand uncertainty
Dependent versus independent demand
Scheduling of operations in an organisation: high-volume scheduling
Scheduling of operations in an organisation: low-volume system scheduling
Loading
Sequencing
Limitations of rule-based dispatching systems
Constrained work centres
Services scheduling
Summary
Key terms
Review questions and activities
Case study
References
Websites
Part 4
Continual improvement
11
11.1
11.2
11.3
11.4
11.4.1
11.4.2
11.4.3
11.5
11.6
11.7
11.8
11.8.1
11.8.2
11.8.3
11.8.4
11.8.5
11.8.6
Lean systems strategy for operations
Introduction
The methodology of lean production
Lean objectives
Strategies, tactics and measures to achieve lean status
Penetration strategy
Stabilisation strategy
Growth strategy
The seven most common wastes
Costs incurred as a result of waste
Achieving lean status
Lean techniques
Standard times
Kaizen
Matching demand and production
Kanban
Standardisation
U-shaped production lines
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11.8.7
11.8.8
11.9
Involvement of employees
5S methodology
Success factors for lean implementation
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
12
12.1
12.2
12.2.1
12.2.2
12.2.3
12.3
12.3.1
12.3.2
12.3.3
12.3.4
12.4
12.4.1
12.4.2
12.4.3
12.5
12.5.1
12.5.2
12.5.3
12.5.4
12.5.5
12.5.6
12.5.7
12.5.8
12.5.9
12.6
12.6.1
12.6.2
12.7
12.7.1
12.7.2
12.7.3
12.7.4
12.7.5
12.7.6
12.7.7
12.7.8
12.7.9
Quality management
Introduction
Exploring definitions of quality
Quality dimensions for goods
Quality dimensions for services
Why has quality become a priority?
Gurus of quality
W. Edwards Deming
Joseph M. Juran
Philip Crosby
Kaoru Ishikawa
Quality spheres
Quality control
Quality assurance
Quality management
Quality contributions from other disciplines
Financial perspective
Human resources perspective
Engineering perspective
Supply chain perspective
The operations perspective
The strategic management perspective
The marketing perspective
The value-based perspective
The contingency perspective
Costs of quality
Internal costs
External costs
Quality management systems
What is ISO 9000?
ISO 9000 series:2000
ISO 14000: Environmental standards
OHSAS 18001: Occupational health and safety standards
ISO 22000: Food safety standards
ISO 31000: Risk management
ISO 19011: Guidelines for auditing management systems
ISO 26000: Social responsibility
ISO 50001: Energy management
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12.8
12.9
12.9.1
12.9.2
12.9.3
12.10
SHEQ management
Quality awards
The Malcolm Baldrige National Quality Award (MBNQA)
The Deming prize for quality
The European Quality Award (EQA)
South African quality organisations
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
13
13.1
13.2
13.2.1
13.2.2
13.2.3
13.2.4
13.2.5
13.2.6
13.2.7
13.2.8
13.2.9
13.3
13.3.1
13.3.2
13.3.3
13.3.4
13.3.5
13.3.6
Quality tools and techniques
Introduction
Tools of quality
Flow charts
Run charts
Control charts
Check sheets
Histograms
Pareto analysis
Cause-and-effect diagrams
Scatter diagrams
Failure mode, effects, and criticality analysis
Quality improvement techniques
Benchmarking
Six-sigma
Lean manufacturing
The Deming cycle
Pokayoke
The 5S model
Summary
Key terms
Review questions and activities
Case study
References
Websites
14
14.1
14.2
14.2.1
14.2.2
14.2.3
14.3
14.3.1
14.3.2
Project management
Introduction
Portfolio and programme management
The triple constraint concept
Project principles
The project context
Project life cycle and project phases
Initiation/Definition
Planning
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14.3.3
14.3.4
14.3.5
14.4
14.4.1
14.4.2
14.4.3
14.5
14.5.1
14.5.2
14.5.3
14.6
14.7
14.7.1
14.7.2
14.7.3
14.7.4
14.8
14.9
14.10
Execution
Monitoring and control
Closure
The project management framework
Core functions
Facilitating functions
Integration management
The role of the project manager
Leadership
Structuring the team
Stakeholder management
Project team structure
Project management tools and techniques
Work breakdown structure
Project network diagram
Critical path method (CPM)
Program evaluation review technique (PERT)
Gantt chart
The project management office
The challenges facing project managers
Summary
Key terms
Review questions and activities
Case studies
References
Websites
15
15.1
15.2
15.2.1
15.2.2
15.2.3
15.2.4
15.2.5
15.2.6
15.2.7
15.3
15.3.1
15.3.2
15.3.3
15.3.4
15.3.5
15.4
15.4.1
15.4.2
15.4.3
Operations management challenges
Introduction
Social and economic challenges
Globalisation
Manufacturing competitive edge
Location of an organisation internationally
An organisation’s social responsibility
World-class manufacturing
Customer satisfaction
Productivity
Environmental challenges
Environmentally friendly design
Green manufacturing
Green reporting
Responsibility towards the environment
Broad-based black economic empowerment (BBBEE)
Technological challenges
Obtaining a competitive edge through technology
The management of technology
Sustaining and disruptive technologies
Summary
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Key terms
Review questions and activities
Case study
References
Websites
YouTube™
Glossary
Abbreviations and acronyms
Index
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15
part
01
Introduction to operations management
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part
01
Copyright 2014. Oxford University Press Southern Africa.
All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
Introduction to operations management
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CHAPTER 1
What is operations management?
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
Define and understand the importance and development of operations management and its role in industry
and society at large
Define and understand the scope of operations management
Explain and understand the different management levels in operations management
Identify and compare the plan related to and decisions made on the strategic, operational and tactical
levels in operations management
Explain the characteristics of operations management
Explain the conversion process from inputs to outputs
Identify the associates and functional groups that work together in operations management
Categorise the differences between goods and services
Discuss processes and process operations as major influences on operations management.
CHAPTER outline
1.1
1.2
1.3
1.4
1.4.1
1.4.2
1.5
1.5.1
1.5.2
1.5.3
1.5.4
1.6
1.7
1.7.1
1.7.2
1.7.3
1.7.4
1.8
1.8.1
1.8.2
1.8.3
1.9
1.9.1
1.10
1.10.1
Introduction
Importance of operations management
The development of operations management
The scope of operations management
Function
System
Levels in operations management
Strategy and strategic decisions
Strategic decision-making
Operational and tactical planning in the supply chain
Operational and tactical decisions
Characteristics
The relationship between the different functions within an organisation
The eight Ms of operations management
Operations
Finance
Marketing
Other departments or functions within an organisation
Servitisation
Types of service department found in organisations
The importance of operations departments to society as a whole
Differences between services and goods production
The characteristics of services
The three modes of operations management
Primary operations management
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17
1.10.2
1.10.3
1.11
1.11.1
1.11.2
Secondary operations management
Tertiary operations management
Operations management structures
Decentralised systems
Centralised systems
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
SETTING THE SCENE
Pick n Pay: From underdog to top dog
Pick n Pay’s history stretches back to 1968, when it was first established by Raymond Ackerman. The
group’s forward-thinking management and its dominance at the lower end of the South African food retail
market have lifted it some way ahead of its peers. In fact, the concept of the modern self-service
supermarket in South Africa is one Pick n Pay pioneered.
However, Pick n Pay became a victim of its own success as its family-controlled structure seemed to
restrict its advancement in the evolving food retail sector. The company’s failure to swiftly adapt to the
changing food retail landscape resulted in its underperformance and losing significant market share, mainly
to Shoprite, Woolworths and Spar.
Shoprite has had a head-start in that it invested in centralised distribution centres and established a
presence in Africa much earlier than its competitors. This has given the group a competitive edge over
other food retailers, especially Pick n Pay.
In addition, Shoprite services a wider range of consumers by targeting low-, middle- and high-income
markets. Pick n Pay, on the other hand, mainly targets the middle- and higher-income markets. Shoprite’s
exposure to the lower-income group (South Africa’s fastest growing market) has been the largest
contributor to its growth in recent years.
Over the past three years, the group has undertaken substantial initiatives to improve its operations. It
has revitalised its warehousing and distribution systems to increase efficiencies, rolled out new store
layouts and formats, significantly improved its house brand (no-name brand and Pick n Pay Choice)
offerings and launched a customer loyalty programme to position the group as a market innovator. If the
success that Clicks has enjoyed with its club card is any indication, Pick n Pay’s smart shopper programme
could be highly beneficial.
Pick n Pay has also increased its push to target the lower-income segments of the South African market.
While it has traditionally been the supermarket of choice for upper-income earners, Pick n Pay has gone a
long way towards penetrating the lower-income segments that have proved so profitable for Shoprite.
After many years of complacency, Pick n Pay is clearly focusing on reclaiming some of its lost market
share. In addition, the imminent appointment of a new CEO and the recent choice of a new chairman could
result in a meaningful change to the company’s operational capabilities. Overall, the outlook for Pick n Pay
has improved and we believe that the company’s new initiatives will result in a major earnings recovery.
However, Pick n Pay is still quite a long way from Shoprite in that they are now implementing things
that they should have been doing five or six years ago, and they are things that take quite a long time to do.
(SOURCE: Davids, A. & Lioma, R. 2012. ‘Pick n Pay: from underdog to top dog?’ UP Kagiso Asset Management Quarterly,
11–16. Available at: http://www.kagisoam.com/upload/website/files/news/Pick%20n%20Pay_from%20underdog%20to
%20top%20dog.pdf)
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18
1.1 Introduction
What does operations management involve? Answering the question means that a holistic view of operations
management should be investigated. The intricate processes utilised to deliver goods and services must be
reflected on. From the inception to production, identifying and tracking down raw materials, processes
required for the product or service have to be catered for. Relationships between different functional areas
must be fostered and the relationships must be sustainable over time. A global perspective towards the
management of operations is required, especially since South Africa has joined the club of developing
nations, namely Brazil, Russia, India, China and South Africa (BRICS). It is therefore imperative that South
Africa sustains a competitive edge in manufacturing and delivering world class services.
Operations management can be defined as the management of processes exploited to conceive, deliver,
create and distribute goods and services to customers that are value adding. The management of processes is
done by planning, organising, leading and controlling the processes that transform inputs into the required
outputs. Customers require value when buying a product. This value is the structure of a successful and
vibrant organisation. Value added can be defined as the additional value of goods over the cost used to
produce it. To guarantee that value is added, the processes in the conversion of the inputs must be monitored
constantly to identify any problems as soon as they occur. Any problem identified must be rectified
immediately. Operations managers manage all the processes and activities leading to the production of goods
and services.
1.2 Importance of operations management
The importance of the supply chain in the management of operations management must be understood. This
understanding result would be the coordination of every operational aspect across different functional areas
in an organisation. It is a necessity to coordinate processes external to the organisation’s immediate control
such as suppliers and distributors. Operations management and managing the supply chain would improve
decision-making at the strategic level.
The value added will determine whether the good or service of an organisation will be seen as an order
qualifier, meaning that customers will consider buying it. An order qualifier is identified when a customer
compares different manufacturers’ products to determine which product to buy. A good or service is eligible
as an order qualifier through price, quality, speedy delivery, and so forth. For example, bread bought from a
spaza shop will be identified differently from bread bought from a speciality baker in a shopping centre.
A product produced by an organisation must have all the uniqueness that the customer is looking for in
that product. For example, a person buying a motor vehicle will compare the features of all the vehicles in his
or her price range to determine the vehicle best suited to him- or herself. However, the fact that the buyer has
thought about the product does not necessarily mean the buyer will buy the vehicle.
For the customer to buy the product, it should have the highest percentage of unique characteristics that
the customer wants. If the customer has bought the product, it must have had characteristics that turned it into
an order winner. Such products ensure that an organisation has an economic advantage over its competitors,
as more people will buy its products. Each product that an organisation produces should have its own unique
characteristics that will make it an order winner. For example, speed will be very important when a customer
decides on a courier service, but not when he or she is looking for a postal service. Order-winner
characteristics can change very swiftly, both because the requirements of customers might change and
because an organisation’s competitors will incorporate similar characteristics into their products, so products
will not be order winners any more but become simply order qualifiers.
1.3 The development of operations management
Many families would like to know more about their roots and who their ancestors were. It is important to
know how the family has evolved to become what it is today. The same is true for the study of operations
management. It is important to know who the pioneers were. When the manufacturing sector became
prominent following the Industrial Revolution, an operations manager’s task was seen as production
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management. Even in the twenty-first century, the title ‘production manager’ is still widely used in
manufacturing organisations. However, developments over the last few years have enlarged the
responsibilities of production managers to include the management of services and the supply chain, and the
term ‘operations management’ has been coined to encompass these changes.
Even though operations management is a relatively young field of management, it does have a rich
history. This short history outlines the most important innovations and pioneers in the development of
operations management. It also gives an idea of how and why the traditional definition of production
management had to change to include new elements and evolve into what we know today as operations
management. Operations managers need to be familiar with the themes discussed here and should
continuously strive to improve on them.
1.4 The scope of operations management
Grasping the full extent of operations management and supply chain management requires an unambiguous
definition. To that end, it can be defined as all activities involved in the creation, operation and improvement
of the processes and procedures devoted to the production and delivery of an organisation’s principal
products or services.
Compared to finance and marketing, operations and supply chain management is part of the functional
management. It results in an unambiguous line of managerial responsibilities. Supply chain management
entails the management of the entire production system. That means all levels of suppliers to the final
consumer of the product or service. An example is the purchase of a cellphone contract. The service provider,
whether it is MTN, Vodacom, Cell ©™ or 8•ta, would expect to manage the system in its entirety from the
handset provider through the process until it reaches you, the customer.
Ensuring that operations management and supply chain management are fully integrated, the following
three major principles must be understood and adhered to:
• All work undertaken can be classified as a process or a subprocess.
• Each process utilised by an organisation can be improved.
• The resultant improvements must ensure that the organisations’ processes are effective, efficient, low cost
and more robustness.
Table 1.1 depicts subject matter and measures that must be understood to achieve the principles of
effectiveness, efficiency, low cost and robustness.
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TABLE 1.1 Subject matter and measures to achieve principles of effectiveness, efficiency, low cost and robustness
PRINCIPLES
SUBJECT MATTER
MEASURES
Effective
•
•
•
•
•
•
Design of processes
Improving processes
Managing quality
Service quality
Expand new products
Voice of the customer
•
•
•
•
Product performance
Service performance
Process capability
Customer approval rate and
allegiances
Efficient
•
•
•
•
•
Set-up reduction
Theory of constraints
Project management
Time-based competition
Mass customisation
•
•
•
•
Theory of constraints
Lean measures
Learning curves
Cycle time and lead time
Low cost
•
•
•
•
•
Capacity management
Supply chain management
Inventory management
Design for manufacture (DFM)
Demand management
•
•
•
•
Inventory counting
Forecasting error
Equipment utilisation
Costing
Robust
•
•
Green supply chain
Failure Mode and Effects Analysis
(FMEA)
Health and safety
Balanced score card
Operations strategy
•
•
•
•
•
Risk assessment
Environment
Triple bottom line
Income statement
Safety failures
•
•
•
The first principle states that all work undertaken in operations management can be classified as a process or
subprocess. A process can be described as being effective if a product or service is produced in a reliable
manner. Thus the product meets or exceeds customer expectations. It is achieved through listening to the
voice of the customer (VOC). Efficient processes produce a product or service in less time. A wider range of
products are produced (customisation). It is achieved through the minimisation of the cycle time in the
production process. Low cost processes minimise cost through balancing supply and demand. It is achieved
through the reduction of non-value adding operations. Robust processes satisfy the higher-level strategies of
an organisation. Thus it becomes more robust. Processes are aligned with the organisation’s strategies on
sustainability, health and safety and goals.
1.4.1 Function
The three major functional areas of an organisation are operations, finance and marketing. In a manufacturing
industry, operations produce the goods. In a service organisation, this department may be referred to as the
operations department. In the general set-up of an organisation, operations refer to that part of the
organisation that produces the goods or service. The relationship and interaction between functions will be
discussed in detail later in the chapter.
1.4.2 System
The organisation as a whole can furthermore be seen as a system. The main purpose of the system is to
generate a profit. To achieve the goal, the main system can be divided into subsystems. The most important
subsystems in the organisational system are operations, finance and marketing. A decision that is made in any
one of the three subsystems will influence what will happen not only in the other subsystems, but also in the
entire system. A decision that seems to be logical to the operations department may seem illogical to the
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other departments. For example, let us assume the Ford Motor Company’s marketing department decides that
there is a need for a small motor car model with an engine capacity of 850cc. The market research may
indicate that the decision is logical. For the production department it will mean that it has to find additional
capacity to produce the car. To this department the decision may seem illogical. A possible consequence of
the decision on the system may be that the financial resources become stretched beyond capacity. Therefore,
before the decision can be made, the entire system must be consulted to determine the impact on each of the
subsystems and on the whole.
The following are some of the areas in which operations managers are involved:
• Quality management
• Product design
• Process design and implementation
• Factory design and layout
• Human resource management
• Planning and control
• Project management
• Supply chain management
• Inventory management.
The following are examples of management positions related to operations management:
• Plant manager/director
• Factory manager/director
• Manufacturing manager/director
• Quality or assurance manager/director
• Supply chain manager/director
• IT manager/director.
The following are examples of what operations managers might do in various work environments:
• In a vehicle-manufacturing plant, the operations manager would manage every resource that enables the
plant to meet the demand for cars.
• In a hospital, the operations manager would, for example, manage all functions, such as patient
admission, scheduling of theatres for surgery, and shift schedules for nursing staff.
• In a bank, the operations manager would schedule teller staff, produce management reports, and ensure
that enough money is available to service the needs of customers.
• In a cleaning company, the operations manager would manage the scheduling of cleaning crews, set up
schedules for the cleaning of different office buildings, and forecast the amount of cleaning materials
required.
• In a university, the operations manager would schedule student registrations, examinations, timetables,
and maintenance schedules.
• In a retail company, the operations manager would control stock levels, forecast replacement inventory,
and schedule till operators.
• In a government department, the operations manager would manage waiting rooms for clients and be
responsible for the management of processes such as computer systems to process documents, staffing
requirements, scheduling of jobs, and quality control.
1.5 Levels in operations management
In order to manage operations properly, an operations manager cannot neglect the areas or levels of strategic
(long-term), tactical (medium-term), and operational planning and control (short-term) management and the
decisions made on each level.
1.5.1 Strategy and strategic decisions
The task of defining or characterising a strategy for an organisation is an intimidating exploit. A major reason
people find the endeavour intimidating, is due to the abundant considerations implied. In the current business
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environment organisations and the products produced by them are escalating in sophistication. As a result it
becomes increasingly demanding to locate an effective commencement point during the decision-making
process.
Operational strategy involves decisions about the customer, customer requirements and continuous
assessments of the extent of customer need satisfaction. Diagram 1.1 depicts the basic structure of modern
organisations as far as strategy is concerned.
FIGURE 1.1 Basic structure of modern organisations as far as strategy is concerned
1 The bottom right of the pyramid represents the decisions regarding who the organisation’s customers are.
The decision made about the customer must translate into the market the organisation wishes to service. It
means any decision must bear in mind the needs of the existing customers, as well as customer groupings
in the target market.
2 The pinnacle of the pyramid represents the customer requirements as expressed by the customers. Any
decision must take cognisance of the value the customer would receive from usage of the product or
service. At this level it would be established what the customer would be willing to pay for the product or
service.
3 The bottom left of the pyramid establishes the manner in which the organisation would satisfy customer
requirements.
The decision areas depicted above can be divided into external and internal influences on the strategy and
decision-making. The external influences are the bottom right and top of the pyramid. The only internal
strategy decision influence is the bottom left point of the pyramid.
The major objectives of operations management strategic decision-making are:
• Guaranteeing the availability of the eight Ms (discussed later on in this chapter) or inputs to satisfy the
needs of the transformation process.
• Guaranteeing the production of products or rendering of services to customers to the exclusion of
competitors’ products or services. The organisation’s offering should therefore satisfy customer needs
continuously.
• Guaranteeing that the decisions made would direct the organisation by delineating the extent of the
activities undertaken.
Bearing the aforementioned in mind, it is apparent that organisational strategy does not have to be
convoluted. It illustrates that management has to answer certain questions that would assist in the
simplification of strategies. These questions are:
• About comparing or benchmarking the current state of the organisation. How does it compare with the
direct competitors?
• Where will the organisation be in the future?
• How does the organisation move from the current state to the future state?
1.5.2 Strategic decision-making
Guaranteeing an effective and efficient supply chain, operations managers have to answer the following
questions truthfully:
1 What
• are the activities, goods or services that the organisation wishes to deliver to its customer base?
• are the characteristics of the product or service customers have identified?
• are the activities, resources, equipment and labour required and how would management control and
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allocate the scarce resources?
2 How
• will the organisation conceive, manufacture and provide the product or service?
• much of the product or service has to be provided by the transformation process?
• would the effectiveness and efficiency of the process be measured?
3 When
• would production take place?
• would each operation take place and in which sequence?
• would a service be delivered?
• would capacity of the equipment be utilised?
4 Where and who
• where would the production activities be undertaken?
• who would be responsible for each activity?
• who would be the organisation’s suppliers?
In answering the aforementioned four questions, management will set the strategic decision pattern for the
organisation. Five major strategic decision-making areas can be identified:
1 Certainty in decision environment: Information is the major input in any decision taken. Information by
its nature is blurred and ambiguous. Due to the sheer size of the business environment, it is impossible to
have an inclusive picture of what is occurring. The problem most often experienced is the unavailability
of data to utilise in the decision-making process. Consequently, a major characteristic of decision-making
is that it is speculative by nature. Too often management sees decision-making as an educated guess. This
type of behaviour could have dire consequences for an organisation.
2 Price of decisions: Every decision taken has a price affixed to it. Taking certain decisions can influence
organisations profoundly, including the manner in which the organisation conducts its business.
Operational decisions only influence the department in which the decision has been taken and
implemented.
3 Degree of intricacy of decisions: Many unconnected and miscellaneous issues ultimately influence the
decision-making process. Issues such as process capabilities, direct competitors, customer requirements,
political climate and the state of the economy have a direct influence on the decision-making process.
Some or all of the aforementioned issues could occur simultaneously. Organisations, irrespective of their
size, should have a good grasp of and manage a myriad of arbitrary interrelated issues.
4 Time horizons: Decisions at the strategic level of the business as a rule are long-term decisions. It is
planning for the future and can have a time horizon from as short as five years to 25 plus years in the
future. Conversely, operational decisions are for the immediate future. The time horizon for this type of
decision could be as short as a couple of days, weeks or months. The type of industry would establish
what long-term decision would be for an organisation operating in that environment.
5 Activity span: The strategic decisions may influence various areas of an organisation. It could include
the geographical area of operations. At the operational level, decisions are concerned with the manner in
which operations are undertaken and processes managed. It would include processes, tools and skills
needs.
1.5.3
Operational and tactical planning in the supply chain
The supply chain faces many challenges. It becomes imperative for the functional areas within the supply
chain to collaborate occasionally. The collaboration could include the setting of forecasts and computing
demand for products or services. The functional areas collaborate in regards to the inputs into the system,
resource exploitation and processes required to produce the products or services. Tactical planning in an
organisation includes sales and operational planning. This is the planning function where the customer is
identified, and targeted demands for products and services are computed. During the planning phase
inventory levels for satisfying customer demand and capacity requirements for production are established.
Operational planning concerns itself with demand planning, material planning as well as capacity
requirements for individual products instead of families of products. Tactical planning can be planning
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actions months in advance, whereas operational planning actions are undertaken over a shorter time horizon.
Usually the time horizon is a number of days or at the most a few weeks.
At the most basic level, the major responsibility of a manager is that of decision-making.
1.5.4
Operational and tactical decisions
Decision-making can be classified as a process, starting with identifying the problem or aspect on which a
decision needs to be made, identifying limitations and alternatives, evaluating alternatives, and selecting and
implementing the best alternative. The process differs from the pure manufacturing process. The major
difference is that the decision process does not produce a tangible end product like the production process.
Intangible decisions impact on the tangible production process. Operations and supply chain managers have
to answer particular important questions, such as:
• What? – Ascertain the exact operations and products or services to be provided by the system. It would
result in the exact products to be produced by listening to the voice of the customer. Decide on the
equipment and operations required and the manner it should be developed, assigned and monitored.
• How? – Ascertain the manner in which the product or service will be created, produced and provided to
the customer. Decide on the quantities of the products that the production system should deliver by the
transformation process. Decide on the manner of assessment for system performance.
• When? – The exact time for production must be decided on, and the operations required to achieve the
targets. Decide on the date when the facilities must be ready for production and compute the capacity
of the system.
• Where and who? – Ascertain the sequence in which operations should be undertaken. Ascertain the type
of employee to be employed. Decide on the most suitable suppliers to partner with.
Answering the above questions necessitates that managers must make decisions in the following five major
areas, namely, plan, supply, create, provide and send back. The following list portrays the responsibilities
involved in each one:
1 Plan: These decisions impact on the operations of the contemporary supply chain. Planning is an integral
part of strategic management. The major element of planning is contemplating demand for products and
the resources necessary to fulfil the demand. Metrics have to be developed to measure the
effectiveness and efficiency of processes. Product and service quality will be influenced by the quality
of the original planning process. The planning process ensures that value is added to products and
services delivered to customers.
2 Supply: Ascertain which of the suppliers are best suited to supply raw materials to the organisation. The
supplier chosen must be able to deliver to the exact specifications set by the organisation. Organisations
evaluate suppliers on factors such as price, delivery and payment before a decision is taken and before a
liaison is formed with a supplier. Supplier performance must be constantly monitored to improve the
relationship between supplier and organisation. Major areas of concern during the supply process are
stores receiving, verifying the correctness of goods received and transfer of the raw materials to where
they are required.
3 Create: This represents the major products manufactured by the organisation. Scheduling of work,
employees, equipment and materials must be undertaken to guarantee on-time delivery of products or
services. Metrics must be developed that measure and analyse speed, quality and productivity. The
metrics are used to monitor the overall production performance.
4 Provide: This represents the last step in the transformation process. This stage is where finished goods
and customers are brought together. Logistic organisations such as Imperial Logistics or value logistics
would deliver finished goods to customers. To be successful, the process must be accurately scheduled
and coordinated. Correct invoicing of the customer is an important function of this process. It ensures that
the producer receives payment for the goods delivered.
5 Send back: A manufacturer must have a process in situ that would ensure that defective goods could be
returned. Returned goods and complaints by customers must be addressed in a timely manner. In a
service organisation, this function is the response action after a customer has lodged a complaint. It is part
of the after-sales service provided to the customer.
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DISCUSSION
Pick n Pay: from underdog to top dog
Read the situation discussed in the setting-the-scene box at the beginning of the chapter. Answer the
following questions and provide examples to illustrate your answers.
1. What strategic decisions did Pick n Pay make to turn its operations around?
2. Which areas in operational and tactical decision-making were included during the turnaround?
1.6 Characteristics
Analyse any type of organisation and it becomes apparent that they all have a single factor in common.
Everyone converts some kind of input to an output which is represented by finished goods or services. How
the final product or service comes into being varies significantly. Four major areas can be identified. They are
known as the four Vs:
1 The volume of completed products that is produced in time. The volume of a particular product or
service is produced during a specific measured time period. It will determine the type of organisation that
the operations manager will manage. This is known as high-volume production. Examples are found in
the fast food industry such as KFC, Steers, and Debonairs Pizza. Another class is fast moving consumer
goods (FMCG). In this group are included grocery products and cold drinks. Examples are KOO
products. High-volume goods are a prime example of investment in specialised equipment.
2 The variety or span of diversity of goods or services that is produced. The diversity is measured by the
number of models of a particular product or service produced. In the automotive industry a basic model is
produced and by adding different options, a different version of the same model is available. Examples
are the different models of the same variant of their popular models produced by Toyota, VW, Audi, Ford
and other car manufacturers. The result is that the process is very specific. A characteristic is the fact that
specialised equipment and staff are required.
3 Variation in the demand for products or services is the demand for a specific number of the product or
service. It is represented by the quantity of the product or service consumed over a measured period of
time. It can be a day, week, month or year, for example, the number of units produced per hour, day,
week or month. Therefore it would become routine to say that an automotive factory has produced 100
vehicles per day. In a service environment a dentist can determine the number of patients requiring his
services.
4 The fourth and final V is that of variability in the product or service. It alludes to whether customers can
see the manufacturing process or rendering of the service. This is more likely to occur in the service
environment. Not many consumers know what the manufacturing process of a vehicle looks like. In
contrast, some processes of services can be observed by the customer. For example, a patient will observe
a doctor during the consultation process and when prescribing medicines. Some parts of the process may
be invisible, for example, an operation to remove an appendix. Another example is depositing money
at a bank. The visible process is the teller receiving, counting and putting money in the drawer. The
invisible part takes place in the back office where reconciliation of the day’s takings is undertaken.
1.7 The relationship between the different functions within an
organisation
The different goals of an organisation are more easily achieved if those goals are pursued by a group of
people rather than by individuals. The objective of most organisations is to produce a good or service for
profit. The three major functional areas of operations, finance and marketing – as well as their supporting
functions – perform quite different activities, but are all interrelated.
Figure 1.2 illustrates this relationship in a manufacturing organisation named Khumalo Enterprises (Pty)
Ltd.
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FIGURE 1.2 The relationship between the three major functional areas of operations, finance and marketing in a
manufacturing organisation named Khumalo Enterprises (Pty) Ltd
In most companies, personnel in each of these three departments think that their department is the most
important one in the organisation. However, no department can claim that it can exist on its own within an
organisation and that it does not need help from, or have to relate to, other departments. The performance of
each individual department is very important to the success of an organisation. Unfortunately, that is only
half the picture. The other half of the organisation’s success depends on how well an individual department
interacts with the rest of the organisation.
An example of this interaction or interface can be seen in the collaboration between the operations
department and the accounting department. Without this collaboration, the operations department will deliver
goods to the customer, and, unless the accounting department is informed that a delivery has taken place, it
cannot collect the money owed to the company by the customer. This will result in the organisation having
no money available to purchase new raw materials for production, as it will be unable to pay its creditors.
Sections 1.7.2 to 1.7.4 and 1.8 will present a more detailed discussion of all the functions in an organisation.
Before the discussion of the different functions, it is essential to discuss the eight Ms of operations
management, which serve as the inputs to the operations function.
1.7.1
The eight Ms of operations management
As indicated earlier, operations management is the planning, organising, leading and controlling of the
processes that transform inputs into the required outputs. It involves managing systems or processes that are
utilised to produce goods and create services in transforming the inputs or assets of money, materials,
machines, management, manpower (human resources), methods, messages and markets (the eight Ms) into
the required outputs of goods and services that customers need. The eight Ms of operations management can
be described as follows:
1 Money. This is the finance available to produce the respective goods and services. An operations
manager facilitates this process by means of budgets. Time is money and must be managed effectively
and efficiently. Think about it: if you lose time, you never regain it nor can you replace it. Time cannot be
bought from the local supermarket. For this reason, the use of time must be maximised by, for instance,
reducing the lead time so that the goods and services are available in the shortest possible time.
2 Manpower (human resources). This is also known as labour. It involves the selection, mentoring,
training and rewarding of the workforce. The operations manager is also involved in job structuring and
performance management and is responsible for counselling and disciplining the workforce when the
need arises.
3 Materials. An operations manager is responsible for obtaining, storing, and the quality of all materials
that are required in the manufacture of goods or rendering of a service. He or she is also responsible for
the materials during the conversion process and for the quality of finished goods and services. Another
duty of the operations manager is the safe keeping of finished goods.
4 Methods. An operations manager needs to choose and design effective systems, subsystems and
processes that will guarantee optimisation in the use of resources and facilitate the manufacture of a good
or the provision of services.
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5 Management. An operations manager is involved in setting up organisational structures that will assist
management in its roles of planning, organising, leading and controlling.
6 Machines. The operations manager must be experienced in the latest technology required to transform
the 8Ms with the least wastage possible. He or she has to ensure that the machinery utilised for the
production of goods and services is reliable and well maintained. This can be achieved through
implementing the correct maintenance programmes.
7 Messages. Messages are the communication between departments, management and employees.
Messages can be the material requirements plan (MRP), the master production schedule (MPS) or the
budget available for producing goods or rendering a service.
8 Markets. An operations manager has to be aware of the markets and market segments in which the
organisation envisages operating. The information gathered from the marketplace by the marketing
department will determine the demand for the organisation’s goods and/or services.
TABLE 1.2 Operations in various organisations
ORGANISATION
INPUTS
OPERATIONS
OUTPUTS
Farm (e.g. ZZ2)
Seeds
Fertiliser
Fields
Tilling
Planting
Growing
Maize
Tobacco
Vegetables
Coal mine (e.g. Matla or
Matimba)
Miners
Tools
Extraction
Removing waste
Cleaning
Coal
Waste
By-products
Brewery (e.g. SAB)
Hops
Water
Grain
Preparing
Mixing
Brewing
Bottles of beer
Booking tickets
Flying
Entertainment
Satisfied passengers
Freight transported
Airline (e.g. Kulula.com, Aircraft
1time, British Airways)
Terminals
Passengers
Crew
Catering services
1.7.2
Operations
For the purpose of the discussion in this section, ‘operations’ includes all those activities that are directly
related to the production and delivery of goods or services. It therefore exists both in manufacturing and
assembly plants that are goods orientated and in service-orientated organisations. Table 1.3 provides
examples of the wide variety of operations management settings.
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TABLE 1.3 Various operations management settings
ACTIVITY
DEFINITION
EXAMPLES
Goods production
The shape and form of the input is
physically changed
•
•
Transport
The transportation of goods, customers or •
raw materials from where they are to
where they have to be
•
•
Sawing of trees that produce usable
timber
Mixing of flour, salt and yeast into
dough to bake bread
Commuting by minibus taxi from
home to work
Flying with kulula.com from
Johannesburg to Cape Town
Using XPS courier services
Distribution and
storage
The stocking and supply of materials until •
needed by customers
•
Managing the stock at retail outlets
such as Spar
Vending machines that dispense cold
drinks, sweets or sandwiches
Information
Transferring important information to
customers
Watching the news on e-TV
Advertising
Consulting a doctor
Attending a lecture
•
•
•
•
Operations is the core activity of any organisation. Understanding the importance of the transformation
process is very important. The process can be equated to the importance of the heart in the human body. If
the heart is not performing as it should, the body will not function as it should. Therefore, the transformation
process is tasked with producing the goods or services of an organisation.
Inputs (the eight Ms) are used to produce the finished goods or render the service of an organisation. The
inputs go through the transformation process to reach the state of outputs. A distinction has to be made
between two different types of inputs:
• Transformed inputs – the inputs (e.g. material, people, data) that are changed during the operations
• Transforming inputs – the resources that are needed by the operation (these inputs themselves do not
change).
The transformation process is the process whereby value is added to the inputs to ensure that the outputs will
have a higher value. To ensure that the proper transformation process is followed, regular measurements must
be taken. This is the feedback process that will inform an organisation about whether the processes are
performing as they should. The feedback results must be compared with previously set standards, and any
deviation from these must be acted upon. This is the control part of an operations manager’s management
task. Figure 1.3 illustrates the transformation process of inputs to outputs – the process of transforming inputs
(the eight Ms) to outputs (finished goods and services).
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FIGURE 1.3 The transformation process
In Figure 1.3, the arrows at the bottom of the diagram represent the feedback that has to take place on a
continuous basis to ensure the success of the transformation process. The feedback can be from customers
and relate to the goods or services that have been produced. It could consist of complaints about inferior
quality of goods or about services that do not meet the expectations of the customer. The arrow from the
outputs block to the control (or feedback) block represents this. It is a one-way, or reverse, feedback. The
feedback between the feedback block and the transformation process is a two-way feedback. The customer
feedback is given to the transformation process (operations) to rectify whatever caused the complaint. Once
the modification has been completed, operations will give feedback too. The feedback block could represent
the complaints department. Regular feedback also takes place between the complaints department and all the
inputs.
The block at the top of Figure 1.3 represents the value added to a product or service. If all the inputs enter
the transformation process, as the process progresses, the inputs are transformed from the individual inputs
into goods or services. At each stage, the inputs are transformed from a previous state to the next by the work
carried out in the manufacturing process. That is called adding value. The reason for this is that the inputs
come ever closer to the final good or service.
Every operation should add value to the inputs. If this is not the case then the operation should be
removed from the process as it only adds cost and, therefore, reduces the profit on the good or service. Some
processes, though not adding value directly, are still required, for example, transporting work in process from
one machine to the next. The transportation does not add any value, but is necessary so that the next
operation can commence. In such cases, the activity has to be performed as efficiently as possible to
minimise waste.
An important point to remember is that goods and services normally occur jointly. The goods produced in
one operation may be a service in the next operation. An example of a service is a person filling a car with
fuel. The delivery of the fuel to the service station is production of goods.
At the one end of the scale, some goods may have a lot of services attached to them. At the other end of
the scale, there are hardly any services attached to the final good that is produced. Value must be added
whenever a good or service is produced. It is important to understand that value added means the difference
between the cost of the inputs and the price that can be charged for the end result (good or service).
The information above begs this question: What do companies do with the profits that are generated by
their goods and services? Most of the money earned is reinvested in the company. The money is used to
research better goods and services, fund salary increases, develop new goods and services, and pay dividends
to investors. It therefore stands to reason that the higher the value added, the more money will be available to
reinvest in the company.
If an organisation is not productive, it will not have a high value-added component. An organisation can
be regarded as increasing its productivity if it eliminates or reduces waste – the goal should always be to
work smarter instead of harder.
Wherever waste is eliminated, the input costs of products will decrease and the value-added component
will increase. Therefore, the organisation will become more productive. An example of one of the most
wasteful operations is storage of overproduced goods. Money is invested in stock that does not move and
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cannot, therefore, generate any profits. Money has been paid for the raw materials, machine time, wages and
all the costs associated with the storage of the goods. If these costs can be decreased or eliminated, more
value will be added to the good.
1.7.3
Finance
The finance function is important for the well-being of an organisation. It is the department that controls the
organisation’s purse strings. It makes the money available to buy raw materials and new machines, pay
salaries and meet many other costs.
It is important that the personnel in operations and in finance consult each other and keep each other
informed of what is happening in each department, for the following reasons.
Budget setting
In any business, budgets must be prepared to determine what the monetary requirements will be for a specific
period. A budget is a form of forecasting of requirements and has to be changed or adjusted if required.
Therefore, every department must evaluate its spending performance against the budget. The measurement of
actual spending against budgeted figures is called budget control.
The evaluation of possible investment proposals
Before an investment in new machines or facilities can be allowed, the finance department must ensure that
the company will not overspend. At this stage, the operations department and the finance department must
cooperate closely to ensure that the best possible investment is made.
The provision of the funds required that would allow operations
Before the funds can be allocated to all the departments, it is important that the finance department finds the
money required. If funds availability is tight, the finance department decides which funds will be allocated to
whom. This is an important function, which in difficult times can become critical. To avoid dreaded problems
of cash flow, careful planning must be done.
Where does an organisation’s money come from? An organisation obtains money in the ways discussed
below.
Selling goods and services
First and foremost, an organisation earns money by selling its goods or services to customers. For this reason,
it is important that the finance department ensures that all money owed to the organisation is collected as
soon as possible after the delivery of goods or the rendering of a service. The longer the money is owed, the
fewer funds will be available for the organisation to use.
Obtaining loans from banks
Many organisations follow this route to find new sources of finance, especially if major expansions are in the
offing. The biggest drawback of bank loans is the repayment and the interest that must be paid on borrowed
money. This can be a very large drain on an organisation’s earnings.
Issuing shares
If it wishes to use this method, the organisation will float shares on the stock market and investors will buy
the shares at a predetermined price. The money earned this way can then be invested in new machines or
equipment. The issuing of stock by Telkom provides a good example. Telkom made its shares available for
all South Africans to purchase, with previously disadvantaged communities receiving preferential treatment
regarding the number of shares that they could buy and the price they had to pay for them. A shareholder can
sell his or her shares in the organisation to another person whenever he or she pleases. Shares can be issued
only by organisations that are listed on the Johannesburg Securities Exchange (JSE) or another exchange,
such as the New York Stock Exchange (NYSE). Usually an organisation that issues shares has to pay
dividends to its shareholders.
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1.7.4
Marketing
One of the main purposes of a marketing department is to sell the good or service of the organisation. For this
purpose, a marketing department employs representatives who visit customers to get orders and ensure that
customers are kept informed of new offerings coming onto the market. Every business must undertake some
sort of advertising. Even the local spaza shop relies on word-of-mouth advertising.
The marketing department is also at the forefront of determining what customers want from the
organisation. In the short term, these needs are communicated to the operations department. In the long term,
any new needs must be communicated to the design department. Communication is required to ensure that
current products meet the expectations of the customers. The input into the design department is to ensure
that the good or service in the development stage will meet customer requirements. The marketing
department is also a very important source of demand information. The operations department will use these
figures in the planning process. Demand and order figures are used for the planning of human resources and
materials requirements and for a variety of other sorts of planning. It is thus important that close cooperation
takes place between the marketing, operations, and research-and-development departments to ensure the
smooth performance of the operations department.
If the marketing department is performing as it should, it can be a valuable source of information about
what the organisation’s competitors are doing. The representatives of the organisation provide this
information. Their customers tell them of new products that have been launched by the organisation’s
competitors. The customers also inform them if a competitor has lowered its prices.
Another critical function of the marketing department is investigating customer behaviour. To achieve
this, the marketing department does market surveys. A typical market survey takes place in a retail store,
where representatives of the organisation ask specific questions regarding the organisation’s product(s).
Another method involves making use of market research organisations. A typical example of such an
organisation is Ipsos (Pty) Ltd.
Ipsos conducts annual market research on how the electorate of South Africa views the performance of
the governing party as well as how they would vote in future elections. Using these results, political parties
form their strategies for their election campaigns. Most political parties also use their own research
organisations to gather this information from the electorate.
Once all the information has been collected and collated, the marketing, operations and design
departments must work closely together to develop new products. Why do these three departments need to
collaborate? Marketing tells the design department what the customers’ needs are. The design department can
use this information to design goods or services that will meet the customers’ expectations. The operations
department, in turn, decides whether the new good can be manufactured. This function is called determining
the manufacturability of a new good. Blueprinting new services facilitates the smooth delivery of these.
A typical example of the function of the marketing department can be seen in a recent advertisement for
Renault motor vehicles. The advertisement claims that Renault cars meet and even exceed the most stringent
safety standards. The manufacturer demonstrates this through simulating the most serious types of accident.
Another example is the advertisement featuring a little boy who helps his mother work at the zoo.
Notwithstanding the fact that his clothing is very dirty, the advertisement claims that if a mother uses OMO
washing powder, no pre-soaking will be required to help remove the stains before the clothes are washed.
Another very important advantage of this close cooperation is that the operations department is
forewarned if new skills, machinery or materials will be needed to manufacture the new product. The
capacity to produce the new product can be determined well in advance. The finance department must be
incorporated into this process as it will have to determine what funds are available in the short term to finance
the new product and what funds will be needed for the medium to long term to launch the new product
successfully. To entice customers to buy the new product, the operations department must state the new
product’s lead time. Customers will not be willing to wait an extraordinarily long time for a new good or
service; they may go to a competitor to obtain the required product.
1.8 Other departments or functions within an organisation
The departments or functions discussed in this section are service departments. These departments render
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services to the operations department; they are not part of the core business of the organisation. The size of
an organisation will determine how many service departments exist as independent departments. In small to
medium-sized organisations, some of the departments that will be discussed may be combined. In some
instances, small and medium-sized organisations may outsource some of these functions.
1.8.1
Servitisation
With the advent of the 21st century, organisations realised that they had neglected possible income streams.
This did not occur in isolation. It resulted from stagnating demand, higher labour costs, as well as the
interference by government through draconian liability laws. Consequently, organisations needed to find
novel ways to improve their productivity. The harsh reality in today’s business environment is that many
organisations are in distress and are teetering on the brink of bankruptcy. Organisations attempt to find other
means of income by investigating opportunities outside their comfort zone of pure manufacturing.
The most common example is the income that can be derived from servicing products that have been
manufactured by an organisation. This situation occurs due to the persistent transformation and advancement
of the economy over time. The need for change is motivated by technological improvements, resulting in
employees from traditional manufacturing positions migrating to service positions. It is a typical example of
how capitalism evolved due to the division of labour. The evolution brought about an unforeseen diversity of
innovative and less evident support functions in organisations. The support functions can be seen as an
integral part of the manufacturing process.
The service functions that can become part of manufacturing processes usually occur in the supply chain.
Consequently, this type of innovative new income stream becomes attractive. Strategically, organisations
changed from pure manufacturing concerns to an integrated strategy of manufacturing and service delivery.
Implementation of an integrated strategy creates greater value for customers. Many organisations are
grappling with the concept of servitisation. The majority of organisations have realised that well-designed
products do not guarantee them a competitive advantage. A number of challenges have been identified when
service functions are integrated into the traditional manufacturing process. The key concern identified was
the manner of integration of the two concepts that would allow optimisation of the best possible outcome. In
most instances the service component could be identified as supplying spares and consumables related to the
manufacturing of a product.
Servitisation can be defined as a transformation process wherein production organisations embrace a
service orientation and/or develop more and better services, with the aim to:
• satisfy customer’s needs
• enhance the organisation’s performance
• achieve competitive advantages (Marks, et al. 2011:6).
Grasping this complicated setting and making lucid decisions is challenging. The decision-making process
involves a large number of staff from a variety of functional areas. The term ‘servitisation’ was coined to
facilitate the move from pure production to a situation where services are incorporated as part of the
manufacturing process. A typical example can be found in original equipment manufacturers (OEMs). The
success of servitisation is dependent on organisations fully grasping the nature of their business as well as
their customers’ wants and needs.
Three well-defined supplier-customer links have been identified, namely:
1 cooperative service and supply chain management
2 condition-based maintenance as a service
3 communicative asset management which can be described as using product demand in the supply chain as
a management tool.
Organisations frequently ask why it has become necessary to servitise. Three major reasons for servitisation
have been identified, namely:
1 elimination of active competitors from the organisation’s present markets
2 guaranteeing a market where customers have no other option than utilising the existing provider
3 increasing differentiation in product offerings.
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Taking the aforementioned into consideration, it makes sense only if the OEMs’ product has a long life cycle.
In that instance the manufacturer can offer life support for the equipment it sells. A typical example is motor
manufacturers. They would offer the owner of their vehicles a warranty and some form of service plan to
prolong the life of the vehicle.
1.8.2
Types of service department found in organisations
This section lists and discusses the types of service department that may be found in organisations and the
functions of these departments. In practice, these departments might go by other names, even though their
functions remain the same.
Note that the list given is not an exhaustive list of all the service departments that can be found in an
organisation. The departments mentioned are service departments commonly found in the average
organisation.
In smaller organisations, some of the functions described below might be combined in the functions of
other departments. In larger organisations, some of the departments may be split because they would
otherwise be unable to handle the workload.
Accounting department
This department is responsible for financial management and cost and management accounting. The
accounting department manages the cost of the organisation’s labour, raw materials and overheads. Further
responsibilities may include the determination and costing of scrap produced, the cost of machine down time
and the cost of holding inventory.
The management information systems (MIS) department
This department is tasked with providing management with the relevant information that will enable it to
manage effectively and efficiently. This information might include exception reports, budget comparisons
between planned and actual spending, work-in-progress (WIP) reports, and many other things. This
department also assists management to design systems that will enable it to generate the reports required.
Purchasing department or procurement department
An organisation might employ a procurement manager, one of whose tasks it is to ensure that raw materials,
machinery and equipment of the highest quality can be purchased by the organisation. The purchasing
department is responsible for ensuring that sufficient stocks of raw material, supplies and equipment are
available. For this reason, it is very important that a close relationship is fostered between the operations
department and the purchasing department. This will ensure that raw materials, supplies and equipment are
delivered in time and that the production process is continuous. In certain instances this department will
evaluate the organisation’s suppliers for quality, price, delivery and overall performance. Department
inspectors check all the items that have been purchased, to ensure that the correct standards are upheld. The
purchasing department might also source indirect supplies, for example, office furniture.
Human resources department
In some organisations, this department is known as the personnel department. The human resources
department takes responsibility for managing the people working within the organisation. People working in
this department deal with real feelings and emotions and must have empathy with the workforce. This
department’s typical areas of responsibility are training, labour relations, health and safety, salaries,
leave-related issues and other important functions.
The corporate communications department
This department used to be referred to as the public relations department. It is tasked with building and
maintaining a positive public image of the organisation. Most importantly, the department can enhance the
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standing of the organisation in the marketplace. This department will produce information and literature on
the company’s stand concerning the environment, HIV/Aids, labour relations, and assistance to previously
disadvantaged communities.
The quality department or industrial engineering department
This is one of the most important departments that assists the operations department in its aim of making
continuous improvements to products and processes. This department can help in cutting costs associated
with the production of goods and services. It achieves this by setting standard times for the production of
goods or services, doing factory and office layouts, and investigating work methods and incentive schemes.
We discuss industrial engineering in some detail in Chapter 4.
Maintenance department
This department is often treated as rather unimportant. If this is the case, the organisation stands to lose vast
amounts of money due to the breakdown of machines. Preventive maintenance is an important aspect of the
department’s responsibilities. This involves maintaining equipment on an ongoing basis to ensure that it does
not fail, rather than waiting for a failure to occur and only then undertaking the necessary repairs. This
department maintains not only the organisation’s machinery but also its facilities.
Logistics department
The logistics department is responsible for supply chain management (which will be discussed in detail later).
1.8.3
The importance of operations departments to society as a whole
The discussion above proves why operations departments are important for society as a whole. The
consumption of goods and services is at the core of every society all over the world. It is therefore not an
exaggeration to claim that if the operations function did not exist, the other functions could not exist either.
This is because the production of goods and services is at the core of all organisations.
Until the last decade of the twentieth century, most people who had jobs worked in some or other
organisation that produced goods. However, there has been a shift away from manufacturing to the
production of services. This is especially true in highly industrialised countries. In these countries, about 20
per cent of the population is involved in producing goods, while 70 per cent is involved in the service
industry. The remaining 10 per cent is involved in industries such as agriculture, mining and fisheries.
1.9 Differences between services and goods production
What is the difference between goods and services? We discuss the differences in detail later in this section
and refer to both goods and services repeatedly throughout this book.
For the moment, it is important that we note and correct a common misconception: that there is no place
for operations management in the service industry. This is definitely not the case, and the role of operations
managers extends into the area of service management.
In South Africa, operations managers are now employed in banks, post offices, cleaning companies,
major hotels and communications companies. Consider these examples:
• Cellphone production by a company such as Nokia or Motorola is purely an operations function, and the
billing for the cellular company can be classed as a service. Even though MTN, Vodacom or Cell ©™
may sell cellphones, they only render a service and do not produce the cellphones themselves. In both
instances the operations department will play a most important role.
• Kalahari.net provides a service: it sells books, compact discs and a variety of other products that can be
ordered online. Here, too, operations are an extremely important function.
It is clear that there is a difference between the types of organisation that are operating in today’s
marketplace: the difference can be drawn between manufacturing and service organisations. Making a
clear-cut difference is not possible and it is not essential to do so.
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Any manufacturing concern will render some sort of service, even if it is only the provision of customer
satisfaction. A purely service organisation may provide some goods that facilitate its service.
For example, when a motor vehicle is taken for a service, some goods will be used to carry out the
service. These goods include the oil, filters, plugs and parts needed to complete the service satisfactorily.
There is also a distinction to be drawn between production and manufacturing:
• manufacturing is the conversion of a design into a finished product
• production is the physical act of making the product.
In the broader sense, manufacturing consists of a number of production activities.
It is important to understand exactly what it entails to provide goods or services before the differences
between the two can be understood. Table 1.4 illustrates the most important differences between goods and
services.
TABLE 1.4 Differences between goods and services
SERVICES
GOODS
Intangible
Tangible
Provided by service organisations
Produced by manufacturers
Impossible to store
Easy to store
Cannot be transported
Can be transported
Consumption and production at the same time
Delay between production and consumption
Lose value rapidly
Maintain value much longer
Likely to be unique
Less likely to be unique
Interaction between customer and provider is high
Little or no contact between customer and
manufacturer
Participation of customers in the service
Little or no participation of customer
Facility of the service near the customer
Centralised away from customer
Very labour intensive
Mostly automated
Difficult to measure quality
Easier to measure quality
Server determines standard of quality
Does not depend on one person
Cannot measure output accurately
Easier to measure the output
To enable an organisation to satisfy the needs of its customers, the organisation has to:
• define in no uncertain terms – through market research – the good or service that will satisfy the needs
and expectations of the targeted customers
• ensure that the systems and operations developed to produce the good or service are value adding so as to
comply with the expectations of the customers
• establish a proper measurement tool to measure the effectiveness and efficiency of the operational
systems performance
• respond in an effective manner to any feedback received from customers.
The core difference between goods and services is that goods are tangible (touchable) and services are
intangible (cannot be touched). Examples of goods are motor vehicles (manufactured by organisations such
as Toyota, Ford and Mercedes-Benz) or tinned foodstuffs (produced by organisations such as KOO [Tiger
Brands] and Del Monte). Examples of services are the consultations provided by professional people such as
doctors, dentists and attorneys, when patients or customers visit their practices or offices.
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A different way of differentiating between goods and services is to note that the production of goods is a
physical output of a process. The location of a service is usually more important than the location of a
manufacturing concern. The reason for this is that there is more customer interaction in the production of a
service than in the production of goods. An example of this is eating a meal at a restaurant. Customer
interaction is very high because the person serving deals directly with the restaurant’s customer. In contrast,
the farmer who produces the food used at the restaurant will never deal directly with the customer who
consumes his or her produce.
Another way of highlighting the difference is to note that the customers are on the shop floor when a
service is consumed. This is not the case with the consumption of goods. Customers hardly ever see the
inside of the factory that produces the goods they consume. In a service environment, the shop floor may be
the receptionist’s area at the doctor’s consultation rooms, the operating room at a hospital, or an attorney’s
office.
1.9.1
The characteristics of services
It is clear from the discussion above that services differ from goods. Looking at the characteristics of services
will reveal further the ways in which services differ from goods.
Services are intangible and perishable
Many services are intangible, but some of them do have both intangible and tangible components. A credit
card (which is tangible) enables its owner to travel, entertain, buy products, and even save money in the
credit card account (which is intangible). Many services are perishable. Take the example of a garden-service
company that maintains a customer’s garden once a week. If a week passes without the garden-service
company’s visit, the grass will grow wild and the garden will look neglected.
It is difficult to determine a reasonable price for a service because of the intangible nature of services.
The service provider may think that the set price is reasonable, while the client may think otherwise. An
auditor may ask a high fee for doing an audit because he or she has experienced many problems during the
audit and these problems have taken time to solve. The client may be unhappy because he or she is not aware
of the time spent on the audit.
The client forms part of the service
Most services a client receives from an organisation are delivered while the client is present. For example,
imagine a person who has been arrested for drunken driving. The person (client) is in the attorney’s office
furnishing details of the transgression. No tangible transaction is taking place, but after the consultation the
attorney will be better able to render an opinion. The opinion is also intangible.
The relationship between the service provider and the client may lead to certain problems. For example,
the attorney may be a teetotaller and as a result loathe offences related to alcohol. Clients have different tastes
about services. What is a good-quality service for one person may be bad-quality service for another. Many
clients may prefer an attorney with a reputation for winning cases at all costs without compassion for the
client. Others may prefer a more compassionate attorney with a lower rate of success.
The relationship between the service provider and the client can also have its positive points. For
example, a restaurant that supplies food and drinks on a self-service basis can also expect the customers to
clear their own tables after they have eaten. This saves money because the restaurant can operate with fewer
staff.
Services cannot be stored
Unlike a product, a service cannot be manufactured and stored. For example, on the one hand, an attorney has
to see his or her clients as soon as possible after they have arrived – clients get disgruntled when they have to
wait for their service. On the other hand, an attorney cannot render the service if the client is not present. The
bookings that clients make help the attorney to deliver the required services at the required times.
Service provision is usually labour intensive
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Service provision is labour intensive. For example, hairdressing salons need hairdressers to provide the
services. However, technology can be used to provide some services. For example, many pharmacies have
equipment that measures people’s blood pressure without the intervention of a person.
Services are usually provided in small service centres
Service centres must be located near to their clients because clients are usually present when a service is
provided. These service centres are often small because there is no need for storage. An example of a service
centre is an attorney’s office. There must be sufficient space for a client to be interviewed in private and
enough room for the attorney and his or her clients. The waiting room can also be relatively small because
there will seldom be more than five people waiting for the attorney at any given time.
The quality of services is difficult to measure
The quality of a good is easy to measure because a physical product has certain specifications that have to
meet a certain standard. The measurement of the quality of a good is done objectively; the measured
characteristics either will or will not meet the quality standards.
However, it is difficult to measure the quality of a service because the measurement is done subjectively.
The same quality of service provided at different times can be experienced differently by the client.
For example, a friendly petrol attendant might be very talkative when filling a customer’s motor vehicle.
The customer might enjoy the conversation the day before his or her annual leave, when he or she is in a
good mood. However, if the same attendant fills up the car a few weeks later on a Monday morning, the
customer might be irritated and not enjoy the conversation, now experiencing the quality of the service as
bad.
Registration of patent rights is difficult
The registration of patent rights on a service is difficult because of the subjectivity attached to services and
the fact that a person does not have standard specifications to register. Where a service has a tangible and an
intangible part, a patent can easily be registered on the tangible part. Consider the case of a restaurant. A
restaurant might decide to have its own tailor-made cutlery and crockery. It can then register a patent on the
cutlery and the crockery, but it will be difficult to register a patent on the quality of the service. For example,
Kentucky Fried Chicken (KFC) has a patent right on its recipe for cooking chicken because it is easy to
determine the specifications of the product. However, people can experience the standard of the service at
KFC differently.
In summary, goods are solid things that can be picked up and looked at. In contrast, services are those
things that other people do for us.
The following are some examples of service industries:
• Rental: housing, motor vehicles (Avis, Imperial), offices, and equipment
• Use of facilities: transportation (Metro Rail or taxi), telephone (Telkom, MTN or Vodacom), and parking
lots
• Safety and protection services: security (ADT or Chubb), and fire fighting (municipal fire brigade)
• Energy and water: water, sanitation, and electricity (Eskom)
• Health: doctors, hospitals, and clinics
• Drainage and waste removal: garbage removal and sanitation rendered by the local council
• Personal service: restaurants (Spur), hotels (Holiday Inn), and funeral services (Avbob)
• Maintenance: repairs (Roto Rotor), painting, and renovations
• Recreation and entertainment: cinemas (Ster Kinekor), amusement parks, and private clubs
• Business services: consulting (PriceWaterhouseCoopers), printing (News24), laboratories, and personnel
service (Kelly)
• Distribution: warehousing (Imperial Logistics), transportation (Transnet), and freight services (Ram
Couriers)
• Financial: banks, credit controllers, and loans (all the local banks)
• Education: universities (Pretoria, Wits or UCT), universities of technology (TUT, DUT), and libraries
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•
(local/municipal)
Environmental quality: radiation control and soil analysis.
The relationships between a service and a good are shown in Figure 1.4.
FIGURE 1.4 The goods–services scale
1.10 The three modes of operations management
It is possible to divide operations management into primary, secondary, and tertiary modes, as the following
points show.
1.10.1
Primary operations management
The operations management functions in this instance involve the sourcing of raw materials from natural
sources, such as mining, fishing, and forestry, for example, mining iron ore to produce cars, fridges, stoves,
and so on.
1.10.2
Secondary operations management
The operations function in this instance utilises the raw materials from the primary functions in the
production of goods utilising the extracted raw materials. For example, in construction, site managers use
steel beams, which are derived from the iron that has been mined, for building purposes. All manufacturing
operations fall into this category.
1.10.3
Tertiary operations management
The operations functions are utilised in the rendering of services only. For example, an attorney, doctor or
bank clerk operates in this type of environment.
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1.11 Operations management structures
In most organisations, the structures referred to are systems. There is some debate as to whether it is better to
have centralised systems or decentralised systems. In multinational organisations, all the systems are
decentralised; the parent company is situated in one country and the subsidiaries in other countries. In the
case of a local organisation, the systems are usually centralised. Management believes that it can better
manage these structures from a central point. The systems can include production, purchasing, distribution,
and human resources.
1.11.1
Decentralised systems
When a system is decentralised, the local manager in charge of that system determines the needs required.
Therefore, the local manager also determines the delivery date and time. Planning is carried out only for this
facility, with no regard to the needs of any other of the subsidiaries. In the case of a manufacturing concern,
the local manager determines the material requirements (buying function) and plans for his or her facility
only (planning function).
In a centralised system, the facilities utilise the same ERP methodology. This means that throughout the
organisation, the same computer systems are utilised. A major advantage of the decentralised system is that
there is a reduced need for elaborate communication and control systems. A major disadvantage is that,
because of the lack of control in the decentralised system, inventory levels can spiral out of control and
customer service may suffer, and this, in turn, may result in poor scheduling.
1.11.2
Centralised systems
In a centralised system, all systems are managed from a central point, which is usually at head office. All
schedules, purchasing and planning are dictated by head office. As a result, a uniform set of systems will be
in operation and local managers have no or little input into what is decided. The same MRP system is
implemented throughout the organisation. The most important function in the centralised system is the
management of inventory to ensure an equitable distribution of raw materials, etc.
The major advantage derived from this system is the proper synchronisation of orders, production
schedules, etc. The major disadvantage is that head office is unable to react timeously to change at local
level. This is particularly true in respect of demand and the requirements to fulfil the demand at local level.
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CLOSING EXAMPLE
Strategic operation decisions by Gold Fields: Unbundling Sibyanye Gold
In 1897, in a small mining town in South Africa, Cecil Rhodes and Charles Rudd formed the company that
would later become Gold Fields. This mining town would later become Johannesburg, the city that today
hosts our corporate office and primary stock-market listing. The history of Gold Fields is very much linked
to that of South Africa.
In 2012 – and as part of a high-profile portfolio review – Gold Fields announced the landmark
restructuring of its assets. This focused on the unbundling of Sibanye Gold – a separately listed entity that
will hold the mature, deep-underground KDC and Beatrix mines.
The unbundling will enable Gold Fields to focus on maximising cash flow and returns from its
remaining operations, and to realise the value of its world-class portfolio of exploration and growth
projects. At the same time, Gold Fields will prioritise the development of its fully mechanised South Deep
underground mine in South Africa. This strategically important asset – which holds more than one-third of
Gold Fields gold reserves and has a mine life of at least 60 years – secures the company’s long-term future
in the country in which it was founded 125 years ago.
(SOURCE: Gold Fields IAR, 2012: Case studies. Available at: http://www.goldfields.co.za/reports/2012/case_studies.pdf)
Summary
In this chapter, we introduced the ideas that operations transform inputs into the desired outputs requested by
customers; that operations management is the planning, organising, leading and controlling of these
processes; and that operations managers manage all the processes and activities leading to the production of
goods and services. We presented certain key definitions in the field of operations management. We
explained that the operations department is responsible for the planning and coordination of manufacturing
products by using all the required inputs. We noted that operations are one of three primary functions
(marketing and finance being the others) and we presented the eight Ms approach to operations management.
We mentioned other departments or functions within an organisation. We discussed reasons for studying
operations management and considered the types of decisions taken by the operations manager. Operating
decisions relate to the operations of the organisation. These include decisions regarding quality, inventory
management, scheduling, and project management. We discussed the distinction between goods and services,
and noted that operations will feature strongly in both a goods-orientated and a service-orientated
organisation.
Key terms
Capacity: The maximum amount of time available to a productive unit and will determine the optimal load
of the productive unit if it operates under perfect conditions.
Effectiveness: The measure of financial prudence with which processes utilise assets, and in particular time
and money.
Efficiency: The ratio in respect to how soundly the process functions in relation to achieving its
predetermined objective from the perspective of the customer. It is performing the appropriate tasks to
generate the most value for the organisation and customer. It can be defined as ‘doing something at the
lowest possible cost’ (Jacobs & Chase, 2008:8).
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Goods: Solid, tangible things that can be picked up and looked at.
Just-in-time (JIT): A philosophy that uses continuous and forced problem-solving to rid an organisation of
all waste in the production processes or the rendering of services. A JIT production system is one in
which the processing and movement of goods and materials happen just as they are required, most often
in small batches.
Lead time: The time from the placement of an order by a customer until the customer receives the good or
the service ordered is rendered.
Lean production: This involves using minimal amounts of resources to make products of high quality with
minimum variation.
Preventive maintenance: The maintenance of equipment on an ongoing basis to ensure that it is always
productive and efficient.
Productivity: The measure of the ratio of outputs to inputs. Higher productivity means that there is better
management of inputs and processes so that outputs are of better quality and produced at a lower cost.
Products: The finished goods or services that an organisation supplies to customers after a relevant need
has been identified.
Services: Invisible things that other people do for us.
Servitisation: A transformation process wherein production organisations embrace a service orientation
and/or develop more and better services.
Supply chain management: The total management strategy of all the activities of an organisation
regarding the facilities, functions and activities involved in the production and delivery of products and
services.
System: A complete system that cannot be broken up without the loss of its essential characteristics.
Value added: A process of eliminating waste and adding value to a good or service, as well as the
difference between the cost of the inputs and the price that can be charged for the product or service.
Review questions and activities
1 Define the term ‘operations management’ and describe what you understand it to mean.
2 Schematically represent and discuss the three major functional areas found in organisations.
3 List and then briefly discuss the various service departments rendering their services to the operations
department.
4 List the differences between goods and services.
5 Distinguish between order qualifiers and order winners.
6 Discuss some of the operations of the institution where you are studying.
7 Write the job description of an operations manager employed in a bank.
8 Compare and contrast the job requirements of operations managers in a manufacturing environment with
those of operations managers in the services industry.
9 Identify a product you would like to manufacture. Describe how you would play the role of operations
manager to market, finance and produce this product.
10 What are the key roles of operations managers in the services industry, where no tangible good is
produced?
11 Discuss the role of technology in operations management.
12 Imagine you are the managing director of a manufacturing company that manufactures gadgets. Write a
profile of an operations manager whom you require for your factory.
13 Discuss the role of an operations manager in:
13.1 The National Council of the Society for the Prevention of Cruelty to Animals (NSPCA)
13.2 A charitable organisation.
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42
CASE STUDY: CAPITEC RETAIL BANK
South Africa’s youngest retail bank, Capitec, was founded in 2001. It has 3.2 million clients and attracts on
average 90 000 new clients a month, according to the company’s interim results, which were released in
September 2010. The growth in active clients to 4.2 million in 2012 means the bank is acquiring both new
to bank clients and other banks’ clients. Capitec CEO Riaan Stassen said the consistent Capitec Bank
growth is a direct reflection of client demand for the bank’s unique simplified bank offer. Capitec’s motto
is ‘Simplicity is the ultimate sophistication’.
The bank was recently named the overall winner at the annual Ask Africa Orange Index Awards.
Surveying close to 100 brands across 18 industries, the award is based on the opinions of 10 000
consumers surveyed nationally over six months.
Capitec won on the strength of its transparent benefits and services that put the customer first and is
therefore suitable for people who do not need a cheque book or overdraft facility and who do not mind
using an external service provider’s credit card.
Capitec does not segment clients according to their income level. The bank offers just one transaction
account – the Global One account. The limitations of the Global One account are that it does not offer a
credit card, an overdraft facility, a cheque book or cellphone banking. However, Capitec does offer internet
banking, which is free. Capitec plans to launch a credit card in 2013. In the meantime, you can link your
Capitec account to a credit card from another financial services provider and pay the amount owing via
internet banking – by making your credit card a beneficiary. Paying a beneficiary costs R2.75, irrespective
of the value of the transaction.
Without question, one of Capitec’s most appealing features is their highly competitive, unbelievably
low fees. For a mere R4.50 monthly administration fee, you receive transactional features and capabilities
that pretty much rival (if not surpass) most other regular bank accounts. In addition to this, Capitec offers
extremely inviting interest rates. Capitec’s fees have remained unchanged since 2010, whereas all the ‘big
four’ banks increased their fees since. Its debit card transactions are free and cash withdrawal fees are
lower than those charged by the other banks.
Anyone who has ever opened up a Capitec account can tell you that walking into a Capitec branch is
surprisingly pleasant. Designed to reduce waiting periods to an absolute minimum, Capitec branches are
fresh and make banking a far nicer experience. In less than half an hour of stepping into my nearest
Capitec branch, I was able to open up a Global One account. The branch representatives were competent,
knowledgeable and very helpful.
In January 2012 Absa took a significant step towards simplified, affordable banking with the launch of
Transact. Aimed at customers who are looking for a basic transactional account which is easy to
understand and very cost effective, Transact simplifies mainstream banking by offering a full bouquet of
services.
(SOURCE: http://www.capitecbank.co.za/media-centre/consumer-release/26/)
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Case study questions and activities
1
2
3
Identify and discuss the order qualifiers and order winners that Capitec Retail Bank has which
contributed to its growth.
What type of decisions are driving Capitec Retail Bank? Provide examples from the case study to
illustrate your answer.
What type of decision has Absa made in reaction to what is happening at Capitec Retail Bank?
Motivate your answer.
References
1 Baines, T., Lightfoot, H., Peppard, J., Johnson, M., Tiwari, A., Shehab, E. & Swink, M. 2009. ‘Towards
an operations strategy for product-centric servitization’, International Journal of Operations &
Production Management, 29:5, 494–519.
2 Cardoso, A., Ferreira, I., Carvalho, J.Á. & Santos, L. 2011. ‘What Service?’, ENTERPRISE Information
Systems, 315–324.
3 Colen, P. & Lambrecht, M. 2010. ‘Product service systems: Exploring service operations strategies’,
Katholieke Universiteit Department of Decision Sciences and Information Management Working Paper
No.1008.
4 Datta, P.P. & Christopher, M.G. 2011. ‘Information sharing and coordination mechanisms for managing
uncertainty in supply chains: A simulation study’, International Journal of Production Research, 49:3,
765–803.
5 Datta, P.P. & Roy, R. 2011. ‘Operations strategy for the effective delivery of integrated industrial
product-service offerings: Two exploratory defence industry case studies’, International Journal of
Operations & Production Management, 31:5, 579–603.
6 Davids, A. & Lioma, R. 2012. ‘Pick n Pay: From underdog to top dog?’ UP Kagiso Asset Management
Quarterly.
7 Erkoyuncu, J.A., Roy, R., Shehab, E. & Cheruvu, K. 2011. ‘Understanding service uncertainties in
industrial product–service system cost estimation’, The International Journal of Advanced
Manufacturing Technology, 52:9, 1223–1238.
8 Ettlie, J.E. & Rosenthal, S.R. 2011. ‘Service versus manufacturing innovation’, Journal of Product
Innovation Management, 28:2, 285–299.
9 Fernandes, K.J. 2012. ‘A framework for service systems analysis: Theory and practice’, Production
Planning and Control: The Management of Operations, 480–497.
10 Goldfields. Industrial Annual Reports: Case Studies.
11 Goodale, J.C., Kuratko, D.F., Hornsby, J.S. & Covin, J.G. 2011. ‘Operations management and corporate
entrepreneurship: The moderating effect of operations control on the antecedents of corporate
entrepreneurial activity in relation to innovation performance’, Journal of Operations management,
29:1–2, 116–127.
12 Gunasekaran, A. & Ngai, E.W.T. 2011. ‘The future of operations management: An outlook and analysis’,
International Journal of Production Economics.
13 Gupta, S., Koulamas, C. & Kyparisis, G.J. 2009. ‘EBusiness: A review of research published in
production and operations management (1992–2008)’, Production and Operations management, 18:6,
604–620.
14 Heim, G.R. & Peng, D.X. 2010. ‘The impact of information technology use on plant structure, practices,
and performance: An exploratory study’, Journal of Operations management, 28:2, 144–162.
15 Hofmann, E. 2010. ‘Linking corporate strategy and supply chain management’, International Journal of
Physical Distribution & Logistics Management, 40:4, 256–276.
16 Holmström, J., Brax, S. & Ala-Risku, T. 2010. ‘Comparing provider-customer constellations of
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44
visibility-based service’, Journal of Service Management, 21, 675–692.
17 Holmström, J., Ketokivi, M. & Hameri, A.P. 2009. ‘Bridging practice and theory: A design science
approach’, Decision Sciences, 40:1, 65–87.
18 Jacobs, F.R. & Chase, R.B. 2008. Operations and supply management: The core. International edition.
New York: McGraw-Hill/Irwin.
19 Jetter, M., Satzger, G. & Neus, A. 2009. ‘Technological innovation and its impact on business model,
organization and corporate culture–IBM’s transformation into a globally integrated, service-oriented
enterprise’, Business & Information Systems Engineering, 1:1, 37–45.
20 Lin, Y., Shi, Y. & Zhou, L. 2010. ‘Service supply chain: Nature, evolution, and operational implications’,
Proceedings of the 6th CIRP-Sponsored International Conference on Digital Enterprise Technology,
Springer, 1189.
21 Marks, F., Ramselaar, L., Mulder, J., Muller, H., Langekamp, S. & Boymans, C. 2011. Servitization in
product companies. Creating business value beyond products. Atos Consulting White Paper, Utrecht,
Netherland.
22 Mingers, J. & White, L. 2010. ‘A review of the recent contribution of systems thinking to operational
research and management science’, European Journal of Operational Research, 207:3, 1147–1161.
23 Nativi, J.J. & Lee, S. 2011. ‘Impact of RFID information-sharing strategies on a decentralized supply
chain with reverse logistics operations’, International Journal of Production Economics.
24 Nickerson, J.A. & Silverman, B.S. 2009. ‘New frontiers in strategic management of organizational
change’, Economic Institutions of Strategy (Advances in Strategic Management, Volume 26), Emerald
Group Publishing Limited, 26, 525–542.
25 Olhager, J. & Johansson, P. 2011. ‘Linking long-term capacity management for manufacturing and
service operations’, Journal of Engineering and Technology Management.
26 Oliveira, P. & Roth, A.V. 2012. ‘Service orientation: The derivation of underlying constructs and
measures’, International Journal of Operations & Production Management, 32:2, 156–190.
27 Parry, G., Newnes, L. & Huang, X. 2011. ‘Goods, products and services’, Service Design and Delivery,
19–29.
28 Pawar, K.S., Beltagui, A. & Riedel, J.C.K.H. 2009. ‘The PSO triangle: Designing product, service and
organisation to create value’, International Journal of Operations & Production Management, 29:5,
468–493.
29 Schmenner, R.W. 2009. ‘Manufacturing, service, and their integration: Some history and theory’,
International Journal of Operations & Production Management, 29:5, 431–443.
30 Slotnick, S.A. 2011. ‘Order acceptance and scheduling: A taxonomy and review’, European Journal of
Operational Research, 212:1, 1–11.
31 Spring, M. & Araujo, L. 2009. ‘Service, services and products: Rethinking operations strategy’,
International Journal of Operations & Production Management, 29:5, 444–467.
32 Stecke, K.E. & Kumar, S. 2009. ‘Sources of supply chain disruptions, factors that breed vulnerability, and
mitigating strategies’, Journal of Marketing Channels, 16:3, 193–226.
33 Wu, Z. & Page11, M. 2011. ‘Balancing priorities: Decision-making in sustainable supply chain
management’, Journal of Operations Management, 29:6, 577–590.
Websites
Visit the websites below, which were last accessed in September 2012:
www.aa.com
www.apple.com
www.apqc.org
www.bmw.com
www.carnivalcruise.com
www.dell.com
www.econ-datalinks.org
www.fedstats.gov
www.hellopeter.com
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www.monster.com
www.rockwell.com
www.trekbikes.com
The websites below were last accessed on the dates given:
www.goldfields.co.za/reports/2012/case_studies.pdf (4 April 2013)
www.kagisoam.com/upload/website/files/news/Pick%20n%20Pay_from%20underdog%20to%20top%20dog
.pdf (20 March 2012)
www.nl.atosconsulting.com/NR/rdonlyres/3C3B9288-7B99-48EE-8008-542E044826AC/0/AC
_WPServitizationinproductcompanies.pdf (20 March 2012)
YouTube™
This clip was last accessed in February 2013:
www.youtube.com/watch?v=-yAEWKX6kWY
These clips were last accessed in March 2013:
www.youtube.com/watch?v=LeeTy3YaMu0
www.youtube.com/watch?v=skg_lg-4m2o
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CHAPTER 2
Supply chain management
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
Explain what a supply chain is
Understand the role and importance of the supply chain
Understand the importance of strategy in the supply chain
Define and explain supply chain management
Understand what is required by a supply chain manager
Explain the drivers in the supply chain
Explain why metrics are important in supply chain management
Understand demand and supply in the supply chain
Understand inventory and its impact on the supply chain
Explain logistics and transportation in the supply chain
Discuss the various influences and challenges that affect the supply chain and its management.
CHAPTER outline
2.1
2.2
2.2.1
2.2.2
2.2.3
2.2.4
2.2.5
2.3
2.4
2.4.1
2.4.2
2.4.3
2.4.4
2.5
2.5.1
2.5.2
2.5.3
2.6
2.7
2.7.1
2.7.2
2.7.3
2.7.4
2.7.5
2.7.6
Introduction
Understanding the supply chain
The difference between the supply chain and supply chain management
The importance of strategy in the supply chain
Improving and influencing performance in the supply chain
Drivers within the supply chain
Supply chain metrics
Designing the supply chain network
Demand and supply in the supply chain
Demand forecasting
Aggregate planning
Sales and operations planning
Coordination and management
Inventory in the supply chain
Economies of scale
Uncertainty
Product availability
Logistics and transportation in the supply chain
Other supply chain influences
Pricing and revenue management
E-business
Information technology (IT)
Stakeholders and partnerships
Sustainability
Globalisation
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2.8
Supply chain challenges
Summary
Key terms
Review questions and activities
Case studies
References
Websites
SETTING THE SCENE
Bouncing back: Supply chain risk management lessons from post-tsunami Japan
Companies are better preparing their supply chains to withstand future crises and minimise the impact of
potential disruptions.
The 9.0 magnitude earthquake and 45-foot wall of water that struck Japan last year devastated local
production and power generation, causing massive supply chain disruptions for companies all around the
world. While the impact for many companies lingered well into 2012, some companies were able to bounce
back much more quickly than expected.
Despite the tsunami’s widespread impact on global supply chains, most companies are not
fundamentally changing how they manage supply chain risk. Meanwhile, supply chain risks appear to be
rising, driven by a variety of internal and external forces, especially globalisation, which is increasing
supply chain complexity and amplifying the impact of disruptions.
High impact, low probability black swan events now seem to be almost a regular occurrence. This is not
necessarily because problems are happening more often, but because in a globally interconnected business
environment, problems that used to remain isolated now have far-reaching impacts.
Efforts to identify and mitigate supply chain risk have traditionally focused on financial and operational
risks and familiar disruptions that caused trouble in the past. But these days, that narrow view of risk is
much too limited, especially when it comes to preparing for major disasters and other black swan events. In
today’s hyper-connected supply chain environment, risks are evolving at a dizzying pace and can strike
from almost any direction, including those that are new and unexpected.
(SOURCE: Adapted from: http://www.industryweek.com/global-economy/bouncing-back-supply-chain-risk-management
-lessons-post-tsunami-japan)
2.1 Introduction
Supply chain management (SCM) is an approach which allows for the management of various aspects of the
supply operation in a cross-functional way. This includes the management of the movement of raw materials
into an organisation, as well as various aspects of the internal processing or transformation of materials into
finished goods, and the distribution of finished goods out of the organisation. This final movement of goods
may involve distribution to downstream wholesalers, retailers or the final consumer.
In the quest to be more effective and efficient, organisations therefore need to focus on their core business
and competencies. They therefore often reduce their ownership of raw materials sources and distribution
channels, which frees up resources to allow for a more focused approach to their business objectives.
Functions that are not recognised as a core business or process of the organisation are increasingly being
outsourced to other entities that are more effective at performing the activities and in a more cost-effective
manner. The effect is to increase the number of different organisations within the company supply chain, and
to be involved in satisfying customer demand. The management control of daily logistics operations is also
reduced within the organisation. This reduction in control and the increased number of supply chain partners
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48
has led to the creation of the various supply chain management concepts. The overall goal of supply chain
management is therefore to coordinate, manage, and improve trust and collaboration among supply chain
(SC) partners.
During the past 20–30 years there has been an increased focus on outsourcing and the use of information
technology due to the impact of globalisation. Information technology and the internet have increasingly
enabled many organisations, such as Dell, to successfully leverage their supply networks to distribute the
products worldwide. In the past, companies in the supply network concentrated on the inputs to and the
outputs of the processes within their operation. Little time was spent actually engaging with the other supply
network participants. The increased focus on SCM has now allowed for companies to leverage off their
suppliers and distributors to deliver increased value at a lower cost.
FIGURE 2.1 Furniture supply chain
(SOURCE: Ouhimmou M., D’Amours S., Beauregard R. Ait-Kadi D. & SinghChauhan S. 2008. ‘Furniture supply chain tactical
planning optimization using a time decomposition approach’, European Journal of Operational Research, 189:3, 952–970. http:/
/www.sciencedirect.com/science/article/pii/S0377221707006698)
In Figure 2.1, the supply chain of a large group of furniture mills is illustrated. From an organisational
perspective, one of the mills, the focal firm, would be the organisation in the supply chain, and partnerships
and stakeholders would be identified upstream (supply side), from the mill to the forest, and downstream
(demand side), from the mill to the retailer. You can therefore understand the complexity within the supply
chain of a large automotive manufacturer, which may have tens of thousands of components from thousands
of suppliers, to manage on the supply side. Any one of the firms across the whole supply chain could be
identified as the focal firm, and each of those would then individually be analysed from a supply chain
management perspective.
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2.2 Understanding the supply chain
2.2.1 The difference between the supply chain and supply chain management
According to Harland (1996), supply chain management (SCM) is the management of a network of
interconnected organisations involved in the production of products and/or services required by consumers in
a supply chain. Supply chain management encompasses all logistics and storage of the various inputs to the
production process, inventory, and the completed products from point of origin to point of consumption.
Mentzer et al. (2001) define supply chain management as:
the systematic, strategic coordination of the traditional business functions and the tactics across these
business functions within a particular company and across businesses within the supply chain, for the
purposes of improving the long-term performance of the individual companies and the supply chain
as a whole.
A supply chain is a set of organisations directly linked by upstream, supply side and downstream, demand
side, flows of products, services, finances and information from a supplier to a customer, and finally the
consumer or end-user. The actual process of managing a supply chain is referred to as ‘supply chain
management’ (Harland, 1996).
In order to maximise profit and return on investment it is important to also engage the customer and
manage customer expectations within the supply chain. Each member of the supply chain requires and
consumes resources from a supplier or suppliers, and these resources need to be acquired via a mutually
beneficial negotiation process. The supply chain must be responsive to customer requirements as well as take
into account specific supplier challenges that may need to be overcome (Hines, 2004). The supply chain
needs to be clearly built on strong partnerships between suppliers and customers, while also drawing on the
strategic objectives of the organisation.
2.2.2 The importance of strategy in the supply chain
It is important for the supply chain to drive the strategic planning process with respect to the supply network,
as well as the number, location and size of warehouses, distribution centres, and other related facilities.
Strategic partnerships with suppliers, distributors and customers lead to value creation, and the creation of
communication channels for important information allows for operational improvements. Product life-cycle
management needs to be integrated with the supply chain to ensure that appropriate processes are in place.
Buying and production decisions need to be aligned with the strategic intent and direction of the organisation.
This allows for the supply strategy to deliver significant value, and for efficient and effective resource
allocation and management.
2.2.3 Improving and influencing performance in the supply chain
Performance within the supply chain can be viewed both from a tactical perspective as well as from an
operational perspective. Tactically the identification and negotiation of contracts with suppliers and other
purchasing decisions allow for improved profitability in conjunction with production decisions relating to
contracts, schedules and planning. Other tactical decisions may relate to inventory and its quality
management, and transportation and its outsourcing and routing. The emphasis also may include the demand
for products or services by customers and the location of this demand.
Operationally, the scheduling of daily production in each of the facilities of the supply chain as well as
the planning, forecasting and communication of the expected demand all play a role in coordinating activities
within the chain. The management of inbound operations, including transportation from suppliers and the
processes associated with incoming inventory, needs to be operationally focused, while the actual
consumption of inventory and materials, along with the flow of finished goods, needs to be monitored. The
distribution of goods involves various warehousing and transportation activities which allow for delivery to
customers. Time scales and delivery constraints need to be taken into account. The clear plans for on-time
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and on-budget deliveries need to be implemented. When goods are returned to the operation due to damage
or other issues, the supply chain needs to be able to manage this reverse flow. Inventory management also
needs to manage the movement of stock that may not be selling and of items that may have explicit expiry
dates.
2.2.4 Drivers within the supply chain
It is important to understand the drivers behind the supply chain and supply chain management, and to use
these drivers to better contextualise the reasons for following the supply chain management process diligently
(Chopra & Meindl, 2007). A number of drivers can be identified and are discussed in the next sections.
Logistical drivers
Logistical drivers include the following:
• Facilities: the actual physical location in supply chain network, for product manufacturing, storage and
processing
• Supply: all the raw materials, unfinished products and completed products in the supply chain can affect
the company’s efficiencies and ability to react to changes in the market
• Transportation: raw materials, inventory and products need to be moved from one location to another in
the supply chain. The methods used and the timing of the movements can drive the planning and
strategy of the companies within the supply chain.
Cross-functional drivers
Cross-functional drives include the following:
• Information: drivers or triggers could also consist of data and analysis on the various facilities, supplies
and suppliers, transport and logistics in use, product and material costs, prices, and current and potential
customers in the supply chain
• Sourcing and resourcing: the drive and the decision process or choice of who or which part of supply
chain activities will be used to deliver production, storage, transportation and management information
• Pricing: pricing often determines the price a company will set for goods and services in the supply chain.
This affects the behaviour of buyers and can therefore have an impact on the performance of the supply
chain.
2.2.5 Supply chain metrics
Supply chain management requires a holistic and comprehensive strategy geared towards the management of
complex dependencies between teams, departments and sections, and supply chain partner companies, which
may be located across international boundaries. Metrics naturally facilitate the monitoring and management
process. These metrics include:
• measurements for purchasing and procurement
• operations and production
• transportation and logistics
• inventory
• warehousing
• materials and stock handling
• packaging
• customer service.
There are a number of measurement methods or metrics that allow for and facilitate monitoring and
evaluation of supply chain performance (Spacey, 2011).
The following are some of the more commonly used metrics (Spacey, 2011):
1 Perfect order measurement: The percentage of orders that is error-free:
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This is often analysed at various stages of the supply chain, for example, transportation (99.02%).
2 Cash to cash cycle time: The number of days between paying suppliers, and getting paid by customers. A
fast cash to cash cycle indicates a lean and profitable supply chain:
materials payment date – customer order payment date* **
* typically averaged for all orders for a week, month, quarter, etc.
** many materials are usually required – a weighted average materials payment date can be calculated
3 Customer order cycle time – measures how long it takes to deliver after the purchase order (PO) is
received:
actual delivery date – purchase order creation date
A variant of this is the promised customer order cycle time:
requested delivery date – purchase order creation date
4 Fill rate: The percentage of a customer’s order that is filled on the first shipment. Fill rate can be
important to customer satisfaction and has implications for transportation efficiency.
5 Supply chain cycle time – indicates the overall efficiency of the supply chain. Short cycles make for a
more efficient and agile supply chain.
The time it would take to fill a customer order if inventory levels were zero:
sum of the longest lead times for each stage of the cycle
6 Inventory days of supply: The number of days it would take to run out of supply if it was not replenished:
SCM seeks to minimise inventory days of supply in order to reduce the risks of excess and obsolete
inventory.
7 Freight bill accuracy – the percentage of freight bills that are error-free:
8 Freight cost per unit – usually measured as the cost of freight per item or SKU:
SCM seeks to minimise freight cost per unit.
9 Inventory turnover: indicates how much inventory is sitting around. A higher inventory turnover indicates
an efficient supply chain. The number of times that a company’s inventory cycles per year:
10 Days sales outstanding – a measure of how quickly revenue can be collected from customers:
A low days sales outstanding indicates a more efficient business.
11 Average payment period for production materials – the average time from receipt of materials and
payment for those materials. It is in a company’s best interests to pay its suppliers slowly:
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12 On-time shipping rate – the percentage of items, SKUs or order value that arrive on or before the
requested ship date and is key to customer satisfaction. A high rate indicates an efficient supply chain:
EXERCISE
A manufacturer produces 650 radios for a specific order. The quality controller found 15 with errors and
discarded these. The manufacturer was able to ship 630 of the radios on time and sent the remaining radios
two days later.
Questions
1 What is the percentage of orders that are error free?
2 Calculate the on-time shipping rate.
Solution:
2.3 Designing the supply chain network
Different industries and sectors require differing supply networks. Primary sectors, for example agriculture,
may have supply networks focused on small numbers of suppliers (upstream) but significant distribution
networks (downstream).
Designing a supply chain network for each industry or business involves taking into account all the
business network elements, such as the product, market, processes, technologies, production costs and
environmental factors. Alternative scenarios need to be analysed which suit the specific business
requirements of the firm. It is very seldom that two supply chain designs are the same in their structure and
respective suppliers/customers. The network design varies depending on factors which may include firm
location, their core product and business strategy, and even if their target market is national, regional or in
many cases global (Management Study Guide, 2012).
Designing a supply chain network can be summarised in very simple terms, and it is critically important
to clearly understand the following process design elements:
• Procurement: the designer needs to analyse the suppliers, and the location and process of procuring raw
materials and components.
• Manufacturing: the decision as to where the factory will be located for manufacturing and/or assembly of
the product. This needs to take into account the availability of resources, labour and access to the market,
as well as the manufacturing methods and processes.
• Finished goods: where will finished goods be transported to and stored, how many warehouses, their
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location, and security considerations are a number of decisions that need to be made when considering the
management of finished goods. The distribution of finished goods needs to be planned and included in the
supply chain network planning process.
These design elements are heavily influenced and driven by the customer fulfilment objectives within the
organisation. The design process is also influenced by other elements which affect the process, for example:
• market structure
• market segmentation
• demand (plotting and estimation)
• procurement costs
• product/conversion costs
• logistics costs
• inventory holding costs
• overheads
• costs of sales.
Key factors that will influence the supply chain network design process may include:
• government policies of the country, where plants are to be located
• taxation policies, incentive schemes, for example, industrial development zones (IDZ), subsidies, as well
as the tax structures in different market locations
• foreign investment, and foreign exchange policies and regulations
• the local and international political and economic climate
• the local cultural and industrial relations environment
• the infrastructural support, technology availability, infrastructure status, and energy availability
• the availability of skilled and/or unskilled human resources.
Accurate and extensive SC network designs not only provide clear details of the operating process of the
entire organisation, but also guide management when they examine the structure from a strategic perspective.
It allows planners to include external influences, interdependencies between processes and supply chain
partners, and allows for an opportunity to maximise the overall profitability of the organisation.
DISCUSSION
The industrial development zone (IDZ) programme
Through its IDZ programme, the national Department of Trade and Industry aims to generate sustainable
local and foreign direct investment while creating jobs, encouraging skills and technology transfer,
encouraging development of small-, medium- and micro-enterprises, and increasing foreign exchange
earnings.
An IDZ is a purpose built, industrial estate linked to an international air- or seaport, which might
contain one or multiple customs controlled areas (CCA) tailored for manufacturing and storage of goods to
boost beneficiation, investment, economic growth and, most importantly, the development of skills and
employment in these regions. A port (air- or seaport) is a place appointed or approved by the commissioner
of the South African Revenue Service (SARS) under the Customs and Excise Act (Act 91 of 1964) through
which goods may be imported or exported.
IDZs are furthermore intended to promote the competitiveness of the manufacturing sector and to
encourage beneficiation of locally available resources. The support could either be a turn-about strategy to
attract investment or a national programme for economic development to increase exports and
competitiveness of South African products.
At present three IDZs have been identified in South Africa:
• Richards Bay industrial development zone (RBIDZ) in KwaZulu-Natal
• East London industrial development zone (ELIDZ) in the Eastern Cape
• Coega industrial development zone (CIDZ) in the Eastern Cape.
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Answer the following question: What direct benefits could it hold to include an IDZ when designing your
supply chain?
2.4 Demand and supply in the supply chain
2.4.1 Demand forecasting
To make sound tactical and strategic decisions that positively impact profitability, decision-makers must have
control over the organisation’s planning function. Investment must be made in supply chain planning and
education, supply chain systems, and supply chain practices must also empower the delegated
decision-makers. Planners should understand the organisation, its product and market strategy and the supply
chain in order to understand what is currently happening. This will facilitate the formulation of questions to
ask, and how to interpret the resulting information – and therefore help meet customer demand (Howitz,
2010).
Demands for products and services are driven by consumers, and an organisation must have a clear
understanding and be able to accurately predict customer demand. This allows manufacturers and distributors
to avoid running out of stock and facilitates the maintenance of appropriate inventory levels. While demand
forecasting is never perfectly accurate, the process is necessary to manage the production process in order to
meet actual demand (Chockalingam, 2001).
In order to be flexible, lean and agile, you have to be able to plan and forecast your demand. Your
historical sales history can help you forecast demand, as well as a critical analysis of the various metrics to
track errors and production volumes and efficiency. Other factors may include sales forecasts, seasonality of
demand, and current inventory levels, and cannot be overlooked. Having accurate as well as relevant
information is critical to being able to make the right decisions based on the various variables that may
influence the demand forecast (Howitz, 2010). Factors that directly affect demand may include consumer
disposable income, consumer expectations, market and population changes, and consumer taste and trends.
Inventory management is a key facilitator of cost control in the supply chain management process.
Having either too much or too little inventory leads to, amongst others, increased holding costs or decreased
sales respectively. An ideal scenario is to use the just-in-time (JIT) supply chain planning approach and
have exactly what is required at a specific time. Demand forecasting facilitates inventory reduction and
requires an accurate picture of what demand will look like in the future (Green, n.d.).
Demand forecasting can be approached in various ways, but it generally falls into one of two categories:
• Quantitative forecasting: utilises statistical modelling to predict future sales figures, and often may take
into account current and historical trends
• Qualitative forecasting: this method is less mathematical and more intuition-based or subjective. In
situations where there is little or no historical data, as in the case of a new product, there is a need to rely
on human expertise and intuition. Demand forecasters can therefore often take into account factors that
statistical models cannot turn into mathematical equations.
2.4.2 Aggregate planning
The aim of aggregate planning is to set overall output levels in the near to medium future in the face of
fluctuating or uncertain demands. The role of aggregate planning is to match supply and demand for output
over a period of time. This may involve a plan for the next 12 months, for example. Aggregate implies that
the plan is for a single amount, for example, 2 000 vehicles of various models per annum, or 150 vehicles of
a specific model or product category per month. Planning in this way might also allow for the opportunity to
influence demand by running marketing and promotional campaigns to boost sales, for example when a new
model is due.
2.4.3 Sales and operations planning
Sales and operations planning involves a coordinated process of decision-making that seeks to balance the
demand for goods with the supply of goods, but with clear integration with the financial and operational
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processes of the organisation. A strong link to high-level corporate strategy is vitally important as these drive
the day-to-day operations of the organisation (Wallace, 1999).
Sales and operations planning (S&OP) was initially proposed and developed in the1980s by Oliver Wight
(Sheldon, 2006) as an integrated business management process developed to allow the executives of
organisations to continually establish and strengthen the focus, alignment and synchronisation between the
various functions of the organisation. It includes accurate and up-to-date forecasting which allows for clear
sales, production, inventory, and customer lead time (or order delivery time) plans. New product
development, strategic initiatives and financial plans are all driven through the S&OP planning process and
ultimately will enable effective and efficient supply chain management.
2.4.4 Coordination and management
Coordination and management of the supply chain is important in that the more complex the supply chain,
the more time, effort and expertise needed to support the integration and management process within the
supply chain. A number of management components that need attention when managing the supply
relationships have been identified by Lambert and Cooper (2000) (Cooper, Lambert & Pagh, 1997):
• planning and control
• work structure
• organisation structure
• product flow facility structure
• information flow facility structure
• management methods
• power and leadership structure
• risk and reward structure
• culture and attitude.
2.5 Inventory in the supply chain
Inventory management, or the management of the raw materials, the work in process and all the finished
products of a supply chain (Felea, 2008), is primarily about specifying the various different types of stocked
goods, and the percentage or ratios of stocked goods. Different locations within the supply chain, or within a
specific factory or warehouse, require different inventory levels to allow for a normal course of production.
2.5.1 Economies of scale
Inventory in an ideal situation needs to be minimised. As soon as inventory exists, it needs to be managed.
Realistically it is more cost efficient to purchase inventory in bulk, as transport and costs are then minimised.
This process allows organisations to minimise costs. It is called an economy of scale, and involves bulk
buying, movement and bulk storage of raw materials and finished goods, but therefore requires the holding of
inventory.
2.5.2 Uncertainty
Inventories also need to be maintained as buffers to meet uncertainties in demand, supply and movements of
goods. The economic environment, political uncertainty, labour instability, logistics complexity, and location
may all play a role in increasing the need to keep inventory, allowing a production process to continue when
the supply chain is not running in an efficient manner. Organisations cannot afford to run out of inputs, which
would mean a halting of the production process. An excellent example of the impact of a natural disaster
affecting inventory holdings and production was the Tohoku earthquake and tsunami on 11 March 2011 in
Japan. It led to widespread disruption of production across the world, and due to inventory shortages, forced
production in many industries to be halted or slowed.
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Tohoku earthquake and tsunami on 11 March 2011 in Japan
(SOURCE: www.japansociety.org.uk)
2.5.3 Product availability
Inventory levels can influence product availability especially during times when high demand puts increased
pressure on the production process. Ideally inventory levels should be minimised, but some inventory is
required when demand is expected to exceed supply, for example, when a promotion is going to increase
forecasted sales. Promotions can also be used to clear high levels of inventory which may have been caused
by a decrease in sales due to various factors. It may also be necessary to hold inventory when lead times from
suppliers are high or some uncertainty exists due to complexities or inefficiencies in the logistics process.
2.6 Logistics and transportation in the supply chain
The management of the flow of resources between the supplier and the point of purchaser in order to meet
some requirements is known as logistics. The main goal of logistics management is the minimisation of time
and costs across the supply chain. Many different types of resources can be managed in logistics and include
physical items such as food, materials, equipment, liquids and people, as well as abstract items such as
information. The logistics of physical items usually involves the various processes of information flow,
materials handling, production of goods, packaging of goods, inventory management, transportation of
goods, warehousing management, and often security of inventory.
2.7 Other supply chain influences
2.7.1 Pricing and revenue management
Pricing is an important process to increase profits within the supply chain, as it facilitates the matching
supply and demand variables. Revenue management is the use of clear and focused pricing to maximise
profit available from supply chain assets. Building relationships between suppliers and purchasers allows for
a win-win situation to arise whereby everyone in the supply chain has the opportunity to benefit from a
consumer demand for goods (Chopra & Meindl, 2007).
The use of supply chain assets needs to be maximised by maximising capacity and reducing inventory.
Capacity assets exist in production, transportation and storage, while inventory assets exist in the whole
supply chain and facilitate product availability (Chopra & Meindl, 2007).
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2.7.2 E-business
E-business is the execution of business transactions over the internet. Supply chain transactions that involve
e-business include the flow of information, product and funds. Various cost impacts can be associated with
the effective implementation of e-business within the supply chain, including:
• a reduction of product handling with a shorter supply chain
• a delay in product differentiation until after an order is placed
• a decrease in delivery cost and time with products that could be transferred electronically, for example, a
software or music download
• the reducing facility
• handling and processing costs
• a decrease in inventory costs
• improved supply chain coordination through more accurate and even real-time information sharing.
2.7.3 Information technology (IT)
The effective utilisation of information technology (IT) is considered a vital requirement for managing
multicompany, multi-echelon networks, and has been associated with significant supply chain efficiency
improvements (Cooper, Lambert & Pagh, 1997; Lee & Billington, 1992; White & Pearson, 2001). IT can link
the various SC member organisations in a real time, accurate and extremely efficient manner, which can
allow for huge efficiencies and real-time inventory management and logistics and warehousing savings.
Payment processes can be automated and JIT ordering and delivery can be facilitated.
2.7.4 Stakeholders and partnerships
Partnerships and strong stakeholder relationships are an important component that needs to be in place.
Implementing supply chain management is the formation of appropriate linkages or partnerships between the
various members of the supply chain. Partnerships are costly in terms of the time commitments and
management effort required, and a firm needs to be careful before partnering, as it is not possible to partner
with every supplier, customer or third-party provider. It is important to allocate only those resources that are
required to build those relationships which will truly benefit from a partnership (Supply Chain Management
Institute, n.d.).
Partnerships enable:
• the leveraging of existing skills and processes
• management to look at business through new eyes
• the identification and development of new product and market opportunities
• shorter decision-making cycles
• increased market share, revenue, profit, brand loyalty.
Well-defined and efficient partnerships also allow for a reduction in environmental footprint and related risk
factors, and furthermore lead to increased sustainability of all the partners (Natural Logic Inc., 2003).
2.7.5 Sustainability
Supply chain sustainability is a business issue which can have a significant effect on organisations’ supply
chains or logistics networks. Consumers have in recent times become more aware of the environmental
impact of their purchases. They are now using sustainability as an agenda for moving to sustainably grown or
organically grown foods, fair labour use in production, and locally produced goods that support local
businesses. We can define sustainable supply chain management as the management of material and
information in a sustainable way, and this can include cooperation among partners along the supply chain.
The three core goals of sustainable development are the primary focus. This entails managing economic,
environmental and social, and stakeholder requirements. Environmental and social criteria are fulfilled in
order for members to be eligible to remain within the supply chain, but the expectation is that all
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organisations will strive to be competitive, while meeting customer needs and economic criteria (Seuring,
Sarkis, Müller & Rao, 2008). In many cases the sustainable supply chain also facilitates and manages the
collection of goods after consumer use for recycling.
FIGURE 2.2 Sustainable development (Venn diagram)
(SOURCE: Adapted: Adams, W.M. 2006. ‘The Future of Sustainability: Re-thinking Environment and Development in the
Twenty-first Century’, Report of the IUCN Renowned Thinkers Meeting, 29–31 January 2006. http://upload.wikimedia.org
/wikipedia/commons/thumb/7/70/Sustainable_development.svg/800px-Sustainable_development.svg.png)
2.7.6 Globalisation
Globalisation and technology improvements are revolutionising supply chains. Product designers, marketers
and manufacturers that were housed in individual locations are now dispersed over several areas and maybe
even continents and may involve different cultures, languages and business strategies (Johnson, 2006).
These changes have introduced more risks and challenges, such as short product lifespan and uncertain
customer demand. The introduction of lean, or JIT, driven supply chains reduces inventory costs, but is at
risk of being severely disrupted by natural disasters, for example earthquakes, or global pandemics (Johnson,
2006).
2.8 Supply chain challenges
According to the Supply Chain Council, there are five common supply chain challenges, which are
summarised below (Supply Chain Council, 2012).
1 Customer service: Effective supply chain management is all about delivering to customer expectations
and needs. This means producing the right product, quantity and in the right condition, and also
delivering to the correct location and at the correct price.
2 Cost control: Supply chain operating costs are very significant and include increased transport costs, a
global customer base, frequent technology upgrades, rising labour costs, diverse regulatory requirements,
and high commodity prices. Metrics can be used to monitor and help control these costs, as the SC is
measured and then managed according to requirements. SC managers need to focus on the key areas of
cost and drive these down initially, moving then to other costs, and so forth.
3 Planning and risk management: Supply chains must be regularly evaluated and redesigned as market
fluctuations and movements drive innovation and change. Supply chain risks must be identified,
described, evaluated and then mitigated against.
4 Supplier/partner relationship management: Communication both internally between departments and
externally with suppliers and partners needs to be clear, and different methods for measuring and
communicating performance expectations and results can make this difficult. Trust needs to be developed
as managers make a choice to follow mutually agreed upon standards and metrics, understand current
performance and drive improvement.
5 Talent: Talent identification, acquisition, training and development are becoming increasingly important
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parts of the supply chain leader’s role. The key competencies and the roles of the supply chain manager
and staff, and specific job criteria and qualifications need to be clearly identified, and an aggressive
recruitment programme needs to be supported by the organisation as a whole. The correct staff in the
correct positions will deliver an effective and efficient supply chain leadership and management.
Other challenges may also include:
• rising transportation rates
• ability to form deeper relationships with supply chain partners
• increasing customer expectations
• changing regulatory requirements
• keeping up with new technology capabilities and investments
• ability to find, train and keep people with the right skills
• globalisation of customers and suppliers.
CLOSING EXAMPLE
Woolworths suffers chicken shortage
Johannesburg 6 March 2013 – Woolworths Holdings is experiencing a shortage of chicken at various stores
across Gauteng following a disruption to the municipal water supply in Potchefstroom, where several of its
suppliers are based.
A staff member at one of the two stores would only say that the retailer had experienced ‘issues’ with its
chicken supplies.
‘Chicken deliveries to Woolworths Gauteng stores have been slowed by a disruption in the municipal
water supply in Potchefstroom where key regional suppliers are based,’ Woolworths said in a written
response to questions from Finweek.
‘We have supplemented supply to these stores with product from other suppliers in other regions. We
expect supply to be back to normal in the next few days.’
South Africa is reeling from a meat scandal similar to the one that rocked the UK in recent weeks, in
which horse flesh was found in products that were proclaimed to be beef.
DNA tests conducted by scientists at the University of Stellenbosch found that certain meat products
sold in SA, including sausages and hamburger patties, contained traces of goat, water buffalo, donkey and
other unlisted meat ingredients.
A separate study by the University of the Western Cape found that 100 of 146 biltong samples that it
tested contained undeclared meat species including horse, pork and kangaroo.
(SOURCE: FMCG Supplier News, 2013. http://www.fastmoving.co.za/news/supplier-news-17/woolworths-suffers-chicken
-shortage-3162)
Summary
In the beginning of the chapter, we explained what a supply chain is and described the role and importance of
the supply chain. The importance of strategy in the supply chain was then highlighted. We defined and
explained supply chain management and discussed various reasons why a supply chain manager is important
in the management of the supply chain. We explained the various drivers in the supply chain, the role of
metrics and their importance in supply chain management. We described the concepts of demand and supply
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in the supply chain and how customer requirements and expectations affect the demand and supply sides of a
supply chain. We described the impact that inventory has and the concepts of logistics and transportation.
Finally, we discussed the various influences and challenges that affect the supply chain and its management.
Key terms
Aggregate planning: An operational activity that prepares a holistic plan for the production process.
Buffer stock: Also called safety stock, this is a term used to describe a level of extra stock that is
maintained to mitigate risk of a shortfall in raw materials or packaging, due to uncertainties in supply
and demand.
Cost of sales: The inventory costs of those goods a business has sold during a particular period.
Customer: The recipient of a good, service, product or idea.
Demand forecasting: The activity of estimating the quantity of a product or service that customers will
purchase.
Distribution channel: Organisations involved in delivering the product to customers.
E-business: The application of information and communication technologies (ICT) in support of all the
activities of business.
Economies of scale: The cost advantages that enterprises obtain due to their size, with cost per unit of
output generally decreasing with increasing scale, as fixed costs are spread out over more units of
output.
Globalisation: The process of international integration arising from the exchange of world views, products,
ideas and other aspects of business and culture.
Inventory: The goods and materials that a business holds for the ultimate purpose of resale.
Just-in-time (JIT): A production strategy that strives to improve return on investment by reducing
inventory.
Logistics management: The part of SCM that plans, implements and controls the forward and reverse flow
and storage of goods, services and related information.
Metrics: A measure of an organisation’s activities and performance.
Strategy: The determination of the basic long-term goals and objectives of an enterprise.
Supplier: Uses tools, raw materials and labour to make things for sale to the organisation.
Supply chain (SC): A system of organisations, people, technology, activities, information and resources
involved in moving a product or service from supplier to customer.
Sustainability: The potential for long-term maintenance of well-being, which has business, environmental,
economic and social dimensions.
Review questions and activities
1 As the supply chain manager of a large multinational, how can you increase customer demand while
lowering global inventories and costs?
2 As a furniture manufacturer in a very competitive luxury furniture manufacturing industry, how do you
improve the profitability of the business by partnering with suppliers and stakeholders in the supply
chain?
3 How can the supply chain manager identify, demonstrate and decrease inventory loss, redundancy and
damage in a supply chain processes?
4 What are the benefits of using IT and e-business to coordinate and link a global supply?
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CASE STUDY 1: NOKIA SUPPLY CHAIN: WEAK LINKS? NOT IF WE CAN
HELP IT.
They say a chain is only as strong as its weakest link. So we do everything we can to ensure there are no
weak links in our supply chain. And if we identify one, we do our best to strengthen it.
As a major global company, we interact with thousands of suppliers every day. This gives us a great
responsibility and we’re committed to ensuring that the highest standards of corporate responsibility are
exercised.
Snapshot of our supply chain:
• As we operate our own global manufacturing network, most manufacturing is done in-house,
complying with our strict internal social and environmental requirements. The first tier of our supplier
network starts after our own manufacturing network.
• Our supply chain consists of around a hundred direct suppliers for hardware, components and parts, as
well as hundreds of software suppliers. We also work with thousands of indirect suppliers who provide
services and equipment needed for our daily operations.
• Our global supply chain begins with raw material extraction and processing, and ends with the
manufacturing of components and final product assembly and distribution.
• There are typically four to eight supplier layers between mining activities and Nokia’s assembly
factories.
• Our supply chain is a network of companies in multiple tiers spread around the world. It delivers goods
and services to our own production sites as well as to our offices worldwide.
(SOURCE: Adapted from Nokia: http://www.nokia.com/global/about-nokia/people-and-planet/supply-chain/supply-chain/)
Case study questions and activities
1 Identify and describe the supply chain issues in the Nokia supply chain.
2 Categorise the issues identified in the case as demand or supply side and describe their impact.
3 Describe who has the responsibility to manage each of the issues, and suggest some solutions for
each issue.
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62
CASE STUDY 2: GOVERNMENT SUPPLY CHAINS UNDER REVIEW
Supply chain management regulations which govern the procurement of goods by state institutions, widely
considered to be the centre of fraud and corruption in government institutions, could come under review.
KwaZulu-Natal Premier Zweli Mkhize told top government leaders – including MECs, heads of
departments, municipal managers and mayors – that supply-chain management would be the subject of
robust debates at the cabinet lekgotla, which opened in Durban on Wednesday.
‘We cannot tolerate the image of the province being tainted… If we think there are weaknesses, we
have to actually tighten the whole process and regulations,’ said Mkhize.
Supply-chain management and the government tender systems have recently come under scrutiny, with
calls that they should be reviewed with a view to tightening controls.
Public outcry has been triggered by the Manase probe into affairs of the eThekwini metro. It found that
there was massive rigging of tenders and flouting of regulations. This resulted in the irregular expenditure
of more than R2 billion in eThekwini alone.
This week, eThekwini municipal manager Sibusiso Sithole announced that he had moved the
supply-chain management unit from the procurement and infrastructure cluster to the Treasury cluster.
Addressing officials at the first day of the KwaZulu-Natal cabinet lekgotla, Mkhize said supply-chain
regulations were always reviewed. ‘This is because they are about ensuring fairness, competitiveness,
transparency, value-for-money and quality of service.’
He said that such moves were informed by the government’s assessment of internal audit processes, the
forensic reports, the criminal investigations done and court cases.
‘If, after this assessment, we find something that is weak, that must be closed so that we can cut down
on abuses and irregularities,’ he said.
Mkhize said that the government did not want it to seem that the problem was with supply-chain
officials only.
‘Political heads must be seen to be watching what is going on… The issue of clean audits has to be
championed by the premier, the MEC and mayor.’ – The Mercury
(SOURCE: Used with permission of The Mercury, Khumalo, S. 2012. ‘Government supply chains under review’, The Mercury,
16 February; http://www.iol.co.za/news/politics/government-supply-chains-under-review-1.1235563)
Case study questions and activities
1 Identify the various partners/stakeholders in the above case and describe the position in the supply
chain.
2 Illustrate the supply chain using a network diagram (use Figure 2.1 as a guide).
3 Identify and describe the various partnerships and discuss the importance of each using the above
case as a reference.
4 How would you manage this supply chain situation if you were appointed as the supply chain
manager for the KwaZulu-Natal government?
References
1 Adams, W.M. 2006. The future of sustainability: Re-thinking environment and development in the
twenty-first century, Report of the IUCN Renowned Thinkers Meeting, 29–31 January.
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2 Chockalingam, M. 2001. Tracking and measurement of demand forecast accuracy and implications for
safety stock strategies. DemandPlanning.Net.
3 Chopra, S. & Meindl, P. 2007. Supply chain management: Strategy, planning & operations, 3rd ed.
Pearson: Prentice Hall.
4 Cooper, M.C., Lambert, D.M. & Pagh, J. 1997. ‘Supply chain management: More than a new name for
logistics’, The International Journal of Logistics Management, 8:1, 1–14.
5 Department of Trade and Industry. 2008. Industrial development zone (DZI) programme guidelines as at
September 2008. Department of Trade and Industry.
6 Felea, M. 2008. ‘The role of inventory in the supply chain’, The Amfiteatru Economic Journal, Academy
of Economic Studies, Bucharest, Romania, 10:24, 109–121.
7 FMCG Supplier News. 2013. Woolworths suffers chicken shortage. [Online: see websites at the end of
this chapter]
8 Green, S. n.d. Demand forecasting methods in supply chain management: Techniques for predicting
future business inventory needs. [Online: see websites at the end of this chapter]
9 Harland, C.M. 1996. ‘Supply chain management, purchasing and supply management, logistics, vertical
integration, materials management and supply chain dynamics’. In: Slack, N. (ed.) Blackwell
encyclopedic dictionary of operations management. UK: Blackwell.
10 Hines, T. 2004. Supply chain strategies: Customer driven and customer focused. Oxford: Elsevier.
11 Horwitz, C. 2010. Applying demand forecasting and planning in supply chain management.
12 Johnson, E.M. 2006. ‘Supply chain management: Technology, globalization, and policy at a crossroads’,
Interfaces, 36:3, May–June: 191–193.
13 Khumalo, S. 2012. ‘Government supply chains under review’, The Mercury, 16 February. [Online: see
websites at the end of this chapter]
14 Lambert, D.M & Cooper, M.C. 2000. Industrial Marketing Management, 29:65–83. Elsevier.
15 Lee, H. & Billington, C. 1992. ‘Managing supply chain inventory: Pitfalls and opportunities’, Sloan
Management Review, 33:3, 65–73.
16 Management Study Guide. 2012. Supply chain network design & contributing factors. [Online: see
websites at the end of this chapter]
17 Mentzer, J.T., DeWitt, W., Keebler, J.S., Min, S., Nix, N.W., Smith, C.D. & Zacharia, Z.G. 2001.
‘Defining supply chain’, Management. Journal of Business Logistics, 22:2, 1–25.
18 Natural Logic, Inc. 2003. Creating value through strategic supply chain partnerships. [Online: see
websites at the end of this chapter]
19 Ouhimmou, M., D’Amours, S., Beauregard, R., Ait-Kadi, D. & SinghChauhan, S. 2008. ‘Furniture
supply chain tactical planning optimization using a time decomposition approach’, European Journal of
Operational Research, 189:3, 952–970.
20 Seuring, S., Sarkis, J., Müller, M. & Rao, P. 2008 ‘Sustainability and supply chain management – An
introduction to the special issue’, Journal of Cleaner Production, 16:1545–1551.
21 Sheldon, D.H. 2006. World class sales & operations planning: A guide to successful implementation and
robust execution. Florida: J. Ross Publishing.
22 Spacey, J. 2011. ‘12 key metrics for supply chain management’, Simplicable Business Guide. [Online: see
websites at the end of this chapter]
23 Supply Chain Council. 2012. The five most common supply chain challenges. [Online: see websites at the
end of this chapter]
24 Supply Chain Management Institute. n.d. Partnerships in the supply chain. [Online: see websites at the
end of this chapter]
25 Wallace, T.F. 1999. Sales & operations planning: The how-to handbook, 3rd ed. [Online: see websites at
the end of this chapter]
26 White, R. & Pearson, J. 2001, ‘JIT, system integration and customer service’, International Journal of
Physical Distribution & Logistics Management, 31:5, 313–333.
Websites
Visit the websites below.
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64
http://www.fastmoving.co.za/news/supplier-news-19/woolworths-suffers-chicken-shortage-3162
http://www.industryweek.com/global-economy/bouncing-back-supply-chain-risk-management-lessons-post
-tsumani-japan
http://www.nokia.com/global/about-nokia/people-and-plant/supply-chain/supply-chain/
www.cio.com
www.coega.co.za/Content2.aspx?objID=85
www.cscmp.org/
www.ijlm.org/index.htm
www.ism.ws/
www.japansociety.org.uk
www.ohl.com/
www.pfscm.org/
www.richardsbayidz.co.za/Pages/default.aspx
www.sars.gov.za/home.asp?pid=44747
www.scdigest.com/
www.scmr.com/
www.supplychainbrain.com
www.supplychain-forum.com/
www.supply-chain.org
www.supplychainseminars.com/
www.tikzn.co.za/Incentives/Incentives_Industrial_Development_Zones.aspx
The websites below were last accessed on the dates given:
http://blog.simcrest.com/applying-demand-forecasting-and-planning-in-supply-chain-management (10
October 2012)
http://simplicable.com/new/12-key-metrics-for-supply-chain-management (10 October 2012)
http://skylergreene.hubpages.com/hub/Inventory-Forecasting-Methods-in-Supply-Chain-Management (14
October 2012)
http://supply-chain.org/top-supply-chain-challenges (13 December 2012)
http://upload.wikimedia.org/wikipedia/commons/thumb/7/70/Sustainable_development.svg/800px
-Sustainable_development.svg.png (30 January 2013)
www.amfiteatrueconomic.ase.ro/arhiva/pdf/no24/articol_fulltext_pag109.pdf (3 September 2012)
www.fastmoving.co.za/news/supplier-news-17/woolworths-suffers-chicken-shortage-3162 (24 March 2013)
www.ijlm.org/Partnership-in-the-supply-chain.htm (13 September 2012)
www.lcacenter.org/InLCA-LCM03/Friend-Presentation.pdf (3 October 2012)
www.managementstudyguide.com/supply-chain-network-design.htm. (11 November 2012)
www.sciencedirect.com/science/article/pii/S0377221707006698 (14 December 2012)
www.tikzn.co.za/Libraries/incentives_-_pdf_s/IDZ_Operational_Guidelines_Sep08.sflb.ashx (21 March
2013)
www.tfwallace.com (2 October 2012)
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65
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under U.S. or applicable copyright law.
CHAPTER 1
What is operations management?
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
Define and understand the importance and development of operations management and its role in industry
and society at large
Define and understand the scope of operations management
Explain and understand the different management levels in operations management
Identify and compare the plan related to and decisions made on the strategic, operational and tactical
levels in operations management
Explain the characteristics of operations management
Explain the conversion process from inputs to outputs
Identify the associates and functional groups that work together in operations management
Categorise the differences between goods and services
Discuss processes and process operations as major influences on operations management.
CHAPTER outline
1.1
1.2
1.3
1.4
1.4.1
1.4.2
1.5
1.5.1
1.5.2
1.5.3
1.5.4
1.6
1.7
1.7.1
1.7.2
1.7.3
1.7.4
1.8
1.8.1
1.8.2
1.8.3
1.9
1.9.1
1.10
1.10.1
Introduction
Importance of operations management
The development of operations management
The scope of operations management
Function
System
Levels in operations management
Strategy and strategic decisions
Strategic decision-making
Operational and tactical planning in the supply chain
Operational and tactical decisions
Characteristics
The relationship between the different functions within an organisation
The eight Ms of operations management
Operations
Finance
Marketing
Other departments or functions within an organisation
Servitisation
Types of service department found in organisations
The importance of operations departments to society as a whole
Differences between services and goods production
The characteristics of services
The three modes of operations management
Primary operations management
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1.10.2
1.10.3
1.11
1.11.1
1.11.2
Secondary operations management
Tertiary operations management
Operations management structures
Decentralised systems
Centralised systems
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
SETTING THE SCENE
Pick n Pay: From underdog to top dog
Pick n Pay’s history stretches back to 1968, when it was first established by Raymond Ackerman. The
group’s forward-thinking management and its dominance at the lower end of the South African food retail
market have lifted it some way ahead of its peers. In fact, the concept of the modern self-service
supermarket in South Africa is one Pick n Pay pioneered.
However, Pick n Pay became a victim of its own success as its family-controlled structure seemed to
restrict its advancement in the evolving food retail sector. The company’s failure to swiftly adapt to the
changing food retail landscape resulted in its underperformance and losing significant market share, mainly
to Shoprite, Woolworths and Spar.
Shoprite has had a head-start in that it invested in centralised distribution centres and established a
presence in Africa much earlier than its competitors. This has given the group a competitive edge over
other food retailers, especially Pick n Pay.
In addition, Shoprite services a wider range of consumers by targeting low-, middle- and high-income
markets. Pick n Pay, on the other hand, mainly targets the middle- and higher-income markets. Shoprite’s
exposure to the lower-income group (South Africa’s fastest growing market) has been the largest
contributor to its growth in recent years.
Over the past three years, the group has undertaken substantial initiatives to improve its operations. It
has revitalised its warehousing and distribution systems to increase efficiencies, rolled out new store
layouts and formats, significantly improved its house brand (no-name brand and Pick n Pay Choice)
offerings and launched a customer loyalty programme to position the group as a market innovator. If the
success that Clicks has enjoyed with its club card is any indication, Pick n Pay’s smart shopper programme
could be highly beneficial.
Pick n Pay has also increased its push to target the lower-income segments of the South African market.
While it has traditionally been the supermarket of choice for upper-income earners, Pick n Pay has gone a
long way towards penetrating the lower-income segments that have proved so profitable for Shoprite.
After many years of complacency, Pick n Pay is clearly focusing on reclaiming some of its lost market
share. In addition, the imminent appointment of a new CEO and the recent choice of a new chairman could
result in a meaningful change to the company’s operational capabilities. Overall, the outlook for Pick n Pay
has improved and we believe that the company’s new initiatives will result in a major earnings recovery.
However, Pick n Pay is still quite a long way from Shoprite in that they are now implementing things
that they should have been doing five or six years ago, and they are things that take quite a long time to do.
(SOURCE: Davids, A. & Lioma, R. 2012. ‘Pick n Pay: from underdog to top dog?’ UP Kagiso Asset Management Quarterly,
11–16. Available at: http://www.kagisoam.com/upload/website/files/news/Pick%20n%20Pay_from%20underdog%20to
%20top%20dog.pdf)
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1.1 Introduction
What does operations management involve? Answering the question means that a holistic view of operations
management should be investigated. The intricate processes utilised to deliver goods and services must be
reflected on. From the inception to production, identifying and tracking down raw materials, processes
required for the product or service have to be catered for. Relationships between different functional areas
must be fostered and the relationships must be sustainable over time. A global perspective towards the
management of operations is required, especially since South Africa has joined the club of developing
nations, namely Brazil, Russia, India, China and South Africa (BRICS). It is therefore imperative that South
Africa sustains a competitive edge in manufacturing and delivering world class services.
Operations management can be defined as the management of processes exploited to conceive, deliver,
create and distribute goods and services to customers that are value adding. The management of processes is
done by planning, organising, leading and controlling the processes that transform inputs into the required
outputs. Customers require value when buying a product. This value is the structure of a successful and
vibrant organisation. Value added can be defined as the additional value of goods over the cost used to
produce it. To guarantee that value is added, the processes in the conversion of the inputs must be monitored
constantly to identify any problems as soon as they occur. Any problem identified must be rectified
immediately. Operations managers manage all the processes and activities leading to the production of goods
and services.
1.2 Importance of operations management
The importance of the supply chain in the management of operations management must be understood. This
understanding result would be the coordination of every operational aspect across different functional areas
in an organisation. It is a necessity to coordinate processes external to the organisation’s immediate control
such as suppliers and distributors. Operations management and managing the supply chain would improve
decision-making at the strategic level.
The value added will determine whether the good or service of an organisation will be seen as an order
qualifier, meaning that customers will consider buying it. An order qualifier is identified when a customer
compares different manufacturers’ products to determine which product to buy. A good or service is eligible
as an order qualifier through price, quality, speedy delivery, and so forth. For example, bread bought from a
spaza shop will be identified differently from bread bought from a speciality baker in a shopping centre.
A product produced by an organisation must have all the uniqueness that the customer is looking for in
that product. For example, a person buying a motor vehicle will compare the features of all the vehicles in his
or her price range to determine the vehicle best suited to him- or herself. However, the fact that the buyer has
thought about the product does not necessarily mean the buyer will buy the vehicle.
For the customer to buy the product, it should have the highest percentage of unique characteristics that
the customer wants. If the customer has bought the product, it must have had characteristics that turned it into
an order winner. Such products ensure that an organisation has an economic advantage over its competitors,
as more people will buy its products. Each product that an organisation produces should have its own unique
characteristics that will make it an order winner. For example, speed will be very important when a customer
decides on a courier service, but not when he or she is looking for a postal service. Order-winner
characteristics can change very swiftly, both because the requirements of customers might change and
because an organisation’s competitors will incorporate similar characteristics into their products, so products
will not be order winners any more but become simply order qualifiers.
1.3 The development of operations management
Many families would like to know more about their roots and who their ancestors were. It is important to
know how the family has evolved to become what it is today. The same is true for the study of operations
management. It is important to know who the pioneers were. When the manufacturing sector became
prominent following the Industrial Revolution, an operations manager’s task was seen as production
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management. Even in the twenty-first century, the title ‘production manager’ is still widely used in
manufacturing organisations. However, developments over the last few years have enlarged the
responsibilities of production managers to include the management of services and the supply chain, and the
term ‘operations management’ has been coined to encompass these changes.
Even though operations management is a relatively young field of management, it does have a rich
history. This short history outlines the most important innovations and pioneers in the development of
operations management. It also gives an idea of how and why the traditional definition of production
management had to change to include new elements and evolve into what we know today as operations
management. Operations managers need to be familiar with the themes discussed here and should
continuously strive to improve on them.
1.4 The scope of operations management
Grasping the full extent of operations management and supply chain management requires an unambiguous
definition. To that end, it can be defined as all activities involved in the creation, operation and improvement
of the processes and procedures devoted to the production and delivery of an organisation’s principal
products or services.
Compared to finance and marketing, operations and supply chain management is part of the functional
management. It results in an unambiguous line of managerial responsibilities. Supply chain management
entails the management of the entire production system. That means all levels of suppliers to the final
consumer of the product or service. An example is the purchase of a cellphone contract. The service provider,
whether it is MTN, Vodacom, Cell ©™ or 8•ta, would expect to manage the system in its entirety from the
handset provider through the process until it reaches you, the customer.
Ensuring that operations management and supply chain management are fully integrated, the following
three major principles must be understood and adhered to:
• All work undertaken can be classified as a process or a subprocess.
• Each process utilised by an organisation can be improved.
• The resultant improvements must ensure that the organisations’ processes are effective, efficient, low cost
and more robustness.
Table 1.1 depicts subject matter and measures that must be understood to achieve the principles of
effectiveness, efficiency, low cost and robustness.
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TABLE 1.1 Subject matter and measures to achieve principles of effectiveness, efficiency, low cost and robustness
PRINCIPLES
SUBJECT MATTER
MEASURES
Effective
•
•
•
•
•
•
Design of processes
Improving processes
Managing quality
Service quality
Expand new products
Voice of the customer
•
•
•
•
Product performance
Service performance
Process capability
Customer approval rate and
allegiances
Efficient
•
•
•
•
•
Set-up reduction
Theory of constraints
Project management
Time-based competition
Mass customisation
•
•
•
•
Theory of constraints
Lean measures
Learning curves
Cycle time and lead time
Low cost
•
•
•
•
•
Capacity management
Supply chain management
Inventory management
Design for manufacture (DFM)
Demand management
•
•
•
•
Inventory counting
Forecasting error
Equipment utilisation
Costing
Robust
•
•
Green supply chain
Failure Mode and Effects Analysis
(FMEA)
Health and safety
Balanced score card
Operations strategy
•
•
•
•
•
Risk assessment
Environment
Triple bottom line
Income statement
Safety failures
•
•
•
The first principle states that all work undertaken in operations management can be classified as a process or
subprocess. A process can be described as being effective if a product or service is produced in a reliable
manner. Thus the product meets or exceeds customer expectations. It is achieved through listening to the
voice of the customer (VOC). Efficient processes produce a product or service in less time. A wider range of
products are produced (customisation). It is achieved through the minimisation of the cycle time in the
production process. Low cost processes minimise cost through balancing supply and demand. It is achieved
through the reduction of non-value adding operations. Robust processes satisfy the higher-level strategies of
an organisation. Thus it becomes more robust. Processes are aligned with the organisation’s strategies on
sustainability, health and safety and goals.
1.4.1 Function
The three major functional areas of an organisation are operations, finance and marketing. In a manufacturing
industry, operations produce the goods. In a service organisation, this department may be referred to as the
operations department. In the general set-up of an organisation, operations refer to that part of the
organisation that produces the goods or service. The relationship and interaction between functions will be
discussed in detail later in the chapter.
1.4.2 System
The organisation as a whole can furthermore be seen as a system. The main purpose of the system is to
generate a profit. To achieve the goal, the main system can be divided into subsystems. The most important
subsystems in the organisational system are operations, finance and marketing. A decision that is made in any
one of the three subsystems will influence what will happen not only in the other subsystems, but also in the
entire system. A decision that seems to be logical to the operations department may seem illogical to the
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other departments. For example, let us assume the Ford Motor Company’s marketing department decides that
there is a need for a small motor car model with an engine capacity of 850cc. The market research may
indicate that the decision is logical. For the production department it will mean that it has to find additional
capacity to produce the car. To this department the decision may seem illogical. A possible consequence of
the decision on the system may be that the financial resources become stretched beyond capacity. Therefore,
before the decision can be made, the entire system must be consulted to determine the impact on each of the
subsystems and on the whole.
The following are some of the areas in which operations managers are involved:
• Quality management
• Product design
• Process design and implementation
• Factory design and layout
• Human resource management
• Planning and control
• Project management
• Supply chain management
• Inventory management.
The following are examples of management positions related to operations management:
• Plant manager/director
• Factory manager/director
• Manufacturing manager/director
• Quality or assurance manager/director
• Supply chain manager/director
• IT manager/director.
The following are examples of what operations managers might do in various work environments:
• In a vehicle-manufacturing plant, the operations manager would manage every resource that enables the
plant to meet the demand for cars.
• In a hospital, the operations manager would, for example, manage all functions, such as patient
admission, scheduling of theatres for surgery, and shift schedules for nursing staff.
• In a bank, the operations manager would schedule teller staff, produce management reports, and ensure
that enough money is available to service the needs of customers.
• In a cleaning company, the operations manager would manage the scheduling of cleaning crews, set up
schedules for the cleaning of different office buildings, and forecast the amount of cleaning materials
required.
• In a university, the operations manager would schedule student registrations, examinations, timetables,
and maintenance schedules.
• In a retail company, the operations manager would control stock levels, forecast replacement inventory,
and schedule till operators.
• In a government department, the operations manager would manage waiting rooms for clients and be
responsible for the management of processes such as computer systems to process documents, staffing
requirements, scheduling of jobs, and quality control.
1.5 Levels in operations management
In order to manage operations properly, an operations manager cannot neglect the areas or levels of strategic
(long-term), tactical (medium-term), and operational planning and control (short-term) management and the
decisions made on each level.
1.5.1 Strategy and strategic decisions
The task of defining or characterising a strategy for an organisation is an intimidating exploit. A major reason
people find the endeavour intimidating, is due to the abundant considerations implied. In the current business
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environment organisations and the products produced by them are escalating in sophistication. As a result it
becomes increasingly demanding to locate an effective commencement point during the decision-making
process.
Operational strategy involves decisions about the customer, customer requirements and continuous
assessments of the extent of customer need satisfaction. Diagram 1.1 depicts the basic structure of modern
organisations as far as strategy is concerned.
FIGURE 1.1 Basic structure of modern organisations as far as strategy is concerned
1 The bottom right of the pyramid represents the decisions regarding who the organisation’s customers are.
The decision made about the customer must translate into the market the organisation wishes to service. It
means any decision must bear in mind the needs of the existing customers, as well as customer groupings
in the target market.
2 The pinnacle of the pyramid represents the customer requirements as expressed by the customers. Any
decision must take cognisance of the value the customer would receive from usage of the product or
service. At this level it would be established what the customer would be willing to pay for the product or
service.
3 The bottom left of the pyramid establishes the manner in which the organisation would satisfy customer
requirements.
The decision areas depicted above can be divided into external and internal influences on the strategy and
decision-making. The external influences are the bottom right and top of the pyramid. The only internal
strategy decision influence is the bottom left point of the pyramid.
The major objectives of operations management strategic decision-making are:
• Guaranteeing the availability of the eight Ms (discussed later on in this chapter) or inputs to satisfy the
needs of the transformation process.
• Guaranteeing the production of products or rendering of services to customers to the exclusion of
competitors’ products or services. The organisation’s offering should therefore satisfy customer needs
continuously.
• Guaranteeing that the decisions made would direct the organisation by delineating the extent of the
activities undertaken.
Bearing the aforementioned in mind, it is apparent that organisational strategy does not have to be
convoluted. It illustrates that management has to answer certain questions that would assist in the
simplification of strategies. These questions are:
• About comparing or benchmarking the current state of the organisation. How does it compare with the
direct competitors?
• Where will the organisation be in the future?
• How does the organisation move from the current state to the future state?
1.5.2 Strategic decision-making
Guaranteeing an effective and efficient supply chain, operations managers have to answer the following
questions truthfully:
1 What
• are the activities, goods or services that the organisation wishes to deliver to its customer base?
• are the characteristics of the product or service customers have identified?
• are the activities, resources, equipment and labour required and how would management control and
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allocate the scarce resources?
2 How
• will the organisation conceive, manufacture and provide the product or service?
• much of the product or service has to be provided by the transformation process?
• would the effectiveness and efficiency of the process be measured?
3 When
• would production take place?
• would each operation take place and in which sequence?
• would a service be delivered?
• would capacity of the equipment be utilised?
4 Where and who
• where would the production activities be undertaken?
• who would be responsible for each activity?
• who would be the organisation’s suppliers?
In answering the aforementioned four questions, management will set the strategic decision pattern for the
organisation. Five major strategic decision-making areas can be identified:
1 Certainty in decision environment: Information is the major input in any decision taken. Information by
its nature is blurred and ambiguous. Due to the sheer size of the business environment, it is impossible to
have an inclusive picture of what is occurring. The problem most often experienced is the unavailability
of data to utilise in the decision-making process. Consequently, a major characteristic of decision-making
is that it is speculative by nature. Too often management sees decision-making as an educated guess. This
type of behaviour could have dire consequences for an organisation.
2 Price of decisions: Every decision taken has a price affixed to it. Taking certain decisions can influence
organisations profoundly, including the manner in which the organisation conducts its business.
Operational decisions only influence the department in which the decision has been taken and
implemented.
3 Degree of intricacy of decisions: Many unconnected and miscellaneous issues ultimately influence the
decision-making process. Issues such as process capabilities, direct competitors, customer requirements,
political climate and the state of the economy have a direct influence on the decision-making process.
Some or all of the aforementioned issues could occur simultaneously. Organisations, irrespective of their
size, should have a good grasp of and manage a myriad of arbitrary interrelated issues.
4 Time horizons: Decisions at the strategic level of the business as a rule are long-term decisions. It is
planning for the future and can have a time horizon from as short as five years to 25 plus years in the
future. Conversely, operational decisions are for the immediate future. The time horizon for this type of
decision could be as short as a couple of days, weeks or months. The type of industry would establish
what long-term decision would be for an organisation operating in that environment.
5 Activity span: The strategic decisions may influence various areas of an organisation. It could include
the geographical area of operations. At the operational level, decisions are concerned with the manner in
which operations are undertaken and processes managed. It would include processes, tools and skills
needs.
1.5.3
Operational and tactical planning in the supply chain
The supply chain faces many challenges. It becomes imperative for the functional areas within the supply
chain to collaborate occasionally. The collaboration could include the setting of forecasts and computing
demand for products or services. The functional areas collaborate in regards to the inputs into the system,
resource exploitation and processes required to produce the products or services. Tactical planning in an
organisation includes sales and operational planning. This is the planning function where the customer is
identified, and targeted demands for products and services are computed. During the planning phase
inventory levels for satisfying customer demand and capacity requirements for production are established.
Operational planning concerns itself with demand planning, material planning as well as capacity
requirements for individual products instead of families of products. Tactical planning can be planning
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actions months in advance, whereas operational planning actions are undertaken over a shorter time horizon.
Usually the time horizon is a number of days or at the most a few weeks.
At the most basic level, the major responsibility of a manager is that of decision-making.
1.5.4
Operational and tactical decisions
Decision-making can be classified as a process, starting with identifying the problem or aspect on which a
decision needs to be made, identifying limitations and alternatives, evaluating alternatives, and selecting and
implementing the best alternative. The process differs from the pure manufacturing process. The major
difference is that the decision process does not produce a tangible end product like the production process.
Intangible decisions impact on the tangible production process. Operations and supply chain managers have
to answer particular important questions, such as:
• What? – Ascertain the exact operations and products or services to be provided by the system. It would
result in the exact products to be produced by listening to the voice of the customer. Decide on the
equipment and operations required and the manner it should be developed, assigned and monitored.
• How? – Ascertain the manner in which the product or service will be created, produced and provided to
the customer. Decide on the quantities of the products that the production system should deliver by the
transformation process. Decide on the manner of assessment for system performance.
• When? – The exact time for production must be decided on, and the operations required to achieve the
targets. Decide on the date when the facilities must be ready for production and compute the capacity
of the system.
• Where and who? – Ascertain the sequence in which operations should be undertaken. Ascertain the type
of employee to be employed. Decide on the most suitable suppliers to partner with.
Answering the above questions necessitates that managers must make decisions in the following five major
areas, namely, plan, supply, create, provide and send back. The following list portrays the responsibilities
involved in each one:
1 Plan: These decisions impact on the operations of the contemporary supply chain. Planning is an integral
part of strategic management. The major element of planning is contemplating demand for products and
the resources necessary to fulfil the demand. Metrics have to be developed to measure the
effectiveness and efficiency of processes. Product and service quality will be influenced by the quality
of the original planning process. The planning process ensures that value is added to products and
services delivered to customers.
2 Supply: Ascertain which of the suppliers are best suited to supply raw materials to the organisation. The
supplier chosen must be able to deliver to the exact specifications set by the organisation. Organisations
evaluate suppliers on factors such as price, delivery and payment before a decision is taken and before a
liaison is formed with a supplier. Supplier performance must be constantly monitored to improve the
relationship between supplier and organisation. Major areas of concern during the supply process are
stores receiving, verifying the correctness of goods received and transfer of the raw materials to where
they are required.
3 Create: This represents the major products manufactured by the organisation. Scheduling of work,
employees, equipment and materials must be undertaken to guarantee on-time delivery of products or
services. Metrics must be developed that measure and analyse speed, quality and productivity. The
metrics are used to monitor the overall production performance.
4 Provide: This represents the last step in the transformation process. This stage is where finished goods
and customers are brought together. Logistic organisations such as Imperial Logistics or value logistics
would deliver finished goods to customers. To be successful, the process must be accurately scheduled
and coordinated. Correct invoicing of the customer is an important function of this process. It ensures that
the producer receives payment for the goods delivered.
5 Send back: A manufacturer must have a process in situ that would ensure that defective goods could be
returned. Returned goods and complaints by customers must be addressed in a timely manner. In a
service organisation, this function is the response action after a customer has lodged a complaint. It is part
of the after-sales service provided to the customer.
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DISCUSSION
Pick n Pay: from underdog to top dog
Read the situation discussed in the setting-the-scene box at the beginning of the chapter. Answer the
following questions and provide examples to illustrate your answers.
1. What strategic decisions did Pick n Pay make to turn its operations around?
2. Which areas in operational and tactical decision-making were included during the turnaround?
1.6 Characteristics
Analyse any type of organisation and it becomes apparent that they all have a single factor in common.
Everyone converts some kind of input to an output which is represented by finished goods or services. How
the final product or service comes into being varies significantly. Four major areas can be identified. They are
known as the four Vs:
1 The volume of completed products that is produced in time. The volume of a particular product or
service is produced during a specific measured time period. It will determine the type of organisation that
the operations manager will manage. This is known as high-volume production. Examples are found in
the fast food industry such as KFC, Steers, and Debonairs Pizza. Another class is fast moving consumer
goods (FMCG). In this group are included grocery products and cold drinks. Examples are KOO
products. High-volume goods are a prime example of investment in specialised equipment.
2 The variety or span of diversity of goods or services that is produced. The diversity is measured by the
number of models of a particular product or service produced. In the automotive industry a basic model is
produced and by adding different options, a different version of the same model is available. Examples
are the different models of the same variant of their popular models produced by Toyota, VW, Audi, Ford
and other car manufacturers. The result is that the process is very specific. A characteristic is the fact that
specialised equipment and staff are required.
3 Variation in the demand for products or services is the demand for a specific number of the product or
service. It is represented by the quantity of the product or service consumed over a measured period of
time. It can be a day, week, month or year, for example, the number of units produced per hour, day,
week or month. Therefore it would become routine to say that an automotive factory has produced 100
vehicles per day. In a service environment a dentist can determine the number of patients requiring his
services.
4 The fourth and final V is that of variability in the product or service. It alludes to whether customers can
see the manufacturing process or rendering of the service. This is more likely to occur in the service
environment. Not many consumers know what the manufacturing process of a vehicle looks like. In
contrast, some processes of services can be observed by the customer. For example, a patient will observe
a doctor during the consultation process and when prescribing medicines. Some parts of the process may
be invisible, for example, an operation to remove an appendix. Another example is depositing money
at a bank. The visible process is the teller receiving, counting and putting money in the drawer. The
invisible part takes place in the back office where reconciliation of the day’s takings is undertaken.
1.7 The relationship between the different functions within an
organisation
The different goals of an organisation are more easily achieved if those goals are pursued by a group of
people rather than by individuals. The objective of most organisations is to produce a good or service for
profit. The three major functional areas of operations, finance and marketing – as well as their supporting
functions – perform quite different activities, but are all interrelated.
Figure 1.2 illustrates this relationship in a manufacturing organisation named Khumalo Enterprises (Pty)
Ltd.
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FIGURE 1.2 The relationship between the three major functional areas of operations, finance and marketing in a
manufacturing organisation named Khumalo Enterprises (Pty) Ltd
In most companies, personnel in each of these three departments think that their department is the most
important one in the organisation. However, no department can claim that it can exist on its own within an
organisation and that it does not need help from, or have to relate to, other departments. The performance of
each individual department is very important to the success of an organisation. Unfortunately, that is only
half the picture. The other half of the organisation’s success depends on how well an individual department
interacts with the rest of the organisation.
An example of this interaction or interface can be seen in the collaboration between the operations
department and the accounting department. Without this collaboration, the operations department will deliver
goods to the customer, and, unless the accounting department is informed that a delivery has taken place, it
cannot collect the money owed to the company by the customer. This will result in the organisation having
no money available to purchase new raw materials for production, as it will be unable to pay its creditors.
Sections 1.7.2 to 1.7.4 and 1.8 will present a more detailed discussion of all the functions in an organisation.
Before the discussion of the different functions, it is essential to discuss the eight Ms of operations
management, which serve as the inputs to the operations function.
1.7.1
The eight Ms of operations management
As indicated earlier, operations management is the planning, organising, leading and controlling of the
processes that transform inputs into the required outputs. It involves managing systems or processes that are
utilised to produce goods and create services in transforming the inputs or assets of money, materials,
machines, management, manpower (human resources), methods, messages and markets (the eight Ms) into
the required outputs of goods and services that customers need. The eight Ms of operations management can
be described as follows:
1 Money. This is the finance available to produce the respective goods and services. An operations
manager facilitates this process by means of budgets. Time is money and must be managed effectively
and efficiently. Think about it: if you lose time, you never regain it nor can you replace it. Time cannot be
bought from the local supermarket. For this reason, the use of time must be maximised by, for instance,
reducing the lead time so that the goods and services are available in the shortest possible time.
2 Manpower (human resources). This is also known as labour. It involves the selection, mentoring,
training and rewarding of the workforce. The operations manager is also involved in job structuring and
performance management and is responsible for counselling and disciplining the workforce when the
need arises.
3 Materials. An operations manager is responsible for obtaining, storing, and the quality of all materials
that are required in the manufacture of goods or rendering of a service. He or she is also responsible for
the materials during the conversion process and for the quality of finished goods and services. Another
duty of the operations manager is the safe keeping of finished goods.
4 Methods. An operations manager needs to choose and design effective systems, subsystems and
processes that will guarantee optimisation in the use of resources and facilitate the manufacture of a good
or the provision of services.
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5 Management. An operations manager is involved in setting up organisational structures that will assist
management in its roles of planning, organising, leading and controlling.
6 Machines. The operations manager must be experienced in the latest technology required to transform
the 8Ms with the least wastage possible. He or she has to ensure that the machinery utilised for the
production of goods and services is reliable and well maintained. This can be achieved through
implementing the correct maintenance programmes.
7 Messages. Messages are the communication between departments, management and employees.
Messages can be the material requirements plan (MRP), the master production schedule (MPS) or the
budget available for producing goods or rendering a service.
8 Markets. An operations manager has to be aware of the markets and market segments in which the
organisation envisages operating. The information gathered from the marketplace by the marketing
department will determine the demand for the organisation’s goods and/or services.
TABLE 1.2 Operations in various organisations
ORGANISATION
INPUTS
OPERATIONS
OUTPUTS
Farm (e.g. ZZ2)
Seeds
Fertiliser
Fields
Tilling
Planting
Growing
Maize
Tobacco
Vegetables
Coal mine (e.g. Matla or
Matimba)
Miners
Tools
Extraction
Removing waste
Cleaning
Coal
Waste
By-products
Brewery (e.g. SAB)
Hops
Water
Grain
Preparing
Mixing
Brewing
Bottles of beer
Booking tickets
Flying
Entertainment
Satisfied passengers
Freight transported
Airline (e.g. Kulula.com, Aircraft
1time, British Airways)
Terminals
Passengers
Crew
Catering services
1.7.2
Operations
For the purpose of the discussion in this section, ‘operations’ includes all those activities that are directly
related to the production and delivery of goods or services. It therefore exists both in manufacturing and
assembly plants that are goods orientated and in service-orientated organisations. Table 1.3 provides
examples of the wide variety of operations management settings.
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TABLE 1.3 Various operations management settings
ACTIVITY
DEFINITION
EXAMPLES
Goods production
The shape and form of the input is
physically changed
•
•
Transport
The transportation of goods, customers or •
raw materials from where they are to
where they have to be
•
•
Sawing of trees that produce usable
timber
Mixing of flour, salt and yeast into
dough to bake bread
Commuting by minibus taxi from
home to work
Flying with kulula.com from
Johannesburg to Cape Town
Using XPS courier services
Distribution and
storage
The stocking and supply of materials until •
needed by customers
•
Managing the stock at retail outlets
such as Spar
Vending machines that dispense cold
drinks, sweets or sandwiches
Information
Transferring important information to
customers
Watching the news on e-TV
Advertising
Consulting a doctor
Attending a lecture
•
•
•
•
Operations is the core activity of any organisation. Understanding the importance of the transformation
process is very important. The process can be equated to the importance of the heart in the human body. If
the heart is not performing as it should, the body will not function as it should. Therefore, the transformation
process is tasked with producing the goods or services of an organisation.
Inputs (the eight Ms) are used to produce the finished goods or render the service of an organisation. The
inputs go through the transformation process to reach the state of outputs. A distinction has to be made
between two different types of inputs:
• Transformed inputs – the inputs (e.g. material, people, data) that are changed during the operations
• Transforming inputs – the resources that are needed by the operation (these inputs themselves do not
change).
The transformation process is the process whereby value is added to the inputs to ensure that the outputs will
have a higher value. To ensure that the proper transformation process is followed, regular measurements must
be taken. This is the feedback process that will inform an organisation about whether the processes are
performing as they should. The feedback results must be compared with previously set standards, and any
deviation from these must be acted upon. This is the control part of an operations manager’s management
task. Figure 1.3 illustrates the transformation process of inputs to outputs – the process of transforming inputs
(the eight Ms) to outputs (finished goods and services).
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FIGURE 1.3 The transformation process
In Figure 1.3, the arrows at the bottom of the diagram represent the feedback that has to take place on a
continuous basis to ensure the success of the transformation process. The feedback can be from customers
and relate to the goods or services that have been produced. It could consist of complaints about inferior
quality of goods or about services that do not meet the expectations of the customer. The arrow from the
outputs block to the control (or feedback) block represents this. It is a one-way, or reverse, feedback. The
feedback between the feedback block and the transformation process is a two-way feedback. The customer
feedback is given to the transformation process (operations) to rectify whatever caused the complaint. Once
the modification has been completed, operations will give feedback too. The feedback block could represent
the complaints department. Regular feedback also takes place between the complaints department and all the
inputs.
The block at the top of Figure 1.3 represents the value added to a product or service. If all the inputs enter
the transformation process, as the process progresses, the inputs are transformed from the individual inputs
into goods or services. At each stage, the inputs are transformed from a previous state to the next by the work
carried out in the manufacturing process. That is called adding value. The reason for this is that the inputs
come ever closer to the final good or service.
Every operation should add value to the inputs. If this is not the case then the operation should be
removed from the process as it only adds cost and, therefore, reduces the profit on the good or service. Some
processes, though not adding value directly, are still required, for example, transporting work in process from
one machine to the next. The transportation does not add any value, but is necessary so that the next
operation can commence. In such cases, the activity has to be performed as efficiently as possible to
minimise waste.
An important point to remember is that goods and services normally occur jointly. The goods produced in
one operation may be a service in the next operation. An example of a service is a person filling a car with
fuel. The delivery of the fuel to the service station is production of goods.
At the one end of the scale, some goods may have a lot of services attached to them. At the other end of
the scale, there are hardly any services attached to the final good that is produced. Value must be added
whenever a good or service is produced. It is important to understand that value added means the difference
between the cost of the inputs and the price that can be charged for the end result (good or service).
The information above begs this question: What do companies do with the profits that are generated by
their goods and services? Most of the money earned is reinvested in the company. The money is used to
research better goods and services, fund salary increases, develop new goods and services, and pay dividends
to investors. It therefore stands to reason that the higher the value added, the more money will be available to
reinvest in the company.
If an organisation is not productive, it will not have a high value-added component. An organisation can
be regarded as increasing its productivity if it eliminates or reduces waste – the goal should always be to
work smarter instead of harder.
Wherever waste is eliminated, the input costs of products will decrease and the value-added component
will increase. Therefore, the organisation will become more productive. An example of one of the most
wasteful operations is storage of overproduced goods. Money is invested in stock that does not move and
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cannot, therefore, generate any profits. Money has been paid for the raw materials, machine time, wages and
all the costs associated with the storage of the goods. If these costs can be decreased or eliminated, more
value will be added to the good.
1.7.3
Finance
The finance function is important for the well-being of an organisation. It is the department that controls the
organisation’s purse strings. It makes the money available to buy raw materials and new machines, pay
salaries and meet many other costs.
It is important that the personnel in operations and in finance consult each other and keep each other
informed of what is happening in each department, for the following reasons.
Budget setting
In any business, budgets must be prepared to determine what the monetary requirements will be for a specific
period. A budget is a form of forecasting of requirements and has to be changed or adjusted if required.
Therefore, every department must evaluate its spending performance against the budget. The measurement of
actual spending against budgeted figures is called budget control.
The evaluation of possible investment proposals
Before an investment in new machines or facilities can be allowed, the finance department must ensure that
the company will not overspend. At this stage, the operations department and the finance department must
cooperate closely to ensure that the best possible investment is made.
The provision of the funds required that would allow operations
Before the funds can be allocated to all the departments, it is important that the finance department finds the
money required. If funds availability is tight, the finance department decides which funds will be allocated to
whom. This is an important function, which in difficult times can become critical. To avoid dreaded problems
of cash flow, careful planning must be done.
Where does an organisation’s money come from? An organisation obtains money in the ways discussed
below.
Selling goods and services
First and foremost, an organisation earns money by selling its goods or services to customers. For this reason,
it is important that the finance department ensures that all money owed to the organisation is collected as
soon as possible after the delivery of goods or the rendering of a service. The longer the money is owed, the
fewer funds will be available for the organisation to use.
Obtaining loans from banks
Many organisations follow this route to find new sources of finance, especially if major expansions are in the
offing. The biggest drawback of bank loans is the repayment and the interest that must be paid on borrowed
money. This can be a very large drain on an organisation’s earnings.
Issuing shares
If it wishes to use this method, the organisation will float shares on the stock market and investors will buy
the shares at a predetermined price. The money earned this way can then be invested in new machines or
equipment. The issuing of stock by Telkom provides a good example. Telkom made its shares available for
all South Africans to purchase, with previously disadvantaged communities receiving preferential treatment
regarding the number of shares that they could buy and the price they had to pay for them. A shareholder can
sell his or her shares in the organisation to another person whenever he or she pleases. Shares can be issued
only by organisations that are listed on the Johannesburg Securities Exchange (JSE) or another exchange,
such as the New York Stock Exchange (NYSE). Usually an organisation that issues shares has to pay
dividends to its shareholders.
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1.7.4
Marketing
One of the main purposes of a marketing department is to sell the good or service of the organisation. For this
purpose, a marketing department employs representatives who visit customers to get orders and ensure that
customers are kept informed of new offerings coming onto the market. Every business must undertake some
sort of advertising. Even the local spaza shop relies on word-of-mouth advertising.
The marketing department is also at the forefront of determining what customers want from the
organisation. In the short term, these needs are communicated to the operations department. In the long term,
any new needs must be communicated to the design department. Communication is required to ensure that
current products meet the expectations of the customers. The input into the design department is to ensure
that the good or service in the development stage will meet customer requirements. The marketing
department is also a very important source of demand information. The operations department will use these
figures in the planning process. Demand and order figures are used for the planning of human resources and
materials requirements and for a variety of other sorts of planning. It is thus important that close cooperation
takes place between the marketing, operations, and research-and-development departments to ensure the
smooth performance of the operations department.
If the marketing department is performing as it should, it can be a valuable source of information about
what the organisation’s competitors are doing. The representatives of the organisation provide this
information. Their customers tell them of new products that have been launched by the organisation’s
competitors. The customers also inform them if a competitor has lowered its prices.
Another critical function of the marketing department is investigating customer behaviour. To achieve
this, the marketing department does market surveys. A typical market survey takes place in a retail store,
where representatives of the organisation ask specific questions regarding the organisation’s product(s).
Another method involves making use of market research organisations. A typical example of such an
organisation is Ipsos (Pty) Ltd.
Ipsos conducts annual market research on how the electorate of South Africa views the performance of
the governing party as well as how they would vote in future elections. Using these results, political parties
form their strategies for their election campaigns. Most political parties also use their own research
organisations to gather this information from the electorate.
Once all the information has been collected and collated, the marketing, operations and design
departments must work closely together to develop new products. Why do these three departments need to
collaborate? Marketing tells the design department what the customers’ needs are. The design department can
use this information to design goods or services that will meet the customers’ expectations. The operations
department, in turn, decides whether the new good can be manufactured. This function is called determining
the manufacturability of a new good. Blueprinting new services facilitates the smooth delivery of these.
A typical example of the function of the marketing department can be seen in a recent advertisement for
Renault motor vehicles. The advertisement claims that Renault cars meet and even exceed the most stringent
safety standards. The manufacturer demonstrates this through simulating the most serious types of accident.
Another example is the advertisement featuring a little boy who helps his mother work at the zoo.
Notwithstanding the fact that his clothing is very dirty, the advertisement claims that if a mother uses OMO
washing powder, no pre-soaking will be required to help remove the stains before the clothes are washed.
Another very important advantage of this close cooperation is that the operations department is
forewarned if new skills, machinery or materials will be needed to manufacture the new product. The
capacity to produce the new product can be determined well in advance. The finance department must be
incorporated into this process as it will have to determine what funds are available in the short term to finance
the new product and what funds will be needed for the medium to long term to launch the new product
successfully. To entice customers to buy the new product, the operations department must state the new
product’s lead time. Customers will not be willing to wait an extraordinarily long time for a new good or
service; they may go to a competitor to obtain the required product.
1.8 Other departments or functions within an organisation
The departments or functions discussed in this section are service departments. These departments render
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services to the operations department; they are not part of the core business of the organisation. The size of
an organisation will determine how many service departments exist as independent departments. In small to
medium-sized organisations, some of the departments that will be discussed may be combined. In some
instances, small and medium-sized organisations may outsource some of these functions.
1.8.1
Servitisation
With the advent of the 21st century, organisations realised that they had neglected possible income streams.
This did not occur in isolation. It resulted from stagnating demand, higher labour costs, as well as the
interference by government through draconian liability laws. Consequently, organisations needed to find
novel ways to improve their productivity. The harsh reality in today’s business environment is that many
organisations are in distress and are teetering on the brink of bankruptcy. Organisations attempt to find other
means of income by investigating opportunities outside their comfort zone of pure manufacturing.
The most common example is the income that can be derived from servicing products that have been
manufactured by an organisation. This situation occurs due to the persistent transformation and advancement
of the economy over time. The need for change is motivated by technological improvements, resulting in
employees from traditional manufacturing positions migrating to service positions. It is a typical example of
how capitalism evolved due to the division of labour. The evolution brought about an unforeseen diversity of
innovative and less evident support functions in organisations. The support functions can be seen as an
integral part of the manufacturing process.
The service functions that can become part of manufacturing processes usually occur in the supply chain.
Consequently, this type of innovative new income stream becomes attractive. Strategically, organisations
changed from pure manufacturing concerns to an integrated strategy of manufacturing and service delivery.
Implementation of an integrated strategy creates greater value for customers. Many organisations are
grappling with the concept of servitisation. The majority of organisations have realised that well-designed
products do not guarantee them a competitive advantage. A number of challenges have been identified when
service functions are integrated into the traditional manufacturing process. The key concern identified was
the manner of integration of the two concepts that would allow optimisation of the best possible outcome. In
most instances the service component could be identified as supplying spares and consumables related to the
manufacturing of a product.
Servitisation can be defined as a transformation process wherein production organisations embrace a
service orientation and/or develop more and better services, with the aim to:
• satisfy customer’s needs
• enhance the organisation’s performance
• achieve competitive advantages (Marks, et al. 2011:6).
Grasping this complicated setting and making lucid decisions is challenging. The decision-making process
involves a large number of staff from a variety of functional areas. The term ‘servitisation’ was coined to
facilitate the move from pure production to a situation where services are incorporated as part of the
manufacturing process. A typical example can be found in original equipment manufacturers (OEMs). The
success of servitisation is dependent on organisations fully grasping the nature of their business as well as
their customers’ wants and needs.
Three well-defined supplier-customer links have been identified, namely:
1 cooperative service and supply chain management
2 condition-based maintenance as a service
3 communicative asset management which can be described as using product demand in the supply chain as
a management tool.
Organisations frequently ask why it has become necessary to servitise. Three major reasons for servitisation
have been identified, namely:
1 elimination of active competitors from the organisation’s present markets
2 guaranteeing a market where customers have no other option than utilising the existing provider
3 increasing differentiation in product offerings.
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Taking the aforementioned into consideration, it makes sense only if the OEMs’ product has a long life cycle.
In that instance the manufacturer can offer life support for the equipment it sells. A typical example is motor
manufacturers. They would offer the owner of their vehicles a warranty and some form of service plan to
prolong the life of the vehicle.
1.8.2
Types of service department found in organisations
This section lists and discusses the types of service department that may be found in organisations and the
functions of these departments. In practice, these departments might go by other names, even though their
functions remain the same.
Note that the list given is not an exhaustive list of all the service departments that can be found in an
organisation. The departments mentioned are service departments commonly found in the average
organisation.
In smaller organisations, some of the functions described below might be combined in the functions of
other departments. In larger organisations, some of the departments may be split because they would
otherwise be unable to handle the workload.
Accounting department
This department is responsible for financial management and cost and management accounting. The
accounting department manages the cost of the organisation’s labour, raw materials and overheads. Further
responsibilities may include the determination and costing of scrap produced, the cost of machine down time
and the cost of holding inventory.
The management information systems (MIS) department
This department is tasked with providing management with the relevant information that will enable it to
manage effectively and efficiently. This information might include exception reports, budget comparisons
between planned and actual spending, work-in-progress (WIP) reports, and many other things. This
department also assists management to design systems that will enable it to generate the reports required.
Purchasing department or procurement department
An organisation might employ a procurement manager, one of whose tasks it is to ensure that raw materials,
machinery and equipment of the highest quality can be purchased by the organisation. The purchasing
department is responsible for ensuring that sufficient stocks of raw material, supplies and equipment are
available. For this reason, it is very important that a close relationship is fostered between the operations
department and the purchasing department. This will ensure that raw materials, supplies and equipment are
delivered in time and that the production process is continuous. In certain instances this department will
evaluate the organisation’s suppliers for quality, price, delivery and overall performance. Department
inspectors check all the items that have been purchased, to ensure that the correct standards are upheld. The
purchasing department might also source indirect supplies, for example, office furniture.
Human resources department
In some organisations, this department is known as the personnel department. The human resources
department takes responsibility for managing the people working within the organisation. People working in
this department deal with real feelings and emotions and must have empathy with the workforce. This
department’s typical areas of responsibility are training, labour relations, health and safety, salaries,
leave-related issues and other important functions.
The corporate communications department
This department used to be referred to as the public relations department. It is tasked with building and
maintaining a positive public image of the organisation. Most importantly, the department can enhance the
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standing of the organisation in the marketplace. This department will produce information and literature on
the company’s stand concerning the environment, HIV/Aids, labour relations, and assistance to previously
disadvantaged communities.
The quality department or industrial engineering department
This is one of the most important departments that assists the operations department in its aim of making
continuous improvements to products and processes. This department can help in cutting costs associated
with the production of goods and services. It achieves this by setting standard times for the production of
goods or services, doing factory and office layouts, and investigating work methods and incentive schemes.
We discuss industrial engineering in some detail in Chapter 4.
Maintenance department
This department is often treated as rather unimportant. If this is the case, the organisation stands to lose vast
amounts of money due to the breakdown of machines. Preventive maintenance is an important aspect of the
department’s responsibilities. This involves maintaining equipment on an ongoing basis to ensure that it does
not fail, rather than waiting for a failure to occur and only then undertaking the necessary repairs. This
department maintains not only the organisation’s machinery but also its facilities.
Logistics department
The logistics department is responsible for supply chain management (which will be discussed in detail later).
1.8.3
The importance of operations departments to society as a whole
The discussion above proves why operations departments are important for society as a whole. The
consumption of goods and services is at the core of every society all over the world. It is therefore not an
exaggeration to claim that if the operations function did not exist, the other functions could not exist either.
This is because the production of goods and services is at the core of all organisations.
Until the last decade of the twentieth century, most people who had jobs worked in some or other
organisation that produced goods. However, there has been a shift away from manufacturing to the
production of services. This is especially true in highly industrialised countries. In these countries, about 20
per cent of the population is involved in producing goods, while 70 per cent is involved in the service
industry. The remaining 10 per cent is involved in industries such as agriculture, mining and fisheries.
1.9 Differences between services and goods production
What is the difference between goods and services? We discuss the differences in detail later in this section
and refer to both goods and services repeatedly throughout this book.
For the moment, it is important that we note and correct a common misconception: that there is no place
for operations management in the service industry. This is definitely not the case, and the role of operations
managers extends into the area of service management.
In South Africa, operations managers are now employed in banks, post offices, cleaning companies,
major hotels and communications companies. Consider these examples:
• Cellphone production by a company such as Nokia or Motorola is purely an operations function, and the
billing for the cellular company can be classed as a service. Even though MTN, Vodacom or Cell ©™
may sell cellphones, they only render a service and do not produce the cellphones themselves. In both
instances the operations department will play a most important role.
• Kalahari.net provides a service: it sells books, compact discs and a variety of other products that can be
ordered online. Here, too, operations are an extremely important function.
It is clear that there is a difference between the types of organisation that are operating in today’s
marketplace: the difference can be drawn between manufacturing and service organisations. Making a
clear-cut difference is not possible and it is not essential to do so.
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Any manufacturing concern will render some sort of service, even if it is only the provision of customer
satisfaction. A purely service organisation may provide some goods that facilitate its service.
For example, when a motor vehicle is taken for a service, some goods will be used to carry out the
service. These goods include the oil, filters, plugs and parts needed to complete the service satisfactorily.
There is also a distinction to be drawn between production and manufacturing:
• manufacturing is the conversion of a design into a finished product
• production is the physical act of making the product.
In the broader sense, manufacturing consists of a number of production activities.
It is important to understand exactly what it entails to provide goods or services before the differences
between the two can be understood. Table 1.4 illustrates the most important differences between goods and
services.
TABLE 1.4 Differences between goods and services
SERVICES
GOODS
Intangible
Tangible
Provided by service organisations
Produced by manufacturers
Impossible to store
Easy to store
Cannot be transported
Can be transported
Consumption and production at the same time
Delay between production and consumption
Lose value rapidly
Maintain value much longer
Likely to be unique
Less likely to be unique
Interaction between customer and provider is high
Little or no contact between customer and
manufacturer
Participation of customers in the service
Little or no participation of customer
Facility of the service near the customer
Centralised away from customer
Very labour intensive
Mostly automated
Difficult to measure quality
Easier to measure quality
Server determines standard of quality
Does not depend on one person
Cannot measure output accurately
Easier to measure the output
To enable an organisation to satisfy the needs of its customers, the organisation has to:
• define in no uncertain terms – through market research – the good or service that will satisfy the needs
and expectations of the targeted customers
• ensure that the systems and operations developed to produce the good or service are value adding so as to
comply with the expectations of the customers
• establish a proper measurement tool to measure the effectiveness and efficiency of the operational
systems performance
• respond in an effective manner to any feedback received from customers.
The core difference between goods and services is that goods are tangible (touchable) and services are
intangible (cannot be touched). Examples of goods are motor vehicles (manufactured by organisations such
as Toyota, Ford and Mercedes-Benz) or tinned foodstuffs (produced by organisations such as KOO [Tiger
Brands] and Del Monte). Examples of services are the consultations provided by professional people such as
doctors, dentists and attorneys, when patients or customers visit their practices or offices.
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A different way of differentiating between goods and services is to note that the production of goods is a
physical output of a process. The location of a service is usually more important than the location of a
manufacturing concern. The reason for this is that there is more customer interaction in the production of a
service than in the production of goods. An example of this is eating a meal at a restaurant. Customer
interaction is very high because the person serving deals directly with the restaurant’s customer. In contrast,
the farmer who produces the food used at the restaurant will never deal directly with the customer who
consumes his or her produce.
Another way of highlighting the difference is to note that the customers are on the shop floor when a
service is consumed. This is not the case with the consumption of goods. Customers hardly ever see the
inside of the factory that produces the goods they consume. In a service environment, the shop floor may be
the receptionist’s area at the doctor’s consultation rooms, the operating room at a hospital, or an attorney’s
office.
1.9.1
The characteristics of services
It is clear from the discussion above that services differ from goods. Looking at the characteristics of services
will reveal further the ways in which services differ from goods.
Services are intangible and perishable
Many services are intangible, but some of them do have both intangible and tangible components. A credit
card (which is tangible) enables its owner to travel, entertain, buy products, and even save money in the
credit card account (which is intangible). Many services are perishable. Take the example of a garden-service
company that maintains a customer’s garden once a week. If a week passes without the garden-service
company’s visit, the grass will grow wild and the garden will look neglected.
It is difficult to determine a reasonable price for a service because of the intangible nature of services.
The service provider may think that the set price is reasonable, while the client may think otherwise. An
auditor may ask a high fee for doing an audit because he or she has experienced many problems during the
audit and these problems have taken time to solve. The client may be unhappy because he or she is not aware
of the time spent on the audit.
The client forms part of the service
Most services a client receives from an organisation are delivered while the client is present. For example,
imagine a person who has been arrested for drunken driving. The person (client) is in the attorney’s office
furnishing details of the transgression. No tangible transaction is taking place, but after the consultation the
attorney will be better able to render an opinion. The opinion is also intangible.
The relationship between the service provider and the client may lead to certain problems. For example,
the attorney may be a teetotaller and as a result loathe offences related to alcohol. Clients have different tastes
about services. What is a good-quality service for one person may be bad-quality service for another. Many
clients may prefer an attorney with a reputation for winning cases at all costs without compassion for the
client. Others may prefer a more compassionate attorney with a lower rate of success.
The relationship between the service provider and the client can also have its positive points. For
example, a restaurant that supplies food and drinks on a self-service basis can also expect the customers to
clear their own tables after they have eaten. This saves money because the restaurant can operate with fewer
staff.
Services cannot be stored
Unlike a product, a service cannot be manufactured and stored. For example, on the one hand, an attorney has
to see his or her clients as soon as possible after they have arrived – clients get disgruntled when they have to
wait for their service. On the other hand, an attorney cannot render the service if the client is not present. The
bookings that clients make help the attorney to deliver the required services at the required times.
Service provision is usually labour intensive
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Service provision is labour intensive. For example, hairdressing salons need hairdressers to provide the
services. However, technology can be used to provide some services. For example, many pharmacies have
equipment that measures people’s blood pressure without the intervention of a person.
Services are usually provided in small service centres
Service centres must be located near to their clients because clients are usually present when a service is
provided. These service centres are often small because there is no need for storage. An example of a service
centre is an attorney’s office. There must be sufficient space for a client to be interviewed in private and
enough room for the attorney and his or her clients. The waiting room can also be relatively small because
there will seldom be more than five people waiting for the attorney at any given time.
The quality of services is difficult to measure
The quality of a good is easy to measure because a physical product has certain specifications that have to
meet a certain standard. The measurement of the quality of a good is done objectively; the measured
characteristics either will or will not meet the quality standards.
However, it is difficult to measure the quality of a service because the measurement is done subjectively.
The same quality of service provided at different times can be experienced differently by the client.
For example, a friendly petrol attendant might be very talkative when filling a customer’s motor vehicle.
The customer might enjoy the conversation the day before his or her annual leave, when he or she is in a
good mood. However, if the same attendant fills up the car a few weeks later on a Monday morning, the
customer might be irritated and not enjoy the conversation, now experiencing the quality of the service as
bad.
Registration of patent rights is difficult
The registration of patent rights on a service is difficult because of the subjectivity attached to services and
the fact that a person does not have standard specifications to register. Where a service has a tangible and an
intangible part, a patent can easily be registered on the tangible part. Consider the case of a restaurant. A
restaurant might decide to have its own tailor-made cutlery and crockery. It can then register a patent on the
cutlery and the crockery, but it will be difficult to register a patent on the quality of the service. For example,
Kentucky Fried Chicken (KFC) has a patent right on its recipe for cooking chicken because it is easy to
determine the specifications of the product. However, people can experience the standard of the service at
KFC differently.
In summary, goods are solid things that can be picked up and looked at. In contrast, services are those
things that other people do for us.
The following are some examples of service industries:
• Rental: housing, motor vehicles (Avis, Imperial), offices, and equipment
• Use of facilities: transportation (Metro Rail or taxi), telephone (Telkom, MTN or Vodacom), and parking
lots
• Safety and protection services: security (ADT or Chubb), and fire fighting (municipal fire brigade)
• Energy and water: water, sanitation, and electricity (Eskom)
• Health: doctors, hospitals, and clinics
• Drainage and waste removal: garbage removal and sanitation rendered by the local council
• Personal service: restaurants (Spur), hotels (Holiday Inn), and funeral services (Avbob)
• Maintenance: repairs (Roto Rotor), painting, and renovations
• Recreation and entertainment: cinemas (Ster Kinekor), amusement parks, and private clubs
• Business services: consulting (PriceWaterhouseCoopers), printing (News24), laboratories, and personnel
service (Kelly)
• Distribution: warehousing (Imperial Logistics), transportation (Transnet), and freight services (Ram
Couriers)
• Financial: banks, credit controllers, and loans (all the local banks)
• Education: universities (Pretoria, Wits or UCT), universities of technology (TUT, DUT), and libraries
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•
(local/municipal)
Environmental quality: radiation control and soil analysis.
The relationships between a service and a good are shown in Figure 1.4.
FIGURE 1.4 The goods–services scale
1.10 The three modes of operations management
It is possible to divide operations management into primary, secondary, and tertiary modes, as the following
points show.
1.10.1
Primary operations management
The operations management functions in this instance involve the sourcing of raw materials from natural
sources, such as mining, fishing, and forestry, for example, mining iron ore to produce cars, fridges, stoves,
and so on.
1.10.2
Secondary operations management
The operations function in this instance utilises the raw materials from the primary functions in the
production of goods utilising the extracted raw materials. For example, in construction, site managers use
steel beams, which are derived from the iron that has been mined, for building purposes. All manufacturing
operations fall into this category.
1.10.3
Tertiary operations management
The operations functions are utilised in the rendering of services only. For example, an attorney, doctor or
bank clerk operates in this type of environment.
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1.11 Operations management structures
In most organisations, the structures referred to are systems. There is some debate as to whether it is better to
have centralised systems or decentralised systems. In multinational organisations, all the systems are
decentralised; the parent company is situated in one country and the subsidiaries in other countries. In the
case of a local organisation, the systems are usually centralised. Management believes that it can better
manage these structures from a central point. The systems can include production, purchasing, distribution,
and human resources.
1.11.1
Decentralised systems
When a system is decentralised, the local manager in charge of that system determines the needs required.
Therefore, the local manager also determines the delivery date and time. Planning is carried out only for this
facility, with no regard to the needs of any other of the subsidiaries. In the case of a manufacturing concern,
the local manager determines the material requirements (buying function) and plans for his or her facility
only (planning function).
In a centralised system, the facilities utilise the same ERP methodology. This means that throughout the
organisation, the same computer systems are utilised. A major advantage of the decentralised system is that
there is a reduced need for elaborate communication and control systems. A major disadvantage is that,
because of the lack of control in the decentralised system, inventory levels can spiral out of control and
customer service may suffer, and this, in turn, may result in poor scheduling.
1.11.2
Centralised systems
In a centralised system, all systems are managed from a central point, which is usually at head office. All
schedules, purchasing and planning are dictated by head office. As a result, a uniform set of systems will be
in operation and local managers have no or little input into what is decided. The same MRP system is
implemented throughout the organisation. The most important function in the centralised system is the
management of inventory to ensure an equitable distribution of raw materials, etc.
The major advantage derived from this system is the proper synchronisation of orders, production
schedules, etc. The major disadvantage is that head office is unable to react timeously to change at local
level. This is particularly true in respect of demand and the requirements to fulfil the demand at local level.
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CLOSING EXAMPLE
Strategic operation decisions by Gold Fields: Unbundling Sibyanye Gold
In 1897, in a small mining town in South Africa, Cecil Rhodes and Charles Rudd formed the company that
would later become Gold Fields. This mining town would later become Johannesburg, the city that today
hosts our corporate office and primary stock-market listing. The history of Gold Fields is very much linked
to that of South Africa.
In 2012 – and as part of a high-profile portfolio review – Gold Fields announced the landmark
restructuring of its assets. This focused on the unbundling of Sibanye Gold – a separately listed entity that
will hold the mature, deep-underground KDC and Beatrix mines.
The unbundling will enable Gold Fields to focus on maximising cash flow and returns from its
remaining operations, and to realise the value of its world-class portfolio of exploration and growth
projects. At the same time, Gold Fields will prioritise the development of its fully mechanised South Deep
underground mine in South Africa. This strategically important asset – which holds more than one-third of
Gold Fields gold reserves and has a mine life of at least 60 years – secures the company’s long-term future
in the country in which it was founded 125 years ago.
(SOURCE: Gold Fields IAR, 2012: Case studies. Available at: http://www.goldfields.co.za/reports/2012/case_studies.pdf)
Summary
In this chapter, we introduced the ideas that operations transform inputs into the desired outputs requested by
customers; that operations management is the planning, organising, leading and controlling of these
processes; and that operations managers manage all the processes and activities leading to the production of
goods and services. We presented certain key definitions in the field of operations management. We
explained that the operations department is responsible for the planning and coordination of manufacturing
products by using all the required inputs. We noted that operations are one of three primary functions
(marketing and finance being the others) and we presented the eight Ms approach to operations management.
We mentioned other departments or functions within an organisation. We discussed reasons for studying
operations management and considered the types of decisions taken by the operations manager. Operating
decisions relate to the operations of the organisation. These include decisions regarding quality, inventory
management, scheduling, and project management. We discussed the distinction between goods and services,
and noted that operations will feature strongly in both a goods-orientated and a service-orientated
organisation.
Key terms
Capacity: The maximum amount of time available to a productive unit and will determine the optimal load
of the productive unit if it operates under perfect conditions.
Effectiveness: The measure of financial prudence with which processes utilise assets, and in particular time
and money.
Efficiency: The ratio in respect to how soundly the process functions in relation to achieving its
predetermined objective from the perspective of the customer. It is performing the appropriate tasks to
generate the most value for the organisation and customer. It can be defined as ‘doing something at the
lowest possible cost’ (Jacobs & Chase, 2008:8).
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Goods: Solid, tangible things that can be picked up and looked at.
Just-in-time (JIT): A philosophy that uses continuous and forced problem-solving to rid an organisation of
all waste in the production processes or the rendering of services. A JIT production system is one in
which the processing and movement of goods and materials happen just as they are required, most often
in small batches.
Lead time: The time from the placement of an order by a customer until the customer receives the good or
the service ordered is rendered.
Lean production: This involves using minimal amounts of resources to make products of high quality with
minimum variation.
Preventive maintenance: The maintenance of equipment on an ongoing basis to ensure that it is always
productive and efficient.
Productivity: The measure of the ratio of outputs to inputs. Higher productivity means that there is better
management of inputs and processes so that outputs are of better quality and produced at a lower cost.
Products: The finished goods or services that an organisation supplies to customers after a relevant need
has been identified.
Services: Invisible things that other people do for us.
Servitisation: A transformation process wherein production organisations embrace a service orientation
and/or develop more and better services.
Supply chain management: The total management strategy of all the activities of an organisation
regarding the facilities, functions and activities involved in the production and delivery of products and
services.
System: A complete system that cannot be broken up without the loss of its essential characteristics.
Value added: A process of eliminating waste and adding value to a good or service, as well as the
difference between the cost of the inputs and the price that can be charged for the product or service.
Review questions and activities
1 Define the term ‘operations management’ and describe what you understand it to mean.
2 Schematically represent and discuss the three major functional areas found in organisations.
3 List and then briefly discuss the various service departments rendering their services to the operations
department.
4 List the differences between goods and services.
5 Distinguish between order qualifiers and order winners.
6 Discuss some of the operations of the institution where you are studying.
7 Write the job description of an operations manager employed in a bank.
8 Compare and contrast the job requirements of operations managers in a manufacturing environment with
those of operations managers in the services industry.
9 Identify a product you would like to manufacture. Describe how you would play the role of operations
manager to market, finance and produce this product.
10 What are the key roles of operations managers in the services industry, where no tangible good is
produced?
11 Discuss the role of technology in operations management.
12 Imagine you are the managing director of a manufacturing company that manufactures gadgets. Write a
profile of an operations manager whom you require for your factory.
13 Discuss the role of an operations manager in:
13.1 The National Council of the Society for the Prevention of Cruelty to Animals (NSPCA)
13.2 A charitable organisation.
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CASE STUDY: CAPITEC RETAIL BANK
South Africa’s youngest retail bank, Capitec, was founded in 2001. It has 3.2 million clients and attracts on
average 90 000 new clients a month, according to the company’s interim results, which were released in
September 2010. The growth in active clients to 4.2 million in 2012 means the bank is acquiring both new
to bank clients and other banks’ clients. Capitec CEO Riaan Stassen said the consistent Capitec Bank
growth is a direct reflection of client demand for the bank’s unique simplified bank offer. Capitec’s motto
is ‘Simplicity is the ultimate sophistication’.
The bank was recently named the overall winner at the annual Ask Africa Orange Index Awards.
Surveying close to 100 brands across 18 industries, the award is based on the opinions of 10 000
consumers surveyed nationally over six months.
Capitec won on the strength of its transparent benefits and services that put the customer first and is
therefore suitable for people who do not need a cheque book or overdraft facility and who do not mind
using an external service provider’s credit card.
Capitec does not segment clients according to their income level. The bank offers just one transaction
account – the Global One account. The limitations of the Global One account are that it does not offer a
credit card, an overdraft facility, a cheque book or cellphone banking. However, Capitec does offer internet
banking, which is free. Capitec plans to launch a credit card in 2013. In the meantime, you can link your
Capitec account to a credit card from another financial services provider and pay the amount owing via
internet banking – by making your credit card a beneficiary. Paying a beneficiary costs R2.75, irrespective
of the value of the transaction.
Without question, one of Capitec’s most appealing features is their highly competitive, unbelievably
low fees. For a mere R4.50 monthly administration fee, you receive transactional features and capabilities
that pretty much rival (if not surpass) most other regular bank accounts. In addition to this, Capitec offers
extremely inviting interest rates. Capitec’s fees have remained unchanged since 2010, whereas all the ‘big
four’ banks increased their fees since. Its debit card transactions are free and cash withdrawal fees are
lower than those charged by the other banks.
Anyone who has ever opened up a Capitec account can tell you that walking into a Capitec branch is
surprisingly pleasant. Designed to reduce waiting periods to an absolute minimum, Capitec branches are
fresh and make banking a far nicer experience. In less than half an hour of stepping into my nearest
Capitec branch, I was able to open up a Global One account. The branch representatives were competent,
knowledgeable and very helpful.
In January 2012 Absa took a significant step towards simplified, affordable banking with the launch of
Transact. Aimed at customers who are looking for a basic transactional account which is easy to
understand and very cost effective, Transact simplifies mainstream banking by offering a full bouquet of
services.
(SOURCE: http://www.capitecbank.co.za/media-centre/consumer-release/26/)
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Case study questions and activities
1
2
3
Identify and discuss the order qualifiers and order winners that Capitec Retail Bank has which
contributed to its growth.
What type of decisions are driving Capitec Retail Bank? Provide examples from the case study to
illustrate your answer.
What type of decision has Absa made in reaction to what is happening at Capitec Retail Bank?
Motivate your answer.
References
1 Baines, T., Lightfoot, H., Peppard, J., Johnson, M., Tiwari, A., Shehab, E. & Swink, M. 2009. ‘Towards
an operations strategy for product-centric servitization’, International Journal of Operations &
Production Management, 29:5, 494–519.
2 Cardoso, A., Ferreira, I., Carvalho, J.Á. & Santos, L. 2011. ‘What Service?’, ENTERPRISE Information
Systems, 315–324.
3 Colen, P. & Lambrecht, M. 2010. ‘Product service systems: Exploring service operations strategies’,
Katholieke Universiteit Department of Decision Sciences and Information Management Working Paper
No.1008.
4 Datta, P.P. & Christopher, M.G. 2011. ‘Information sharing and coordination mechanisms for managing
uncertainty in supply chains: A simulation study’, International Journal of Production Research, 49:3,
765–803.
5 Datta, P.P. & Roy, R. 2011. ‘Operations strategy for the effective delivery of integrated industrial
product-service offerings: Two exploratory defence industry case studies’, International Journal of
Operations & Production Management, 31:5, 579–603.
6 Davids, A. & Lioma, R. 2012. ‘Pick n Pay: From underdog to top dog?’ UP Kagiso Asset Management
Quarterly.
7 Erkoyuncu, J.A., Roy, R., Shehab, E. & Cheruvu, K. 2011. ‘Understanding service uncertainties in
industrial product–service system cost estimation’, The International Journal of Advanced
Manufacturing Technology, 52:9, 1223–1238.
8 Ettlie, J.E. & Rosenthal, S.R. 2011. ‘Service versus manufacturing innovation’, Journal of Product
Innovation Management, 28:2, 285–299.
9 Fernandes, K.J. 2012. ‘A framework for service systems analysis: Theory and practice’, Production
Planning and Control: The Management of Operations, 480–497.
10 Goldfields. Industrial Annual Reports: Case Studies.
11 Goodale, J.C., Kuratko, D.F., Hornsby, J.S. & Covin, J.G. 2011. ‘Operations management and corporate
entrepreneurship: The moderating effect of operations control on the antecedents of corporate
entrepreneurial activity in relation to innovation performance’, Journal of Operations management,
29:1–2, 116–127.
12 Gunasekaran, A. & Ngai, E.W.T. 2011. ‘The future of operations management: An outlook and analysis’,
International Journal of Production Economics.
13 Gupta, S., Koulamas, C. & Kyparisis, G.J. 2009. ‘EBusiness: A review of research published in
production and operations management (1992–2008)’, Production and Operations management, 18:6,
604–620.
14 Heim, G.R. & Peng, D.X. 2010. ‘The impact of information technology use on plant structure, practices,
and performance: An exploratory study’, Journal of Operations management, 28:2, 144–162.
15 Hofmann, E. 2010. ‘Linking corporate strategy and supply chain management’, International Journal of
Physical Distribution & Logistics Management, 40:4, 256–276.
16 Holmström, J., Brax, S. & Ala-Risku, T. 2010. ‘Comparing provider-customer constellations of
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visibility-based service’, Journal of Service Management, 21, 675–692.
17 Holmström, J., Ketokivi, M. & Hameri, A.P. 2009. ‘Bridging practice and theory: A design science
approach’, Decision Sciences, 40:1, 65–87.
18 Jacobs, F.R. & Chase, R.B. 2008. Operations and supply management: The core. International edition.
New York: McGraw-Hill/Irwin.
19 Jetter, M., Satzger, G. & Neus, A. 2009. ‘Technological innovation and its impact on business model,
organization and corporate culture–IBM’s transformation into a globally integrated, service-oriented
enterprise’, Business & Information Systems Engineering, 1:1, 37–45.
20 Lin, Y., Shi, Y. & Zhou, L. 2010. ‘Service supply chain: Nature, evolution, and operational implications’,
Proceedings of the 6th CIRP-Sponsored International Conference on Digital Enterprise Technology,
Springer, 1189.
21 Marks, F., Ramselaar, L., Mulder, J., Muller, H., Langekamp, S. & Boymans, C. 2011. Servitization in
product companies. Creating business value beyond products. Atos Consulting White Paper, Utrecht,
Netherland.
22 Mingers, J. & White, L. 2010. ‘A review of the recent contribution of systems thinking to operational
research and management science’, European Journal of Operational Research, 207:3, 1147–1161.
23 Nativi, J.J. & Lee, S. 2011. ‘Impact of RFID information-sharing strategies on a decentralized supply
chain with reverse logistics operations’, International Journal of Production Economics.
24 Nickerson, J.A. & Silverman, B.S. 2009. ‘New frontiers in strategic management of organizational
change’, Economic Institutions of Strategy (Advances in Strategic Management, Volume 26), Emerald
Group Publishing Limited, 26, 525–542.
25 Olhager, J. & Johansson, P. 2011. ‘Linking long-term capacity management for manufacturing and
service operations’, Journal of Engineering and Technology Management.
26 Oliveira, P. & Roth, A.V. 2012. ‘Service orientation: The derivation of underlying constructs and
measures’, International Journal of Operations & Production Management, 32:2, 156–190.
27 Parry, G., Newnes, L. & Huang, X. 2011. ‘Goods, products and services’, Service Design and Delivery,
19–29.
28 Pawar, K.S., Beltagui, A. & Riedel, J.C.K.H. 2009. ‘The PSO triangle: Designing product, service and
organisation to create value’, International Journal of Operations & Production Management, 29:5,
468–493.
29 Schmenner, R.W. 2009. ‘Manufacturing, service, and their integration: Some history and theory’,
International Journal of Operations & Production Management, 29:5, 431–443.
30 Slotnick, S.A. 2011. ‘Order acceptance and scheduling: A taxonomy and review’, European Journal of
Operational Research, 212:1, 1–11.
31 Spring, M. & Araujo, L. 2009. ‘Service, services and products: Rethinking operations strategy’,
International Journal of Operations & Production Management, 29:5, 444–467.
32 Stecke, K.E. & Kumar, S. 2009. ‘Sources of supply chain disruptions, factors that breed vulnerability, and
mitigating strategies’, Journal of Marketing Channels, 16:3, 193–226.
33 Wu, Z. & Page11, M. 2011. ‘Balancing priorities: Decision-making in sustainable supply chain
management’, Journal of Operations Management, 29:6, 577–590.
Websites
Visit the websites below, which were last accessed in September 2012:
www.aa.com
www.apple.com
www.apqc.org
www.bmw.com
www.carnivalcruise.com
www.dell.com
www.econ-datalinks.org
www.fedstats.gov
www.hellopeter.com
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under U.S. or applicable copyright law.
www.monster.com
www.rockwell.com
www.trekbikes.com
The websites below were last accessed on the dates given:
www.goldfields.co.za/reports/2012/case_studies.pdf (4 April 2013)
www.kagisoam.com/upload/website/files/news/Pick%20n%20Pay_from%20underdog%20to%20top%20dog
.pdf (20 March 2012)
www.nl.atosconsulting.com/NR/rdonlyres/3C3B9288-7B99-48EE-8008-542E044826AC/0/AC
_WPServitizationinproductcompanies.pdf (20 March 2012)
YouTube™
This clip was last accessed in February 2013:
www.youtube.com/watch?v=-yAEWKX6kWY
These clips were last accessed in March 2013:
www.youtube.com/watch?v=LeeTy3YaMu0
www.youtube.com/watch?v=skg_lg-4m2o
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CHAPTER 2
Supply chain management
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
Explain what a supply chain is
Understand the role and importance of the supply chain
Understand the importance of strategy in the supply chain
Define and explain supply chain management
Understand what is required by a supply chain manager
Explain the drivers in the supply chain
Explain why metrics are important in supply chain management
Understand demand and supply in the supply chain
Understand inventory and its impact on the supply chain
Explain logistics and transportation in the supply chain
Discuss the various influences and challenges that affect the supply chain and its management.
CHAPTER outline
2.1
2.2
2.2.1
2.2.2
2.2.3
2.2.4
2.2.5
2.3
2.4
2.4.1
2.4.2
2.4.3
2.4.4
2.5
2.5.1
2.5.2
2.5.3
2.6
2.7
2.7.1
2.7.2
2.7.3
2.7.4
2.7.5
2.7.6
Introduction
Understanding the supply chain
The difference between the supply chain and supply chain management
The importance of strategy in the supply chain
Improving and influencing performance in the supply chain
Drivers within the supply chain
Supply chain metrics
Designing the supply chain network
Demand and supply in the supply chain
Demand forecasting
Aggregate planning
Sales and operations planning
Coordination and management
Inventory in the supply chain
Economies of scale
Uncertainty
Product availability
Logistics and transportation in the supply chain
Other supply chain influences
Pricing and revenue management
E-business
Information technology (IT)
Stakeholders and partnerships
Sustainability
Globalisation
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part
02
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All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable copyright law.
Operations principles
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CHAPTER 3
Design of goods and services
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
•
Realise that satisfying customers is perhaps the most important competitive goal of any business
Understand that customers form perceptions of the quality of goods and services by comparing their
expectations with actual outcomes
Understand the importance of customers in the design process
Understand the main objectives and importance of goods and service design
Define the product life cycle and the steps in the actual design process
Explain the concept of a product development team
Explain robust design, manufacturability, modular design and CAD
Discuss value analysis and configuration management
Explain the principles and practices of kaizen
Discuss the concepts of mass customisation and modular design
Appreciate that gathering customer information is vital to providing a quality service
Contextualise and explain the future of the design process.
CHAPTER outline
3.1
3.2
3.3
3.4
3.4.1
3.4.2
3.4.3
3.4.4
3.5
3.6
3.7
3.8
3.8.1
3.8.2
3.8.3
3.8.4
3.9
3.10
Introduction
Basis of competitiveness
The importance of the customer in product and service design
Product development
Product life cycle
Steps in product design and development
System, parameter, and tolerance design
Product development team
Robust design
Ensuring manufacturability and analysis of value
Generation of new product ideas
Product life cycle management
Managing reprocessing, restructuring or re-engineering change
Managing continuity and configuration management
Managing revision changes
Focusing on customer satisfaction
Mass customisation
The future of the design process
Summary
Key terms
Review questions and activities
Case studies
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References
Websites
YouTube™
SETTING THE SCENE
BMW to preview radical Maxi scooters at AMiD show
BMW Motorrad South Africa previewed its radical new maxi-scooters, the C 600 Sport and C 650 GT at
the AMiD national motorcycle show, staged at the Johannesburg Expo Centre, Nasrec, from 24–26 August
2012. These stylish new models went on sale in SA in the fourth quarter of 2012.
This was notthe first time that BMW has entered the scooter market, but the previous model, the C 1,
aimed at commuters, is a far cry from the high-powered new range. The C 1, which was manufactured
between 2000 and 2003 and powered by either 125cc or 200cc Rotax engines, featured a novel windscreen
and roof design that meant that it was not necessary for the rider to wear a helmet in certain countries.
The latest maxi-scooters are trend-setters in many respects. Both models are powered by all-new,
BMW-designed 650cc twin cylinder engines that pump out 44kW of power, making them the most
powerful scooters on the market. Power goes to the rear wheel via a continuously variable transmission
(CVT).
The two models are aimed at specific markets: the C 600 Sport at those who want to engage in sporty
riding, while the C 650 GT is meant for those who put a premium on comfort and touring ability.
As one would expect from an innovative company such as BMW Motorrad the maxi-scooters are
innovative in many ways. New thinking sees a parking brake which operates when the sidestand is pushed
down, while flexible storage space is another first. The under-seat space on the GT model can be expanded
to 60 litres to take two helmets, if necessary. The styling of the Sport limits storage space somewhat, but it
is still substantial in terms of that offered by other maxi-scooters. Besides these impressive-looking
maxi-scooters BMW Motorrad will have examples of most of the popular models on display.
(SOURCE: Get News. 2012. BMW to preview radical Maxi scooters at AMiD show. Get News. Where business meet. 23 July
2012. http://www.getnews.co.za/story?id=1850. Accessed September 2013.)
3.1 Introduction
Customers expect products and services that meet their needs and expectations. Good design relies on clear
customer requirements and assumes that organisations know their customers and the factors that ensure
customer retention. Organisations also need to understand how the customer measures quality and what they
perceive to be the level of quality that will meet their expectations. Product and service design therefore starts
and ends with the customer, and this fact needs to be clearly understood by the organisation when it designs
new products and services. Customers will not purchase a product unless it conforms to their requirements.
Often product and service design is organised separately to the operations function by a specific design
department in the organisation. It may sometimes be incorporated within the operations function. Irrespective
of where its role is located as a function, it is vitally important that operations managers understand how
products and services are designed within the organisation, and that they understand how this impacts on
their specific operations process.
Good design does not only make products and services more attractive to the customer, but it ensures that
they perform their specific tasks better. Designs need to look good, they need to be easy to use, and they need
to be better and easier to produce or manufacture if they are replacing an existing product. In most cases, for
an equivalent product it is also important for the cost to be equal to or less than the cost of the predecessor.
In the vast majority of cases, there is a clear link between the quality of a product or service and the
success of an organisation. This fact increases the pressure to deliver excellence in the design process. If an
organisation’s goods and services are well designed, there is a related benefit in that the organisation will
have a stronger chance of success when competing against other organisations who may have poorly
designed goods or services.
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There is therefore broad agreement that the importance of good design has been underestimated over the
years and that the aesthetics (does it look better), usability (is it easier to use) and produce-ability (is it easier
or cheaper to make) dimensions all need to be considered when the design process is performed.
Products and services differ in many ways, which in turn allows for and results in different design
processes and strategies. Products are generally:
• tangible
• storable (for varying lengths of time)
• measureable which facilitates quality control
• countable (which allows for clear tracking and control)
• repeatable
• patentable or copyrightable, in most cases.
Services are generally:
• intangible
• perishable
• difficult to measure from a quality perspective
• difficult to repeat and replicate on a guaranteed basis
• difficult to patent or copyright.
In most cases the organisation understands its core competency and can decide when to outsource functions
that it does not have the resources or time to undertake itself. In some cases the organisation may outsource
the production of components within the manufacturing process to allow it to focus its attention on the core
manufacturing activities.
DISCUSSION
Outsourcing of seat component manufacturing processes within the automotive industry in
South Africa
Within the automotive industry in South Africa, the seat components manufacturing process of
Mercedes-Benz is outsourced to another organisation, Fehrer (East London IDZ, 2012), in the East London
industrial development zone (IDZ). Another example is that of Johnson Controls, which manufactures all
the seats and interiors for the Ford Motor Company of South Africa.
Answer the following questions about outsourcing:
1 What are the risks of outsourcing a component to another manufacturer?
2 How do you manage the relationship or contract with this manufacturer?
A core competency, initially advocated by authors CK Prahalad and Gary Hamel (Prahalad & Hamel, 1990),
is the specific factor that is central to the way in which a business competes or in which employees work. It
fulfils three key characteristics, namely:
1 It is not easily imitated by competitors
2 It can be replicated widely for various products and markets
3 It must contribute to the product and benefit the consumer.
The core competence is a key ingredient of the organisation’s competiveness, which will be discussed in the
next section.
3.2 Basis of competitiveness
The continued impact of globalisation has resulted in a greater pressure on the organisation to deliver at a
higher level than before and in a context where there is no guarantee that a product or service will attract a
customer or significantly ensure a stable customer base. Competitiveness in the marketplace has become a
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key strategic objective for every organisation, and its ability to step up and compete has become critical.
A number of factors influence the competitiveness of an organisation:
• Economic change: Competition from other markets and specifically emerging markets, for example
China and India, where goods and services may be produced more quickly and cheaply. Often the labour
costs in emerging markets are a key factor that allows them to produce goods and services at lower costs.
An example is the production of footwear in China, instead of in a more expensive market.
• Competition: Competitors in an industry are also able to proactively market their goods or services,
which allows them to capture market share. For example, Nokia markets products in the same market as
Samsung and tries to achieve greater sales in this way.
• Cost and availability: Resources required must be sourced at a low price and conform to appropriate
quality criteria and must be consistently available. The location of the factory close to the source of
materials is often used to reduce cost.
• Sociological and demographic change: An increase or decrease in the demographics of the market can
lead to changes, for example, the sale of baby products that decreases if legislation forces a limit on the
number of children in a market, as was the case in China.
• Technology change: The availability of advanced technologies and design and manufacturing methods
allows organisations to become world-class competitors. It is therefore critical for organisations to keep
abreast of technological changes in their industry. For example, solar power technologies are being used
in certain markets to reduce the reliance on fossil fuels.
• External factors: Political, legal, labour and environmental issues can lead to an organisation’s
competiveness being compromised. For example, the strike and violent action at Lonmin’s Marikana
mine led to widespread disruption in production and significantly influenced the South African economy
(National Treasury, 2012; Steyn, 2012).
A number of marketing methods can lead to an increase in the competitiveness of an organisation. These
methods include:
• Market research: increasing quality of research into customers and their needs
• Product: a solution specific to a specific customer need (for example, reading glasses)
• Promotion: promoting a product based on information on product features (for example, mobile phones)
• Pricing: marketing based on product value or value added (for example, additional after sales
support/warranty)
• Place: marketing given a specific need in a place or supporting a specific activity (for example,
sunscreen).
Non-marketing methods to increase the competitiveness of an organisation include:
• Reducing costs: reduction of cost of production or raw materials
• Quality: improving the quality and therefore the desirability of the product
• Staff training: training staff to increase sales by improved selling and negotiation techniques.
During the design stage a number of tasks need to be performed, although these may also be product or
service specific. These include:
• The product and service specifications need to be documented with the help of customers and users
• The marketing department needs to be engaged in the design process
• Customer expectations and needs must be clearly understood and communicated to the design function by
the marketing department through market and competitor research
• Quality standards need to be clearly defined and agreed upon
• Marketing must design and articulate plans to increase the market visibility of existing and new goods
and services
• All departments involved in the design and development process need to agree with and be involved in
the testing process
• The accounting, finance and operations departments must develop budgets and costing plans to ensure
sales and costs targets are achieved.
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Even a fantastic idea on paper may not meet the market expectations, and customers will fail to purchase the
new product. There are no guarantees of success. The target market for products and services is a crucial
driver in the design process. All organisations need to take into account the needs of the market and then
target their offerings using clear and focused design principles. It is critical to make sure the design is fit for
purpose and this means analysing the different market characteristics carefully to ensure compatibility.
3.3 The importance of the customer in product and service design
The customer is critical to the success of a product or service, and therefore needs to be the core focus when
designing the goods or services. Some guidelines for managing this process include:
• An understanding of key customers, customer groups, potential customers and markets, and appropriate
segmentation of customers
• Understanding the ‘voice of the customer’, their short-term and longer-term needs and expectations, and
clear activities that facilitate listening to and learning from customers – this enhances the design,
production and delivery processes
• Building of customer relationships through:
- commitments that promote trust and confidence
- accessibility to customer and market information
- setting of effective service standards
- appropriate training of customer-contact employees
- effective and efficient after sales service on goods, services and transactions
• An effective complaints management process which allows customers to quickly and easily comment or
complain, and receive prompt resolution of their issues
• Clearly defined key performance indicators (KPIs) which allow accurate measurement and analysis of
customer satisfaction, for example product returns due to defects
• Appropriate interventions given the analysis of KPIs to deliver the product/service and process
improvements, for example, measure customer complaints and their resolution with the aim to resolve
every complaint within a specific period of time
• Careful consideration of competitors and their role in the market.
In general all functional areas of an organisation are important, but operations and marketing are often the
functional areas that are most influenced by goods and service design.
3.4 Product development
Product or service development involves various focused research and design activities that deliver a
product that is marketable and will deliver against the market share and profitability targets outlined by the
organisation. The product life cycle can guide the development process to make sure the improvements to
existing products are timed to happen during the maturity phase. New products are then developed to be
released to the market during the decline phase of existing products to support the competitiveness and
profitability of the business.
3.4.1 Product life cycle
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FIGURE 3.1 The product life cycle
The life cycle concept is applicable to both services and goods experience life cycles, and they have various
defining characteristics as describe below.
The product life cycle is divided into four stages:
1 Introduction: In this stage the product is introduced to the market and significant expenditure is invested
in the marketing and the advertising of the product. Exposure of the product to the market in order to
attract customers and gain market share is critical to the success of this stage.
2 Growth: This stage is also characterised by high advertising expenditure, but this expenditure is
hopefully being offset by increased sales as the product increases its market share. This stage is also
known as the ascent stage.
3 Maturity: The maturity stage is characterised by a steady and consistent level of sales and stable revenue
stream. In most cases the customer service level becomes the driver behind retaining customers, and
increasing market share. The objective of the organisation is to try and prolong the maturity stage for as
long as possible as this is usually the most profitable period of the life cycle.
4 Decline: As the sales in a product decline and the product becomes less relevant to the market, the
product will reach a stage where retirement is the only option. The product is abandoned by the producer
and left to naturally lose sales until it is not commercially viable to produce.
The marketing strategy for the product must be tailored to each stage of this life cycle to maximise
opportunities and sales volumes, and allow the organisation to engage with issues that are unique to each
phase in the product’s life.
3.4.2 Steps in product design and development
During the design process and before a product can be produced, the design phase needs to be completed.
The steps in the design process can be described theoretically, and can be modified or tailored to suit the
specific product or service that is being designed.
The design process is characterised by the following six steps:
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FIGURE 3.2 Phases in the design process
1 Planning: Initial planning allows for all other steps to be planned appropriately, and the design strategy is
developed. All practical and technological requirements are investigated and it should allow for the other
steps to be completed.
2 Concept development: The target market and the requirements of that target market are reviewed and all
the scenarios for the goods or service must be analysed, evaluated and accepted or rejected.
3 System design: All the related systems and subsystems that will be affected by the manufacturing of the
new product need to be redesigned or modified to allow for the new process.
4 Detailed design: Specifications of the goods or service are captured and designed in detail. Aspects such
as materials, quality and tolerance levels for the components are specified with clear processes
documented.
5 Testing and improvement: Prototypes are produced and the performance of the good under specific
conditions is evaluated. All tests are evaluated before they are signed off, and any problems in process or
design need to be corrected. This process may require some redesign and even a review of the concept
itself.
6 Production initialisation: Actual production begins with the general labour force being trained in the
process required to create the new goods, and to make sure that the production operation is able to sustain
the production process at a level that ensures quality and conformity to the initial specifications.
3.4.3 System, parameter and tolerance design
Designing how the new product development process will fit into the existing production and organisational
processes is called system design, and it allows the organisation to produce a basic functional design, and to
meet both customer needs as well as manufacturing requirements within the operation. Parameter design
delivers detailed specifications for the product or the process, and ensures that the intangible design is
translated into a design with established specifications which can deliver a quality physical product. The
measurements and limits that are defined as part of the manufacturing process and the acceptable levels of
variation associated with this process are known as the tolerances and are defined in the tolerance design
process.
3.4.4 Product development team
The product development team ensures that the product design process is followed and that the goods or
services are delivered to the production environment successfully. They involve the customer requirements
identification process as well as the specification of the product or service. In many cases the team is made
up of individuals who are multidisciplinary and are co-opted from all functions of the business. They come
together to ensure a holistic approach to the development process. As they are specialists in their specific
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areas of expertise, they can add significant value and clearly define and direct the development process. If the
team is skilled and successful, then the development process can be significantly shortened.
3.5 Robust design
Robust design is a scientific approach to designing products and services in order to ensure that performance
goals are met, for example:
• variation needs to be kept to a minimum
• various product usage conditions need to be allowed for
• the life of the product is maximised.
Robust design is often used in the automotive industry where the product, for example a Toyota 4x4 vehicle,
needs to be able to meet various customer needs, ranging from daily commuter travel to significant off-road
conditions. The vehicle needs to be multifunctional and give the customer the freedom to make decisions in
as flexible a way as possible. Other vehicles, for example a BMW sedan, will not perform to this level as they
have been designed and engineered with a different operating environment in mind and with different
customer expectations. The specific purpose needs to be clearly specified so that customers are not misled
and have expectations that the vehicle will not be able to meet. An off-road vehicle will need to meet high
standards of robustness, thereby reducing the probability of a breakdown occurring under ‘normal’ operating
conditions.
DISCUSSION
Waterproof jacket sold by HiTec in South Africa
HiTec in South Africa sells a waterproof jacket which they describe as follows (HiTec, 2012): ‘3-in-1
jacket gives unbeatable waterproofing and breathability. With a removable fleece lined soft shell inner, two
hand warmer pockets, adjustable cuffs and a hood, bad weather will never keep you at home again.’
Answer the following questions about the jacket sold by HiTec:
1 What does the specification ‘waterproof’ really mean to a customer?
2 Is it valid for a customer to expect this jacket to perform in all conditions given its comparably low
price?
3 What is the useable lifespan of a jacket of this sort?
Robustness cannot just be included into the manufacturing process at the later stages of the process. It needs
to be included in the first stage and needs to be clearly targeted at the specific customer requirements for
robustness. Not all goods need to be robust, and to complicate the process further, the definition of robust
may also differ from one customer to another depending on their use of the product and the environment in
which they will use the product.
3.6 Ensuring manufacturability and analysis of value
Design for manufacturability – also known as design for manufacturing (DFM) – is based on the premise
that products need to be made in a way that makes them easy to manufacture. This design process therefore
describes the design aspect of a good, and the ease with which the product can be produced. For obvious
reasons, the easier a product is to produce, the more cost effective it will be, and also the risks of poor quality
are decreased.
If DFM guidelines as per the design phase are not followed correctly, it could result in an iterative design
which requires multiple redesign phases and loss of valuable manufacturing time. Value analysis (VA) is an
approach which looks at the value that is added by each component in the product and its associated costs,
and then tries to improve the component by reduction of the cost or increasing the value. A cost reduction of
the final product through value analysis can lead to significant savings, while an improvement of the
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operating characteristics can lead to ease of maintenance, complexity reduction, and an increase in the safety
of the good. In some situations the components are standardised to an extent where they can be used in the
manufacturing of many different products, even though these products may be sold to very different markets.
An excellent example of this is the use of the same engine in the Toyota Fortuner SUV, the Toyota Hilux
4x4, and the Toyota Quantum minibus. Maintenance and cost are reduced, as all the associated components
for these engines are interchangeable and therefore more widely available.
The concept of DFM was expanded to include assembly (DFMA), given the increased need for
components in the manufacturing process to be easily integrated into the assembly process of the
organisation. A more effective and efficient assembly process then also leads to a decrease in assembly time
and complexity on the assembly line.
Some advantages of using the DFMA methodology include:
• lowering of the assembly cost
• shortening of the assembly time
• increased product reliability
• a shorter total time to deliver the product to the market.
Basic guidelines for using the DFMA methodology include:
• minimise the number of parts
• multifunctional parts can reduce costs and complexity
• reduce the number of screw types
• facilitate parts handling
• encourage modular assembly of components
• design parts with self-locating features
• design for part interchange ability
• design tolerances to the process.
3.7 Generation of new product ideas
The process of idea generation is not a simple process and often requires specific talents from creative
individuals. Some guidelines and ideas may include:
• critically observe the environment and what has been tried before
• think creatively about existing products
• analyse competitors’ products, observe their strengths and weaknesses
• ask for ideas from existing and potential customers
• invite everyone in the quest for new ideas
• involve customers in different ways
• focus on the needs that customers don’t clearly express
• involve suppliers in the product innovation process.
Brainstorming, for example, uses team participation to identify and develop innovative thoughts on specific
topics. Customers can be invited to user sessions on the new product or service ideas can be explored, and
this can add a lot to the ideas generation process.
There are many factors that influence the need for new products and services. Some of these are listed
below:
• Economic factors: economic growth, inflation rate changes, and interest rates changes, which influence
the profitability of the organisation and also the purchasing power of the consumer
• Technology advances: technology changes influence the expectations of the consumer as well as the
manufacturing methods and components in the production process – cost savings can also be achieved by
using the most current technology
• Market information and customer knowledge: as the organisation improves the quality of the knowledge
it has about the market and the customer, there may be a need to tailor and change the product or service
to more accurately meet the needs and expectations of the customer
• Legal and political changes: as the political or legal environment changes, so agreements between trading
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•
partners and even countries may change – this may lead to an increased or decreased availability of
certain components and may spark a serious search for new options or solutions
General: general changes in the availability of suppliers and the specialised standards may mean that new
ideas need to be developed. Suppliers may improve their components and this allows us to reduce costs if
they are incorporated into our products.
3.8 Product life cycle management
Careful and proactive management of the life cycle of a product or service is crucial to the organisation.
Products and services are the lifeblood of any organisation. The profitability of the organisation comes from
maximising sales and reducing costs. These are key reasons for careful management of the product life cycle.
An organisation needs to constantly keep abreast of new technological advances and explore new
methods and processes in manufacturing and associated manufacturing technologies. This process of
continuous improvement is called product and process optimisation (PPO) and is a function of life cycle
management.
Re-engineering involves ‘the fundamental rethinking and radical redesign of business processes to
achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality,
service, and speed’ (Hammer & Champy, 1993). Re-engineering does not just relate to business processes,
but includes product and process re-engineering. It has important benefits when employed in the development
and manufacturing functions within the organisation.
There are many ways in which re-engineering can be implemented, and examples include just-in-time
(JIT) strategy (Davis, Aquilano & Chase, 2003), quality function deployment (QFD), employee
empowerment, ISO 9000, quality circles, the six-sigma programme, continuous process improvements (CPI),
cross-functional teams, and process management and control (Kano, 1993).
Life cycle management is very important to manufacturing and service industries. We discuss in more
detail various pertinent aspects below:
• managing reprocessing, restructuring or re-engineering change
• managing continuity
• managing revision changes.
3.8.1
Managing reprocessing, restructuring or re-engineering change
Given that change is inevitable and that change needs to be managed, it is important to understand that there
needs to be a balance when managing change across the production process. Specific changes will influence
other areas of the process or business, and these need to be factored into the change process through
disciplined management.
Some types of change may include:
• the introduction of a new product or component
• the introduction of new technology due to either strategic or operational reasons
• the effects of agile and virtual organisational influences and traits
• continuous process improvements leading to restructuring or renovation strategies.
Reprocessing (recycling) is the process whereby products and their associated manufacturing waste are
reused in the manufacturing of other components or products. It is important to realise that even though there
may not be profitability, legislative or legal reasons for recycling, there are often environmental imperatives
that may make the recycling process attractive. As consumer buying power increases, so the customer may
drive this process by varying their purchase decisions depending on the type and level of recycling
undertaken by the organisation.
Restructuring of operations and other functions within the business is a good strategy for managing
change that commonly cannot be handled by the continuous improvement process.
Renovation implies a move from one older method of production to a new or more efficient method of
production, and means taking action to proactively redesign and simplify processes and integrate new
technologies. Organisations must develop a workforce that is able to use these redesigned processes and
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technologies, and to identify and capitalise on new business methods. If organisations identify and
incorporate best practice in their industry, they strengthen their ability to stay competitive.
3.8.2
Managing continuity and configuration management
The continuity management process is critical to the organisation and helps to ensure uninterrupted,
continuous production. An initial design of the management process is used to manage when and how
changes can take place without negatively impacting on the rest of a process or other business functions.
Continuity management may include disaster recovery plans, crisis communications plans, emergency action
plans, operational risk assessment, programme maintenance, and training/awareness programmes.
Configuration management is a discipline to ensure the proper identification and recording of the
various configurations within the manufacturing process, and to facilitate the control of changes and
configuration status of the physical and functional equipment and other components within the production
system.
Configuration management involves three interdependent activities:
1 Configuration identification: a discipline for identifying the configuration of a piece of equipment or a
machine and documenting its characteristics
2 Configuration control: the use of procedures for changes to agreed specifications and baselines
3 Configuration accounting: the recording and reporting of data from approved changes during all phases of
the project.
3.8.3
Managing revision changes
Kotter (2011) defines change management as the utilisation of basic structures and tools to control any
organisational change effort. Change management’s goal is to minimise the change impacts on workers and
avoid distractions.
Kotter’s eight-step change model (Kotter International, 2012), in the context of managing revision
changes, can be summarised as:
1 Increase urgency: Inspire people to move, and make objectives real and relevant. Understand the reason
and importance of the revision and communicate its urgency.
2 Build the guiding team: Get the right people in place to perform the revision change. They must
understand the equipment and the process clearly.
3 Get the vision right: The context and clear strategy behind the change needs to drive service and
efficiency gains.
4 Communicate for buy-in: Make sure the change is clearly and comprehensively documented and
communicated so that all impacts are understood and managed.
5 Empower action: Remove obstacles, for example, provide training and specific equipment to allow
appropriate action and efficient delivery of the change.
6 Create short-term wins: Manage the number of changes carefully, and complete and test one change
before moving to another.
7 Don’t let up: Encourage ongoing change in order to stay current and proactive while encouraging
ongoing progress reporting.
8 Make change stick: Make change a positive process and reiterate the benefits of change. This means
change becomes engrained in the day-to-day operations of the business.
Managers need to manage the various revision changes across the production process. These include levels
for parts and product releases.
Change management (CM) involves four main processes, which are outlined below.
1 Quality leadership process: In the area of CM, it is important to support and provide well-balanced
quality leadership which is prepared to continuously scrutinise, re-examine and question the
organisation’s operations. TQL is defined as ‘the application of quantitative methods and the knowledge
of people to assess and improve (a) materials and services supplied to the organisation, (b) all significant
processes within the organisation, and (c) meeting the needs of the end-user, now and in the future’
(Houston & Dockstader, n.d.).
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Total quality management (TQM) is used by organisations that need to continuously engage with
new technologies as they appear, and implement those that they find useful and that will improve their
productivity and profitability.
2 Process management: Process management is the application of knowledge, skills, tools, techniques and
systems to define, visualise, measure, control, report and improve processes with the goal to meet
customer requirements profitably (Thom, 2009).
Process management involves the management of the ideas and initiatives put forward by the
process improvement teams to evaluate the various proposed process changes and the types of change
under consideration. Improvements may be the result of the following: product changes, process changes,
labour changes, requirement changes, and operational changes (Becker, Kugeler & Rosemann, 2003).
The effective management of a process usually involves people and needs a structured approach. Process
management can be viewed as a five-stage process, which manages the stages outlined in Figure 3.3 and
described below.
FIGURE 3.3 Stages in process management
•
•
•
Current status: the current state with respect to the environment being changed
Future status: the proposed state
What is lacking in the current process: what is needed to facilitate the move from the current to the
future state?
• How to accomplish the transition: the plan to implement the various changes
• A basis for measuring progress: the monitoring and evaluation of the change process to make sure
progress is as planned and achieves the desired outcomes.
3 The change control process: The change control process used within quality management systems (QMS)
is a formal process that seeks to ensure that any changes to a product, process or system are implemented
in a controlled and planned manner. This reduces the chance that unnecessary changes will be introduced
without due care, and minimises the introduction of faults or the reversal of changes made by others.
The goals of a change control procedure are usually to minimise disruption to services, reduce the
reversal of changes, and use change resources efficiently.
4 The continuous improvement process: A continuous improvement process (CIP) is recognised as an
ongoing process to improve products, services or processes. The process can follow an incremental
improvement approach which delivers change over a period of time, or a breakthrough improvement
which makes a change immediately and in one large process change (ASQ, 2012).
Some organisations use the approach known as kaizen (Imai, 1986), which roughly translates to ‘good
change is improvement’, and is characterised by feedback (reflection on the process), efficiency (reduce or
eliminate suboptimal processes), and evolution (change is incremental).
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•
•
•
•
•
•
Key features of kaizen include (Imai, 1997):
Improvements are made as many, small changes
Ideas come from the workers and are therefore easier to implement
Small improvements require less investment of finance and resources
The ideas are cheap as they come from the employees on a continuous basis and there is less need for
expensive consultants and programmes
Employees are encouraged to improve their own performance
Ownership for individual tasks increases team and worker motivation.
Continuous improvement must not be seen as the responsibility of management alone; it must be true to the
kaizen focus on ownership by the whole organisation. Continuous improvement by its nature never comes to
an end or achieves its quality goal. There is always opportunity to change and improve.
3.8.4 Focusing on customer satisfaction
Customer satisfaction is a term frequently used in marketing, and is a measurement of how products and
services supplied by an organisation meet the customers’ expectations. It is defined as ‘the number of
customers, or percentage of total customers, whose reported experience with a firm, its products, or its
services (ratings) exceeds specified satisfaction goals’ (Farris, Bendle, Pfeifer & Reibstein, 2010).
As discussed earlier, it is crucially important that the product or service that is designed for the customer
is designed according to their needs. The customer ultimately will decide to purchase the product or not, and
if their satisfaction level is high, they will often return to purchase other goods as well. Customer information
needs to be relevant (fit for purpose) and on time, while still being accurate and easy to understand and
analyse.
Lessons learned are an important part of managing and engaging with customer satisfaction and
improving the overall quality process. As noted earlier, most organisations rely on a competitive advantage to
increase sales revenues and their customer base. Often this competitive advantage relies on the workforce to
develop accurate ‘customer and market knowledge’ in order for them to be effective.
To design appropriate and competitive products and services, the organisation, and specifically the design
team, needs to engage with the knowledge base within the organisation and use this valuable information to
deliver excellent products and services.
Using a continuous improvement methodology, companies have been able to focus on decreasing the
time to market and the costs of their products, while increasing customer satisfaction with robust design.
3.9 Mass customisation
Mass customisation is a new paradigm that replaces mass production, which is no longer suitable for
complex customers and markets. The process allows for a growing product variety and many opportunities
for electronic commerce. Mass customisation proactively manages product variety. In the environment of
rapidly evolving markets and products, mass customisation for example allows for individually customised
products to be sold over the internet.
Mass customised products need to compete with readily available products which are available
immediately at a local store or dealer. The appeal of mass customisation is the organisation’s ability to
provide customised products for an individual customer need, and for suppliers in the supply chain to be able
to respond on demand to stock requests in a just-in-time (JIT) delivery strategy (Chase, Jacobs & Aquilano,
2006). Speed is critical to minimise delivery time, which is the biggest threat to this production strategy. For
fast and efficient production, mass customisation products should be designed for manufacturability.
The main objective of an organisation is competitiveness. A strategy must support the objective and
facilitate products or services winning orders. The larger the selection available to the customer, the more
attractive a product, and the more customers the organisation attracts.
3.10 The future of the design process
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Future design processes are likely to be influenced heavily by future trends in various areas, for example:
• The economy: The increasing focus on consumer health, for example, wills consumers to spend money on
new products in line with health trends. If economic growth slows and spending decreases, then sales
decrease, which in turn affects the profitability of companies.
• Technology: The development of new technologies and increased production capability will lead to a
proliferation of new products and services.
• The ‘meta product’: The activity of product design will continue, but the focus may be more on the
services associated with a product rather than on the product itself. The product may not even exist but be
‘virtual’ or a meta product, for example, an avatar in an online computer game.
• Competitive pressure: As it becomes more difficult to innovate, a need to be different will develop and
the ability to think totally ‘out of the box’ will be imperative. Product design will define a dynamic
company which explores new, as yet unimaginable markets.
• Environmental issues: As the world economy begins to grapple more seriously with environment issues,
we will find that consumers become more vocal and discerning about ‘environmentally responsible’
manufacturing processes and products. This will then ideally lead to more recyclability, reparability
and longer product lifetimes, and an associated quality improvement.
• Social trends: Social trends often define product success. As the world economy becomes easier to access,
we will find that society drives product selection and choice. Consumers will be influenced by their peers,
‘popular’ products and ‘have to have’ brands.
Continuous improvements need to be engrained in the way organisations design and develop products. This
approach will replace the disjointed and periodic improvement processes seen currently in organisations.
CLOSING EXAMPLE
Vodacom expands LTE base
SA’s largest cellular provider, Vodacom, has extended long-term evolution offerings to prepaid and Top Up
subscribers on the back of increased coverage and a wider range of devices becoming available.
LTE, commonly known as 4G, provides speeds of up to double the current network offerings. Vodacom
was the first operator to launch commercial LTE services in South Africa in October last year. The service
was initially available to contract customers, but with increased LTE coverage and a much wider range of
devices now available, LTE services have now also been made available to prepaid and Top Up customers.
“We want everyone to have access to the latest technology and fastest mobile connection, so there’s no
additional charge for LTE. All you’ll need is a 64kb or higher SIM card and a compatible device. It’s that
simple,” says Vodacom CEO Shameel Joosub.
Vodacom is investing more than R6 billion a year in South Africa, adding to its network of 3G base
stations as well as building LTE coverage. At current rates, the number of 3G base stations is growing at
around 25%, it says.
All customers who have a Vodacom supported LTE capable device will be automatically provisioned
for the LTE service within 24 hours of the device being registered on the network. In certain instances the
settings may need to be changed directly on the device.
(SOURCE: IT Web Cellular, Johannesburg, 2013. Available at: www.itweb.co.za/?id=62728:Vodacom-expands-LTE-base)
Summary
In this chapter, we first explored the importance of goods and services design. A discussion on the basis of
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competitiveness and the functions of a goods and services design team followed.
The product development process was explored, along with the product life cycle and the role of a
product development team. We considered system, parameter and tolerance design and explored the
characteristics of robust design.
We also investigated product design and discussed the concept of design for manufacturability. We also
discussed the role and impact of customers, both internal and external, and how customer satisfaction plays a
key role in the product life cycle management process.
Then we explored the concepts of reprocessing, restructuring and re-engineering change, as well as
continuity and configuration, and revision changes.
We discussed mass customisation and examined the quality leadership process, process management,
change control, and the continuous improvement (kaizen) process. We concluded by looking at customer
support, new product development, and the future of the design process.
Key terms
Configuration management: The detailed recording and updating of information that describes an
enterprise’s hardware and software.
Continuous improvement: An ongoing process to improve the quality of products, services or processes.
Design for manufacturability and assembly (DFMA): The design for ease of manufacturing of the parts
that will form a product, and for ease of assembly.
Kaizen: Japanese for ‘improvement’, or ‘change for the better’.
Manufacturability: Products are designed in a way that makes them easy to manufacture.
Mass customisation: Use of flexible computer-aided manufacturing systems to produce custom output.
Product development: The process of bringing a new product to market.
Renovation: The process of improving a product.
System design: The process of defining the architecture, components, modules, interfaces and data for a
system to satisfy specified requirements.
Total quality management (TQM): A philosophy of management for continuously improving the quality
of products and services.
Review questions and activities
1 Why is competitiveness so important to a company?
2 Describe the product design and development process.
3 Why are customers so important in the design process?
4 How can product design affect manufacturability?
5 Describe the role of the design team.
6 Is robust design an option for a manufacturer of cellular telephones?
7 Explain the basic principles of kaizen. How is it implemented in an organisation of your choice?
8 Describe mass customisation with examples.
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CASE STUDY 1: SHELL SOUTH AFRICA AND SPAR SOUTH AFRICA
ANNOUNCE SPAR EXPRESS TRIAL
Shell South Africa and SPAR South Africa have launched an exciting and exclusive retail partnership in
the forecourt convenience market. This partnership will see a “SPAR Express” store open its doors at Shell
Lambton Gardens Service Station, in Wadeville, Gauteng in August 2013. This store will offer customers a
24-hour compact supermarket experience at a service station.
Globally, Shell and SPAR International have entered into partnerships in countries such as Germany
and Austria. This trial store will kick off the local partnership which is an integral part of both parties’
convenience retail strategy.
Farouk Farista, General Manager for Retail Services at Shell South Africa, describes the forecourt
convenience retail market in South Africa as a fast changing and highly competitive environment. “Shell is
developing a competitive enhanced customer value proposition. Complimenting this SPAR alliance is a
recent exclusive partnership with Vida e-caffe which will serve as the premium coffee offer at Shell
service stations”.
Bill Brown, SPAR Group Business Development Enterprises Executive, advises “We see the forecourt
convenience space as a great opportunity to highlight the fresh and convenient offer of our brand.”
Both Shell and SPAR are exceptionally excited about the trial and are confident that the combined
forces of both brands will make a competitive difference in the forecourt convenience retail market in this
country.
(SOURCE: FMCG Supplier News. 15 August 2013. Shell South Africa and SPAR South Africa announce SPAR Express Trial.
http://www.fastmoving.co.za/news/supplier-news-17/shell-south-africa-and-spar-south-africa-announce-spar-express-trial
-4240. Accessed 21 August 2013)
Case study questions and activities
1 In the case study, SPAR South Africa is moving into a new area of 24-hour convenience
supermarkets marking. Comment on the strategic reasons for this from a product or service design
perspective?
2 What benefits will SPAR gain from the partnership with Shell South Africa?
3 Would you expect Shell South Africa to increase their customers base with this initiative, and why?
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CASE STUDY 2: SUBSCRIBER-SELECTED DSTV CHANNELS
DEMANDED
A petition calling for individual channel selection and customisable DStv channel bouquets is circulating
around e-mail inboxes of South Africans, and appears to have collected a substantial number of names
already.
“Let us be in charge of that which we want to watch and pay for only that,” the e-mail demands.
“Should DSTV come up with a new and interesting channel, and then let them give us a free 1 month
trial.”
The issue of channel unbundling came up at governmental level last year (2011) when the National
Consumer Commission (NCC) served MultiChoice and On Digital Media (Top TV) with compliance
notices.
It is understood that the NCC invoked part of the Consumer Protection Act which states: “Suppliers
may not require consumers to purchase additional goods or services, or to enter into an additional
agreement or transaction unless it can be shown that:
The convenience to the consumer in having those goods or services bundled outweighs the limitation
of the consumer’s right to choice;
The bundling of those goods or services results in economic benefit for consumers;
Bundled goods or services are available separately and at individual prices.”
Approached to comment on the issue of user-selectable channels, MultiChoice said that DStv does not
provide customised channel selection as the service will be very expensive for subscribers. It is also not a
viable business model, MultiChoice said.
MultiChoice added that the pre-packaged service allows it to provide subscribers an affordable service
well into the future as it lets it spread the cost of each channel across the bouquet.
“Our business model enables us to continually introduce new innovative products and services on
DStv,” MultiChoice said.
According to MultiChoice, all pay television operators worldwide provide pre-packaged channels.
MultiChoice explained that there are operators with a variation on this model that offer a basic bouquet
with the ability to add limited genres such as movies.
“The economic realities of the pay television industry are such that payment for channels has an
economies of scale benefit which results in savings which are passed on directly to our subscribers,”
MultiChoice said.
This means that should customers choose only the channels they want to watch, they will have to pay
much more per channel.
“There is a significant cost associated with the development, implementation and administration of the
broadcast and back-end systems required to deliver customised channel packages to individual
subscribers,” MultiChoice said.
The net result, MultiChoice explained, would be a more expensive service and a lowering of the
overall value of the DStv service.
(SOURCE: Vermeulen, J. 2012. ‘Subscriber selected DStv channels demanded’, MyBroadBand. Available: http://mybroadband
.co.za/news/broadcasting/56271-subscriber-selected-dstv-channels-demanded.html)
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Case study questions and activities
1 What type of product and/or service is being offered by MultiChoice?
2 How have the various channel bouquets been designed and what type of design process was
followed?
3 Would you recommend that MultiChoice engages with its customers around the challenge of
customisation in the case study?
References
1 ASQ. 2012. Learn about quality. [Online: see websites at the end of this chapter]
2 Becker, J., Kugeler, M. & Rosemann, M. (eds). 2003. Process management. New York: Springer.
3 Chase, R.B., Jacobs, F.R. & Aquilano, N.J. 2006. Operations management for competitive advantage,
11th ed. Maidenhead: McGraw-Hill/Irwin.
4 Davis, M.M., Aquilano, N.J. & Chase, R.B. 2003. Fundamentals of operations management, 4th ed.
Boston: McGraw-Hill/Irwin.
5 Dilworth, J.B. 2000. Operations management – Providing value in goods and services, 3rd ed. London:
Harcourt College Publishers.
6 East London IDZ. 2012. Automotive brochure. [Online: see websites at the end of this chapter]
7 Farris, P.W., Bendle, N.T., Pfeifer, P.E. & Reibstein, D.J. 2010. Marketing metrics: The definitive guide
to measuring marketing performance. Upper Saddle River, N.J.: Pearson Education.
8 FMCG Supplier News. 2013. Shell South Africa and SPAR South Africa announce SPAR Express Trial.
[Online: see websites at the end of this chapter]
9 Gaither, N. & Frazier, G. 2002. Operations management, 9th ed. Cincinnati, Ohio:
South-Western/Thomson Learning.
10 Hammer, M. & Champy, J. 1993. Reengineering the corporation. New York: Harper Collins.
11 Heizer J. & Render, B. 2006. Principles of operations management, 6th ed. Upper Saddle River, N.J.:
Pearson Prentice Hall.
12 HiTec. 2012. Storm 3–1 Jacket Online Advert. [Online: see websites at the end of this chapter]
13 Houston, A. & Dockstader, S.L. n.d. TQLO Publication Number 97–02. [Online: see websites at the end
of this chapter]
14 Imai, M. 1986. Kaizen: The key to Japan’s competitive success. New York: McGraw-Hill/Irwin.
15 Imai, M. 1997. Gemba kaizen: A commonsense, low-cost approach to management. New York:
McGraw-Hill.
16 Jackson, M.C. 2003. Systems thinking – Creative holism for managers. Hoboken, N.J.: John Wiley.
17 Jacobs, F.R. & Chase, R.B. 2008. Operations and supply management: The core, international edition.
New York: McGraw-Hill/Irwin.
18 Kano, N. 1993. ‘A perspective on quality activities in American firms’, California Management Review,
35:12–31.
19 Knod, E.M. & Schonberger, R.J. 2001. Operations management: Meeting customers’ demands, 7th ed.
New York: McGraw-Hill.
20 Kotter, J. 2011. Change management vs. change leadership – What’s the Difference? [Forbes online: see
websites at the end of this chapter]
21 Kotter International. 2012. The 8-step process for leading change. [Online: see websites at the end of this
chapter]
22 National Treasury. 2012. Economic outlook, 2:12. [Online: see websites at the end of this chapter]
23 Prahalad, C.K. & Hamel, G. 1990. ‘The core competence of the corporation’, Harvard Business Review,
68:3, 79–91.
24 Reijers, H.A. & Mansar, L.S. 2005. ‘Best practices in business process redesign: An overview and
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84
qualitative evaluation of successful redesign heuristics’, The International Journal of Management
Science, 33:283–306.
25 Schroeder, R.G. 2004. Operations management – Contemporary concepts and cases, 2nd ed. New York:
McGraw–Hill/Irwin.
26 Slack, N., Chambers, S. & Johnson, R. 2004. Operations management, 4th ed. Harlow: Pearson
Education.
27 Stevenson, W.J. 2007. Operations management, 9th ed. London: McGraw-Hill.
28 Steyn, L. 2012. Midterm budget: Strikes cost economy dearly. [Online: see websites at the end of this
chapter]
29 Thom, W. 2009. People, process, and performance management in project management. [Online: see
websites at the end of this chapter]
30 Vermeulen, J. 2012. ‘Subscriber selected DStv channels demanded’, MyBroadband. [Online: see
websites at the end of this chapter]
31 Waller, D.L. 2003. Operations management – A supply chain approach, 2nd ed. London: Thomson
Learning.
32 Wild, R. 2002. Operations management, 6th ed. London: Continuum.
Websites
Visit the websites below.
http://4ltrpress.cengage.com/om/om2/om2_ch1.pdf
http://catapultdesign.org/
http://en.wikipedia.org/wiki/Design_management
http://leadingstrategies.net/elegant-design/
http://mg.co.za/article/2012-10-25-strikes-cost-economy-dearly
http://online.uis.edu/spring2002/bus322/lectures/summer2003/ISM/ch05_ism.pdf
http://portals.dmst.aueb.gr/om/
http://www.fastmoving.co.za/news/supplier-news-17/shell-south-africa-and-spar-south-africa-announce-spar
-express-trail-4240
www.emeraldinsight.com/journals.htm?articleid=849489
www.pomsmeetings.org/ConfProceedings/007/CDProgram/Topics/full_length_papers_files/007-0008.pdf
www.treasury.gov.za/documents/mtbps/2012/mtbps/Chapter%202.pdf
The websites below were last accessed on 29 August 2012:
http://mybroadband.co.za/news/broadcasting/56271-subscriber-selected-dstv-channels-demanded.html
www.asq.org/learn-about-quality/continuous-improvement/overview/overview.html
www.balancedscorecard.org/Portals/0/PDF/primer.pdf
www.elidz.co.za/wp-content/uploads/2012/01/NEW-ELIDZ_Automotive-Brochure_FEB-11.pdf
www.forbes.com/sites/johnkotter/2011/07/12/change-management-vs-change-leadership-whats-the
-difference/
www.hi-tec.com/za/products/jackets/1233-5519/storm-3-in-1/
www.kotterinternational.com/
www.pmhut.com/people-process-and-performance-management-in-project-management
YouTube™
www.youtube.com/watch?v=eBse-IYLF_o
www.youtube.com/watch?v=QYnqRmsf_tI
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CHAPTER 4
Process design, strategy and management
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
Understand and describe a process in your own words
Explain the reasons for process selection and why it is a strategic issue
Identify and explain in your own words the different types of process structures for manufacturing
Identify and explain in your own words the different types of process strategies used in manufacturing
processes
Identify and explain in your own words the different types of process structures for services
Identify and explain in your own words the different methods for process performance measurement
Explain in your own words the concepts of:
- process engineering
- industrial engineering.
CHAPTER outline
4.1
4.2
4.3
4.4
4.4.1
4.4.2
4.4.3
4.4.4
4.5
4.5.1
4.5.2
4.5.3
4.6
4.6.1
4.6.2
4.6.3
4.7
4.7.1
4.7.2
4.8
4.8.1
4.9
4.9.1
Introduction
Understanding processes
Strategic process decisions
Process structures for manufacturing
Job process
Batch process
Line process
Continuous flow process
Strategies for manufacturing processes
Make to order strategy
Assemble to order strategy
Make to stock strategy
Process structures for service
Professional service process
Service shop process
Mass service process
Process performance measurement
Benchmarking
Process performance ratios
Business process re-engineering (BPR)
Development of the BPR methodology
Industrial engineering
Areas most commonly featuring industrial engineers
Summary
Key terms
Review questions and activities
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Case study
References
Websites
YouTube™
SETTING THE SCENE
PSA Peugeot Citroën to supply Toyota with light commercial vehicles in Europe
With Toyota looking for a way to re-enter the light-commercial van segment in Europe after suspending
sales of the HiAce and the PSAPeugeot Citroën group searching for a partner for its Sevelnord plant in
northern France after the Fiat Group pulled out of a joint venture there, the two automakers took the
decision to collaborate.
As part of the deal announced today, the French group will supply Toyota with light commercial
vehicles for sale in Europe under its own brand, including the Peugeot Expert and Citroën Jumpy, starting
from the second quarter of 2013.
The accord, which also includes collaboration on next generation vehicles to be produced by PSA
Peugeot Citroën with Toyota participating in the development and industrial investment costs, is expected
to go beyond 2020, the two companies stated.
“The light commercial vehicle segment is an important one for us in many markets throughout Europe,”
said Toyota Motor Europe President and CEO Didier Leroy. “By joining forces with PSA Peugeot Citroën,
we have found a good solution for our loyal customers following the recent discontinuation of our own
Hiace model.”
PSA Peugeot Citroën and Toyota, which also produce a trio of small city cars named the Citroen C1,
Peugeot 107 and Toyota Aygo, noted that they have no plans to enter into capital tie-ups or joint
production.
“We are delighted to announce today the enlargement of the scope of our successful cooperation with
Toyota. This agreement launches the development of a new generation of mid-size light commercial
vehicle offering both companies a competitive product for the European market,” quoted Jean-Christophe
Quémard, PSA Peugeot Citroën programmes executive vice president.
(SOURCE: ‘PSA Peugeot Citroën to supply Toyota with light commercial vehicles in Europe’, Car Scoops, 2012. Available at:
http://www.carscoops.com/2012/07/psa-peugeot-citroen-to-supply-toyota.html)
4.1 Introduction
What is a process? Before we define what a process is, here is an example of how you experience processes
in your daily life. When you wash your dirty laundry, you follow a process. The process begins when you
sort the different items of clothing that have to be washed. You load the washing machine with the first
bundle of dirty clothing, then add detergent and fabric softener. When the load is done, you remove it from
the washing machine and repeat the process. This continues until all the dirty clothing has been washed. In
this process, you follow the same routine every time. It is no different in a production process.
A process can be defined as a methodology that will be utilised on a continuous basis that will result in
the creation of a good or service that can be delivered to a customer at a profit. The process can thus be seen
as the ‘how’ of the production of a good or service. It is exactly as described in the example of washing your
dirty laundry. How did you achieve the goal of having clean clothes available? It is important to understand
that process impacts on various important areas of an organisation. Some of these areas are capacity
planning, facility layout, types of equipment utilised in the production process, and designing systems. For
every new or redesigned product, new or redesigned processes are required.
During the design phase of processes, two major aims must be satisfied. These are:
1 The process must add the maximum value to the good or service it will create.
2 The cost added to the good or service during its creation must be minimised.
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The management of these two opposites can be classified as a coincidence and can be very difficult. It may
become a case in which the so-called value added is a perception and is in fact so small that the value is
barely discernible by the customer. In a successful process, the distance between traits added to the process
and the cost incurred as a result will be great. The result will be a further improvement in the profit of the
product.
4.2 Understanding processes
Designers of processes must practise system thinking during the design phase. This is necessary to guarantee
that the user requirements for the newly designed processes are taken into account and that the users
understand the processes. The need to understand the processes stems from the fact that every process utilised
in an organisation crosses the time honoured organisational borders. The following example will demonstrate
this further. Langeberg Cooperation (KOO) receives orders for its products from distributors. The process of
filling the orders can be described as follows: The sales force registers the orders that they have received
from the distributors at the sales office. A sales clerk captures all the orders on the organisation’s
computerised sales book. The next step is that a clerk in the finance department does a credit check on the
distributor. On approval, the order is routed to the warehouse where the specified items are picked, packaged
and dispatched to the distributor. At the same time, the warehouse personnel let the manufacturing
department know what items need to be replenished.
The example illustrates the need for management to manage a process in its entirety, rather than
concentrate on specific operations within the process. All the operations are gathered in one process.
Therefore, process thinking can be described as an ordered methodology that examines the diversified system
within the organisation as a unified system. Continuous improvements to the processes must be the result of
the manner in which a process is managed. The improvements must be achieved to guarantee that processes
remain effective and efficient. The crossing of organisational borders by processes makes the management of
the processes more difficult. When a process fails, penalties must be paid. The penalty usually manifests
itself in the form of an unhappy customer. The following six characteristics must be taken into account to
fully understand a process:
1 The good or service must be accurately defined.
2 The needs of the customers that will consume the output must be clearly understood.
3 All the possible suppliers to an organisation must be identified.
4 The correct process for the goods or services to be produced must be defined.
5 The process must be mistake proofed.
6 Continuous feedback of process performance must be carried out.
Characteristics one to three above form the boundaries of the process, and characteristics four and five are the
map of how the process will perform. The final characteristic sets the standard to which the process will have
to perform in order to remain effective and efficient.
This is illustrated in Figure 4.1 below.
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FIGURE 4.1 Characteristics to be taken into account to understand a process
BOUNDARIES OF THE
PROCESS
MAP OF THE PROCESS
PROCESS
PERFORMANCE
STANDARD
•
•
•
•
•
The good or service must
be accurately defined
The needs of the customers
that will consume the
output must be clearly
understood
All the possible suppliers
to an organisation must be
identified
•
The correct process for the
goods or services to be
produced must be defined
The process must be
mistake proofed
Continuous feedback of
process performance must
be carried out
4.3 Strategic process decisions
Every process utilised by an organisation consumes scarce resources. In return, the process must produce
something of value. Without processes, the organisation will be unable to produce goods or services that can
be consumed by its customers. The most important decision to be made by management is the way in which
the process will provide the envisaged output. Strategies must be developed for the consumption of resources,
types of equipment and machinery to purchase, possible outsourcing of processes, goods or services and so
forth. In some instances, organisations have to strategise about which goods, services or processes to
subcontract to other organisations and which will remain in house. For example, motor vehicle manufacturers
must have strategies to outsource the manufacture of certain components used during the manufacturing
process in their factories.
As indicated in the setting-the-scene box, Peugeot Citroen has made the strategic decision to provide
Toyota with light commercial vehicles to sell under the Toyota name brand. In the service industry, Telkom
outsources to private contractors the laying of telephone cables. The strategies must be developed to identify
the supply or value chain. The strategies developed will also minimise the impact of the organisation’s
operating environment on its operations. The strategies can include, for example, the production of healthier
foodstuff, greener products, and services.
Recently it has become very important for organisations to reduce their carbon footprint. Strategies must
be put in place to achieve this.
The following philosophies on the subject of process determination are of specific significance:
• Successful process decisions will be adopted if process choices are an exact match for the setting in
which the organisation operates. Cross-purpose processes should not be favoured if they will be
disadvantageous to the functioning of other processes. The process should, instead, aim to fulfil the major
process characteristics and be as closely related to the strategic match as possible.
• Each process must be a part of the process foundation of the organisation, which in its totality creates the
supply chain of the organisation. The achievement of this goal will have a colossal impact on the
approach the organisation has to satisfying customer needs and remaining competitive at the same time.
• There must be a close working relationship between all the processes within an organisation. This
relationship has to include all subcontracted processes – after all, they remain the organisation’s
processes, even though someone else is executing or managing them. There must be a seamless interface
between all the processes. The optimal management of all cross-functional processes cannot be
overemphasised.
Figure 4.2 illustrates the principal determinations for effective and efficient processes.
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FIGURE 4.2 Determination of effective and efficient processes
4.4 Process structures for manufacturing
In this section we discuss the choice of process. An organisation must come to a decision about whether to
configure its assets according to products or according to processes. If the assets are configured according to
processes, the result will be that the assets carrying out the same work will be grouped together. For example,
all the drilling machines, milling machines and lathes will be grouped together. Each piece of work will
follow the same route through the assets. In contrast, the product-focused environment will focus on routing
every piece of work through the operations in a process that is similar, if not identical, for that particular
product. A product that does not require a specific operation will simply bypass that operation in the process.
Prior to deciding on the type of process to adopt, the designers of processes must ask the following questions:
• What is the amount of variability present in the good or service produced?
• What is the degree of flexibility required from labour and equipment?
• What are the quantities of goods and services to be produced by the process?
There are four key process types from which management can choose. Each will be discussed in detail in
sections 4.4.1 to 4.4.4.
4.4.1 Job process
The job process is also known as the job shop or process-focused process. This process type is highly
adaptable. The scale of the operations in this type of process is fairly small. The process is structured around
particular events. The result is that the process produces an extensive diversity of products in small
quantities. Products, by their nature, will be highly customised but the quantities produced are low. Labour
and machinery have a significant level of elasticity to accommodate the large diversity of products. This
process will produce each of the products in an irregular way. In the job shop, no work is undertaken without
a customer order for that particular product. Every customer order received is treated as a separate piece of
work. The result is that every customer order is completed in its entirety before the next job commences. The
assets are arranged around the process. The equipment utilised in the process is of a more general nature and
little specialised machinery and labour are used. For example, the entire customer order is routed through the
milling section, then progresses to the drilling section, and is finally routed to the turning section. It is
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possible that some of the work to be carried out can be classified as a line type process. The variable cost
component of the process is very high. The process is ideally suited to automation because of low utilisation
of equipment and labour. An example of the process type can be found in the manufacture of furniture. For
instance, a customer order for a particular type of lounge suite for Russells will be completed before the order
for lounge suites for Morkels commences. An example of a job shop in the service industry is a doctor’s
surgery. Each patient is treated as an order. After the consultation with one patient has been completed, the
doctor starts the next ‘order’ (patient).
4.4.2 Batch process
Batch process is also known as the standardised job shop process. This is the most common type of process
utilised in industry. Batch processes make use of small or large batches. The process is by nature intermittent
(irregular) and is therefore highly flexible. The levels of skill required from labour in this type of process are
much lower than the skill levels required in the job shop process. The most telling difference between batch
processing and job processing is in the number, range and quantity of goods and services produced by each
process. In the batch process the same parts, components or products are manufactured continuously. The
limited array of goods or services produced by the process differentiates it from the job shop process. Every
batch produced by the process is completed in its entirety before the production of the next batch
commences. The process alternates between the products to be manufactured. Due to the fact that the batch
sizes for the process are reasonably large, each product produced has its own dedicated process for
manufacturing. There is a degree of flexibility present in the process. A typical example of batch production
is a bakery in a supermarket: a batch of white bread will be produced, and then batches of brown bread, a
batch of rolls, and so forth. A typical example of batch production in the service industry is the videos shown
on VH1 or MTV.
4.4.3 Line process
The line process is also known as the repetitive process, repetitive focus or assembly line process. The
process produces one type of product in a straight-line configuration. Modular production is a characteristic
of the process. A typical example of the process is the manufacture of motor vehicles. The process is placed
between the pure batch production process and the continuous production process. The result is high
quantities of production, and the utilisation of standardised parts and components is very high. The process
tends to be structured around a specific product. Very little inventory is present in the process. Each operation
in the process performs the same task continuously, with no variance allowed. For example, on the motor
vehicle assembly line, one person fits the front wheels on the car; he or she performs that operation for the
entire shift and is not allowed to perform any other operation. The commencement of production in this type
of process is not reliant on the receipt of a customer order; production of a relatively standard product
constantly occurs. The variety of products produced at any one time is very low, to the point that it is almost
non-existent. Labour and skill requirements for the process are very low. Low-skilled workers are employed,
as their role is more that of machine minders than machine operators.
4.4.4 Continuous flow process
The continuous flow process is also known as the product-focused process. A typical example of the process
is the production of petroleum products at Sasol. Other examples are production at Amalgamated Beverage
Industries (Coca-Cola, Fanta, Sprite) and SABMiller (Castle Lager, Black Label). The production volumes in
this type of process are very high. The production line cannot be changed without causing huge losses to
production volumes and high costs due to work stoppages. Flexibility in the process is therefore non-existent.
Depending on where in the process people are employed, their skills level requirement can be classified as
very low, moderate or high, and is determined by the task performed. The main characteristic of this process
is that only one type of product flows through the process at any one time. In the case of Sasol it is petrol or
diesel, at ABI it is soft drinks, and at SABMiller it is beer. The only time that the production line comes to a
halt is when a breakdown is experienced somewhere in the line. The capital investment in this type of process
is very high and must be made continuously to ensure the latest technology is utilised. The process is in
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operation continuously and operates in shifts of 8 or 12 hours. Therefore, an organisation can operate 3 shifts
of 8 hours or 2 shifts of 12 hours. Product changes are usually scheduled for the beginning of a new shift.
4.5 Strategies for manufacturing processes
There are fundamental differences between the strategies that are utilised for manufacturing and those
utilised for services. The major reason for the difference is the level of customer contact that is present in the
service industry but not necessarily in the manufacturing sector. The reason for the difference is that the
manufacturing sector can create inventory, while the service sector is unable to do so. Due to the fact that the
product is consumed somewhere else, the following manufacturing strategies can be utilised to guarantee the
availability of the products.
4.5.1 Make to order strategy
The make to order strategy is also known as the manufacture to order strategy. The strategy is utilised where
low-volume customer specification products are produced. The preferred method of production is the job or
batch production process. There are a number of subprocesses that can be utilised to produce the required
product. The strategy will satisfy a unique desire of the customer. Another characteristic of the strategy is the
high level of customisation and the highly multifaceted processes that are utilised. Any process that utilises
this strategy must have a high degree of flexibility. An example of this type of strategy is the building of a
very expensive house or office building.
4.5.2 Assemble to order strategy
The assemble to order strategy makes use of a small number of assemblies or components to produce a large
diversity of products. The assembly process commences after an order has been received from a customer.
The major requirement is that the finished product is delivered in the shortest possible time. The processes
most often utilised for this strategy are the batch or assembly line. The production of the components and
sub-assemblies is achieved through batch production, and final assembly is achieved using the line
production process. The strategy requires high volumes of standardised products and results in high levels of
inventory. Without the high levels of inventory the strategy will be unsuccessful. The end item of the strategy
is not individually created or invented, as a rule. The reason is that the cost to create or invent many different
products is prohibitive. A typical example is a paint shop. The shop will stock inventories of the most basic
colours of paint. The customers use a colour chart to choose their desired colours and the staff members at
the shop mix the colours utilising the colours they have in stock. The final colour a customer has ordered is
not kept in inventory as the shop does not have enough room to house all the different colours of paint. The
‘recipes’ for a specific colour are available on a computer for later use.
4.5.3 Make to stock strategy
The make to stock strategy will have large inventories of products available in anticipation of customer
orders. Utilising this strategy, an organisation can satisfy a large number of customer orders in the shortest
lead time possible. The strategy is suitable for highly standardised products and where exact forecasts of
customer demand can be undertaken. The strategy is mostly utilised by the product-focused process. A
typical example is the production of fast moving consumer goods (groceries). Owing to the volumes of
groceries sold, the goods can be created to satisfy future customer needs. The demand for this type of good
can be predicted with relative accuracy. Another characteristic of this strategy is the uniqueness of the
product and the fact that the sales are of sufficient volumes.
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DISCUSSION
PSA Peugeot Citroën to supply Toyota with light commercial vehicles in Europe
Read the situation discussed in the setting-the-scene box at the beginning of the chapter. Answer the
following questions:
1 What type of strategy did Toyota and Peugeot Citroen follow in this case?
2 Do you think that this type of strategy will work for general consumer goods?
4.6 Process structures for service
In section 4.4 we discussed process structures for manufacturing. Designing the correct processes for the
service industry is no less important, and the same diligent care must be taken in the designing process. There
are three major process types available for the service industry. These are discussed in more detail in the
subsections that follow.
4.6.1 Professional service process
This process is typified by producing a great variety of services with low volumes. As a result, the customer
involved in this type of process will be part of this process for prolonged periods of time. The process is
further typified by highly custom-made services. Therefore, employees in the process have a high degree of
freedom of choice in the manner in which the customer will be handled while he or she is in the system. The
process can be classified as being focused on people rather than equipment. The process places equal
importance on the process itself and on the product of the process. Some examples of this type of process are
doctors’ surgeries and attorneys’ offices.
4.6.2 Service shop process
The service shop process falls somewhere between the professional service process and the mass service
process. The process is distinguished by the degree of customer participation in the process. As with the
professional process, the service shop is typified by a high degree of adaptation. The process experiences
fairly high volumes of customers. A fair amount of customer interaction is present within the process.
If this type of process is utilised, it is characterised by work being carried out in a set-up of front and back
offices. Typical examples are banks (for example, Standard Bank, ABSA, Nedbank). Members of the front
office staff – such as tellers, receptionists and personal bankers – carry out particular duties. Back office staff
members – such as loan officers and investment bankers – carry out other duties. The front office staff
members have a minimum level of training that mostly covers the tasks they perform daily. The back office
staff members have more experience and training that covers a broader spectrum of the operations in the
bank. This process requires highly standardised services, such as loan applications, depositing and
withdrawing of funds, ordering new cheque books, and so on. In most instances, the services closely
resemble the requirements of the customers.
4.6.3 Mass service process
This type of process is distinguished by large numbers of client dealings. As a result, there is very little scope
for customisation. The process mostly utilises machinery and equipment to produce the output of the process.
Most tasks in the process are carried out by the back office staff. The front office staff members have little
leeway in the way in which they deal with clients. In this type of process, the front office staff members have
clearly defined job descriptions. They are not allowed to deviate from standard procedures. The mass service
process is typically found in supermarkets (for example, Pick n Pay, Spar and Checkers). The front office
staff consists of the till operators, shelf packers and cleaners. Back office staff includes management, buyers
and stock controllers.
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4.7 Process performance measurement
During the design phase of a process, the specifications of the process will be settled on. Once a decision has
been made, the process must constantly perform to these specifications. Process performance measurement
establishes to what extent the process is performing to the specifications. Performance can be measured only
if the appropriate metrics (measurements) have been developed. A number of metrics are available to
management for the evaluation of a specific process’s performance. The following are the metrics most often
exploited.
4.7.1 Benchmarking
When benchmarking is utilised, an organisation researches other organisations’ processes to determine why
others’ processes are outperforming its own. The industry leader, whose processes are constantly
outperforming all the other processes, is identified and, once the leader’s specific process has been analysed,
the benchmarking organisation has a clear indication of where its own processes require improvement. The
result of the analysis is important to other departments as well. Through the process of benchmarking,
processes contributing to the poor performance of the benchmarked process can be identified. The result is
that the organisation can determine the level of performance of a process against clearly defined metrics. The
results of benchmarking can be utilised to determine the productivity of the process. (See Chapter 13 for a
further discussion of benchmarking.)
4.7.2 Process performance ratios
The performance ratio methodology is the most commonly practised measuring device to measure the
performance of a process. A ratio is always expressed relative to the amount of time that a resource will be
utilised in performing particular tasks. The ratio is then measured against the actual time available to perform
that activity. The utilisation factor is computed for that particular resource, such as labour hours, machine
hours, capital, energy, and so forth.
Productivity
Productivity is one of the most important metrics through which process performance can be measured.
Productivity measures the output of the process against the inputs consumed by the process. When the ratio
is computed, it measures how well the process has been performed. The following formula can be utilised:
The outcome of the calculation is expressed as a percentage. The total value of output in South African rand
is divided by the total cost in South African rand. From this calculation, the organisation can determine how
productive the process has been. The lower the productivity ratio, the poorer the process performs.
Efficiency
Efficiency ratios measure the actual output produced by a particular process. The output is therefore
measured against a well-known standard. The following formula can be utilised:
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WORKED EXAMPLE
For example, imagine a machine has been designed to fill 30 bottles per minute (often referred to as the
design capacity) and that measurement of the output found that 60 bottles were filled. The efficiency ratio
is calculated as follows:
The outcome is normally expressed as a percentage.
EXERCISE
A shoemaker bought a new machine with the capacity of making 300 shoes per month. She invested in the
training of her workers in operating the machine effectively. In the first month she spent R83 200 on labour,
material, maintenance and other costs and was able to make 500 shoes which she was able to sell all at
R250 per pair.
Questions:
1 Calculate the productivity of her factory.
2 Calculate the efficiency of the machine.
Solution:
Run time
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Run time ratios determine the performance of the process in respect of the time it requires to produce a batch
of products. A simple calculation is done where the time required to produce one item of the product is
multiplied by the batch size. This time can then be compared to the total available time. The set-up time with
the run time will be utilised to determine the next performance ratio.
Operations time
The operations time ratio is the sum of the run time and set-up time when a batch of products is produced on
a particular machine. Again, this time can be compared to the available time. Many organisations neglect to
take set-up time into consideration when the operations time ratio is computed. In such instances, the time is
classified as down time as though a breakdown had occurred. An unbalanced ratio is thus achieved.
Throughput
Throughput rate is computed by adding the time labour actually utilised for production to the time that the
product spent waiting in the process to be worked on. The throughput rate then becomes the output rate of the
process. That means the rate represents the actual number of products the process produced.
4.8 Business process re-engineering (BPR)
The success of an organisation is dependent on the cost-effective deployment of its scarce resources of
material, machines, manpower (human resources) and methods. Managers have to utilise all available tools
and methodologies to improve methods, which include all the processes within the organisation.
One methodology that can achieve process improvements is BPR. The methodology was popularised by
Hammer in the early 1990s and was further enhanced by research, which was published by Hammer and
Champy (1993). As a result of the research undertaken, the methodology has been developed since the early
1990s to become an authoritative technique used in assisting organisations to improve their processes. A
cornerstone of the methodology is that changes must result in the fundamental and radical redesign of
processes.
Methodologies such as concurrent engineering, group technologies, and Kanban type manufacturing
systems are proof that organisations are practising the methodology of BPR. There are, however, two widely
divergent viewpoints regarding the methodology. One viewpoint expresses the opinion that BPR and total
quality management (TQM) are exactly the same methodology; the second viewpoint expresses the opinion
that the two methodologies are irreconcilable.
The most important contributions from the methodology of TQM are teamwork, employee empowerment
and participation, cross-functional training, in-depth analysis, and the measurement of all processes. The
methodology of TQM further encourages organisations to treat suppliers as part of the organisation rather
than as antagonists and to benchmark processes against the best in the industry. Implementing the techniques,
an organisation then realises that change has become imperative. There is, however, a major difference in the
manner in which BPR and TQM realise the desired change.
Change is realised through what is referred to as ‘fundamental radical redesign of processes’ if BPR is
utilised. In contrast, change is realised through what is referred to as a ‘process of incremental change’ when
TQM is utilised. With TQM, then, the result is that change is dispersed over a longer time period than is the
case with BPR. BPR achieves the desired improvements to processes in a much shorter time with more
immediately measurable results. The radical changes are the hallmark of the methodology. A further
characteristic of the methodology is that it is pioneering by nature. BPR cannot be seen as a single event that
can then be forgotten. If the improved process is not performing to the desired level, that process must be
re-engineered again.
The major area of similarity between the two methodologies is the fact that both hold the customer to be
the centrepiece of the organisation.
4.8.1 Development of the BPR methodology
Researchers from 1994 further developed the BPR methodology. Roberts (1994:4) defines BPR as ‘a start to
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finish holistic view of the related set of activities that deliver value to the customer’. The establishment of a
quality culture in an organisation can take up to five years. During the 1990s, the establishment of a quality
culture was deemed important to the implementation of BPR projects. Due to the evolution of the technique
over time, the quality culture cannot be claimed as a competitive edge, but is rather a necessity. If quality is
no longer a competitive edge, techniques have to be found to address waste and inefficiencies in processes.
Employee productivity can be another focus area for improvement. Organisations have for too long
neglected employees – the human capital of an organisation – as possible improvement vehicles. Both
products and productivity are very important if an organisation wishes to remain competitive. To achieve the
required level of competitiveness, organisations must have effective and efficient processes. Processes that
have been in operation for long periods without any improvements may lose their competitiveness.
Costs and cycle time will be improved once an organisation realises that fundamental changes are
required to streamline processes. This can be achieved as follows:
1 Losses in business can be assigned to poor processes rather than to poor products.
2 The degree of difficulty in detecting inefficiencies and waste in business processes is much higher than in
detecting inefficiencies and waste in manufacturing processes.
3 The business process takes five per cent or less of available process time to add value to activities.
4 Manufacturing processes are developed more rapidly than business processes and, as a result, the scope
for the improvement of business processes is more significant.
5 Business processes deal with the cross-functional issues in an organisation; change to these is much
slower as manufacturing processes do not have to labour under the same constraints.
Considering the above, it is understandable that a radical rethink of business processes can become necessary.
Organisations have to realise that BPR is a technique complementary to continuous improvement. Processes
must be re-engineered to achieve breakthrough improvements and re-engineering must be undertaken as a
project. The focus of the project must be in the correct area, and by utilising the project technique, the
organisation knows that there will be a specific start date and end date. Once the project has ended,
continuous improvements can then be utilised to maintain the efficiency and effectiveness of the processes.
Jacobs and Chase (2008:8) define efficiency as ‘doing something at the lowest possible cost’ and
effectiveness as ‘doing the right things to create the most value for the company’.
4.9 Industrial engineering
The industrial engineering department in any organisation is one of the most important service departments
that help the operations department in its quest for continuous improvements to products and processes.
Industrial engineering is mainly concerned with the investigation, redesign and implementation of
processes, performance standards, work methods, and related issues. Below we shall discuss some examples
of the work done by industrial engineers.
4.9.1 Areas most commonly featuring industrial engineers
In this section we consider the areas that most commonly feature industrial engineers. Bonus schemes are a
monetary reward paid to management in an organisation. These monies are paid if performances are above a
standard set of parameters. Industrial engineers investigate and develop the best possible measures or
parameters to ensure an equitable distribution of funds available for performance bonuses.
Industrial engineers also investigate and develop guidelines for profit sharing in an organisation. Profit
sharing takes place when a portion of an organisation’s profit is shared amongst employees as part of
performance schemes. Profit is shared by all employees and not by management only.
Ergonomics is another area in which industrial engineering features. Ergonomics is the study of work
and is often called the study of human factors. The main purpose of industrial engineering is to study the
relationship between humans and the machines or equipment they operate.
Method analysis is a tool used by industrial engineers to assist operations managers in developing work
procedures that ensure a safe working environment and the production of high-quality products. An industrial
engineer makes use of flow diagrams, process diagrams, activity charts and operations charts as tools to
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analyse the above. These charts further assist an industrial engineer to visualise the methods and processes
being investigated.
The industrial engineering department in an organisation uses work measurement, time studies and work
sampling to set labour standards. Labour standards must be set for all types of work that will be done in an
organisation. Time studies are samples of the performance of employees and this performance forms the
basis for the standard time to be set. In contrast, work sampling is an estimate of the time that employees
spend on the various tasks that constitute their jobs.
CLOSING EXAMPLE
Minister of Water Affairs on business process review (BPR)
The Minister of Water and Environmental Affairs noted the need for a turnaround strategy in the
Department of Water Affairs (DWA). She then introduced the experts who comprised the Business Process
Review Committee (BPRC), and said that they would be working with the DWA in a complementary role.
Water was not yet seen as central to development, and many of the infrastructural challenges were historic
and based on apartheid patterns, and the current legislation did not allow for effective change or public
participatory processes. The difficulties were exacerbated by lack of skills, particularly in engineering, and
policy reforms needed to be pro-poor.
The BPRC was established in July 2011, to prepare a report on the operations of the DWA, based upon
ten work streams. Each of the members of BPRC present then outlined the focus of his or her work stream.
The Finance stream was concentrating on audit issues and had already achieved substantial progress, was
interrogating finance capacity requirements and ensuring suitable personnel, as well as achieving alignment
across the various projects, regions and municipalities.
The BPRC outlined its operational analysis and culture, the communication methods in the Department,
citing nine projects, and noted that it was seeking a new service provider for ICT solutions, with the
intention of a handover process from September 2012 to March 2013. The legislative review was briefly
mentioned, although the DWA went into more detail on it later. Institutional alignment was seen as a
consultative process and there would be hearings with stakeholders. The water boards could be
democratised still further to allow greater public participation, through a tribunal and through rewriting of
the National Water Resource Strategy. The need for greater awareness and education was stressed, as well
as the need to improve the whole value chain.
(SOURCE: Parliamentary Monitoring Group, 2012. http://www.pmg.org.za/report/20120417-department-water-affairs-dwa
-budget-2012-13-financial-statements-2012)
Summary
This chapter began by examining the concept of process design for products and services. We discussed the
importance of process choices as a strategic issue. The why and the how of selecting processes, and the
results of such decisions were discussed. We discussed why it is important to understand processes and the
way in which they behave. The major point made was that one should manage processes as a whole – one
cannot micro manage a process. To understand the working of a process it is necessary to understand what
characteristics the process will display. If the characteristics are not understood, an incorrect process will
result. It is important that a process produces something of value as it consumes scarce resources. Particular
philosophies further influence the type of process that is designed and installed. Process structures for the
manufacturing sector were identified. The four major processes identified were job process, batch process,
line process and continuous flow process. Different strategies to optimise that process can be utilised. The
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three major strategies identified were made to order, assemble to order, and make to stock. Three service
process structures were identified as well: the professional service shop, service shop process, and mass
service process. We explained that benchmarking as a performance measure is important as it indicates to an
organisation how well its processes are performing compared to industry leaders. From the benchmarking,
performance ratios can be developed against which the actual performance of every process can be measured.
We mentioned that radical improvements to underperforming processes can be achieved through the
application of BPR, while a more gradual improvement is envisaged in a TQM environment. We explained
that the task of improvement is the responsibility of industrial engineers.
Key terms
Assemble to order: This strategy makes use of a small number of assemblies or components to produce a
large diversity of products.
Assembly/product focus: Also known as the repetitive process, repetitive focus or assembly line process, it
produces one type of product in a straight-line configuration.
Automation: The use of machines, control systems and information technologies to optimise productivity
in the production of goods and delivery of services.
Batch/repetitive process: Also known as the standardised job shop process, which makes use of small or
large batches. The process is by nature intermittent (irregular) and is therefore highly flexible.
Benchmarking: When an organisation researches other organisations’ processes to determine why others’
processes are outperforming its own.
Business process re-engineering (BPR): An authoritative technique used in assisting organisations to
improve their processes. A cornerstone of the methodology is that changes must result in the
fundamental and radical redesign of processes.
Design capacity: The capacity/volume of output that a machine has been designed to achieve within a set
time frame.
Effectiveness: Doing the right things to create the most value for the company.
Efficiency: Doing something at the lowest possible cost to the company.
Ergonomics: The study of work; often called the study of human factors.
Job shop/process focus: This process type is highly adaptable and the scale of the operations in this type of
process is fairly small and usually structured around particular events or jobs.
Make to order: This strategy is also known as the manufacture to order strategy, which is utilised where
low-volume customer specification products are produced. The preferred method of production is the
job or batch production process.
Make to stock: This strategy will have large inventories of products available in anticipation of customer
orders.
Productivity: This measures the output of the process against the inputs consumed by the process. When
the ratio is computed, it measures how well the process has been performed.
Project: A task that has to be undertaken in a specific area, with a start and end date and certain milestones
and deliveries linked to specific due dates.
Repetitive production: This process produces one type of product in a straight-line configuration, resulting
in high quantities of production and the utilisation of standardised parts and components.
Total quality management (TQM): The most important contributions from the methodology of TQM are
teamwork, employee empowerment and participation, cross-functional training, in-depth analysis, and
the measurement of all processes.
Review questions and activities
1 Describe a production process in your own words.
2 Explain process selection and why it is seen as a strategic issue, including the philosophies on process
determination.
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3 Identify and explain in your own words the different types of process structures for manufacturing.
4 Identify and explain in your own words the different types of process strategies used in manufacturing
processes.
5 Identify and explain in your own words the different types of process structures for services.
6 Identify and briefly explain (in your own words) the different methods for process performance
measurement.
7 Explain in your own words the concepts of:
7.1 Business process engineering
7.2 Industrial engineering.
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CASE STUDY: THE EAT ’N ENJOY BAKING COMPANY
The company
The Eat ’n Enjoy Baking Company is located in Roodepoort on the West Rand. Two brothers, Peter and
John, who formed the company after purchasing a cookie franchise, run the bakery. The franchise assures
them of exclusive rights in Gauteng and is one of the largest franchises in South Africa. The company
employs fewer than 200 people, mainly blue-collar workers, and the atmosphere is informal.
The product
The company’s only product is a soft cookie, of which it makes more than 50 varieties. Larger companies,
such as Bakers, have traditionally produced biscuit cookies from which most of the water has been baked
out, resulting in crisp cookies. Eat ’n Enjoy cookies have no additives or preservatives. The high quality of
the cookies has enabled the company to develop a strong market niche for its product.
The customers
The cookies are sold in supermarkets throughout Gauteng. Eat ’n Enjoy markets its cookies as ‘good food’
– no additives or preservatives – and this appeals to a health-conscious segment of the market. Many
customers are over 45 years of age, and prefer a cookie that is soft and not too sweet. Parents with young
children also buy the cookies.
The production process
The company uses two continuous band ovens to bake the cookies. The production process is a batch
processing system. The process begins as soon as management gets orders from distributors. These orders
are used to schedule production. At the start of each shift, a list of the cookies to be made that day is
delivered to the person in charge of mixing. That person checks a master list, which indicates the
ingredients needed for each type of cookie, and enters that information into the computer. The computer
then determines the amount of each ingredient needed, according to the quantity of cookies ordered, and
relays that information to storage silos located outside the plant, where the main ingredients (flour, sugar,
and cake flour) are stored. The ingredients are automatically sent to giant mixing machines, where they are
combined with the required amounts of eggs, water and flavourings. After the ingredients have been mixed,
the batter is poured into a cutting machine, which cuts it into individual cookies. The cookies are then
dropped onto a conveyor belt and transported through one of two ovens. Filled cookies – such as those
filled with lemon cream, strawberry and raspberry – require an additional step for filling and folding.
The non-filled cookies are cut in a diagonal, rather than round, way. The diagonally cut cookies require
less space than straight-cut or round cookies, and the result is a higher level of productivity. The company
recently increased the length of each oven by 25 metres, which also increased the rate of production.
As the cookies emerge from the ovens, they are fed onto spiral cooling racks 20 metres high and 3
metres wide. As the cookies come off the cooling racks, workers place the cookies into boxes manually,
removing any broken or deformed cookies in the process. The boxes are then wrapped, sealed and labelled
automatically.
Inventory
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Most cookies are loaded immediately onto trucks and shipped to distributors. A small percentage is stored
temporarily in the company’s warehouse, but the cookies must be shipped as soon as possible because of
their limited shelf life. Other inventory includes individual cookie boxes, shipping boxes, labels, and
cellophane for wrapping. Labels are reordered frequently in small batches because governmental label
requirements are subject to change and the company does not want to get stuck with labels it cannot use.
The bulk silos are refilled two or three times a week, depending on how quickly supplies are used.
Cookies are baked in a sequence that minimises downtime for cleaning. For instance, light-coloured
cookies (for example, chocolate chip) are baked before dark-coloured cookies (for example, fudge), and
oatmeal cookies are baked before oatmeal raisin cookies. This permits the company to avoid having to clean
the processing equipment every time a different type of cookie is produced.
Quality
The bakery prides itself on the quality of its cookies. A quality control inspector samples the cookies at
random as they come off the line to assure that their taste and consistency are satisfactory and that they have
been baked to the proper degree. Also, workers on the line are responsible for removing defective cookies
when they spot them. The company has also installed an X-ray machine on the line that can detect small
bits of metal filings that may have got into cookies during the production process. The use of automatic
equipment for transporting raw materials and mixing batter has made it easier to maintain a sterile process.
Scrap
The bakery is run very efficiently and has minimal amounts of scrap. For example, if a batch is mixed
improperly, it is sold as dog food. Broken cookies are used in the oatmeal cookies. These practices reduce
the cost of ingredients and save on costs of waste disposal. The company also uses heat reclamation; the
heat that escapes from the two ovens is captured and used to boil the water that supplies the heat to the
building. Also, the use of automation in the mixing process has resulted in a reduction in waste compared
with the manual methods used previously.
New products
Ideas for new products come from customers, employees and observations of competitors’ products. New
ideas are first examined to determine whether the cookies can be made with existing equipment. If so, a
sample run is made to determine the cost and time requirements. If the results are satisfactory, marketing
tests are conducted to see if there is a demand for the product.
Potential improvements
There are a number of areas of potential improvement at the bakery. One possibility is automating the
packing of the cookies into boxes. Although labour costs are not high, automating the process might save
some money and increase efficiency. So far, the owners have resisted making this change because they feel
an obligation to the community to employ the 30 women who now do the boxing manually. Another
possible improvement is to use suppliers located closer to the plant than the suppliers the company currently
uses. This would reduce delivery lead times and transportation costs, but the owners are not convinced that
suppliers could provide the same good quality. Other opportunities have been proposed in recent years, but
the owners rejected them because they feared that the quality of the product might suffer.
Case study questions and activities
1 Discuss the steps the owners of the franchise must take to understand their business better.
2 What type of manufacturing structure is utilised by the organisation? Motivate your answer.
3 In your opinion, which process structure for manufacturing would be better suited in this instance?
4 According to inventory holding, which strategy for manufacturing is utilised? Motivate your answer.
5 Is there room for improvement? If so, which methodologies would you utilise?
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102
References
1 Bicheno, J. & Catherwood, P. 2005. Six-sigma and the quality toolbox for service and manufacturing.
Buckingham: PICSIE Books.
2 Car Scoops. 2012. PSA Peugeot Citroën to supply Toyota with light commercial vehicles in Europe.
Available at: http://www.carscoops.com/2012/07/psa-peugeot-citroen-to-supply-toyota.html
3 Chase, R.B., Jacobs, F.R. & Aquilano, N.J. 2006. Operations management for competitive advantage,
11th ed. Maidenhead: McGraw-Hill/Irwin.
4 Cochon, G. & Terwiesch, C. 2006. Matching supply with demand – An introduction to operations
management, international edition. New York: McGrawHill/Irwin.
5 Davis, M.M., Aquilano, N.J. & Chase, R.B. 2003. Fundamentals of operations management, 4th ed.
Boston: McGraw-Hill/Irwin.
6 Davis, M.M. & Heineke, J. 2005. Operations management – Integrating manufacturing and services, 5th
ed. Boston: McGraw-Hill/Irwin.
7 Dilworth, J.B. 2000. Operations management – Providing value in goods and services, 3rd ed. London:
Harcourt College Publishers.
8 Finch, B.J. 2008. Operations now – Profitability, processes, performance, 3rd ed. New York:
McGraw-Hill.
9 Gaither, N. & Frazier, G. 2002. Operations management, 9th ed. Cincinnati, Ohio:
South-Western/Thomson Learning.
10 Hammer, M. 1990. ‘Reengineering work: Don’t automate; obliterate’, Harvard Business Review, 90(4):
104–112.
11 Hammer, M. & Champy, J. 1993. Reengineering the corporation: A manifesto for business revolution.
New York: Harper Business.
12 Heizer, J. & Render, B. 2006. Principles of operations management, 6th ed. Upper Saddle River, N.J.:
Pearson Prentice Hall.
13 Hill, T. 2005. Operations management, 2nd ed. Basingstoke: Palgrave Macmillan.
14 Jackson, M.C. 2003. Systems thinking – Creative holism for managers. Hoboken, N.J.: John Wiley and
Sons.
15 Jacobs, F.R. & Chase, R.B. 2008. Operations and supply management: The core, international edition.
New York: McGraw-Hill/Irwin.
16 Knod, E.M. & Schonberger, R.J. 2001. Operations management: Meeting customers’ demands, 7th ed.
New York: McGraw-Hill.
17 Mullins, L.J. 2005. Management and organisational behaviour, 7th ed. New York: Financial Times,
Prentice Hall.
18 Parliamentary Monitoring Group. 2012. Minister of Water Affairs on business process review (BPR),
Meeting, 17 April. [Online: see websites at the end of this chapter]
19 Reijers, H.A. & Mansar, L.S. 2005. ‘Best practices in business process redesign: An overview and
qualitative evaluation of successful redesign heuristics’, The International Journal of Management
Science, 33:283–306.
20 Roberts, L. 1994. Process reengineering – The key to achieving breakthrough success. Milwaukee: ASQ
Quality Press.
21 Russell, R.S. & Taylor III, B.W. 2003. Operations management, 4th ed. Harlow: Pearson Education.
22 Schroeder, R.G. 2004. Operations management – Contemporary concepts and cases, 2nd ed.
McGraw-Hill/Irwin.
23 Slack, N., Chambers, S. & Johnson, R. 2004. Operations management, 4th ed. Harlow: Pearson
Education.
24 Slack, N., Chambers, S., Johnson, R. & Betts, A. 2006. Operations and process management – Principles
and practices for strategic impact. Harlow: Pearson Education.
25 Stevenson, W.J. 2007. Operations management, 9th ed. London: McGraw-Hill.
26 Vollman, T.E., Berry, W.L., Whybark, D.C. & Jacobs, F.R. 2005. Manufacturing planning and control
systems for supply chain management, 5th ed. New York: McGraw-Hill.
27 Waller, D.L. 2003. Operations management – A supply chain approach, 2nd ed. London: Thomson
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103
Learning.
28 Wild, R. 2002. Operations management, 6th ed. London: Continuum.
Websites
Visit the websites below.
The websites below were last accessed on 11 September 2013:
ARPA.org
prosci.com
www.acec.org
www.ame.org
www.dsweb.com
www.waria.com.
The websites below were last accessed on the dates given:
http://en.wikipedia.org/wiki/Quality_management_system (March 2013)
www.bmanalysts.com/site/static/ViewStaticPage.aspx?id=9c3909d9-1043-4da9-8ec9-a4bddfc5870b (March
2013)
www.bmw.com/com/en/insights/bmw_design_2012/process/opener.html#row00-1 (March 2013)
www.businessballs.com/dtiresources/quality_management_systems_QMS.pdf (March 2013)
www.carscoops.com/2012/07/psa-peugeot-citroen-to-supply-toyota.html (March 2013)
www.iso.org/iso/qmp_2012.pdf (March 2013)
www.lonza.com/custom-manufacturing/capabilities-overview/process-design-techniques.aspx (March 2013)
www.ndu.edu/press/center-of-gravity.html (March 2013)
www.nrcs.org.za/siteimgs/LMGenInfo/QMS-Article_NRCS.pdf (March 2013)
www.pmg.org.za/report/20120417-department-water-affairs-dwa-budget-2012-13-financial-statements-2012
(4 April 2013)
www.qualicertus.co.za/index.html (March 2013)
www.qualicertus.co.za/qualitymanagement.html (March 2013)
www.tutorialspoint.com/management_concepts/benchmarking_process.htm (March 2013)
YouTube™
www.youtube.com/watch?v=asNXYF8CTkw
www.youtube.com/watch?v=pRhhy5gt70A
www.youtube.com/watch?v=vOVsI2T8Lzw
www.youtube.com/watch?v=Wac3aGn5twc&feature=player_embedded
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under U.S. or applicable copyright law.
CHAPTER 6
Inventory management
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
Understand and explain the nature and importance of holding inventory
Define the term ‘inventory’ in your own words
Describe the different inventory types
Understand and describe control and turnover of inventory and calculate turnover of different inventory
Understand and explain the methods to utilise stock
Describe and comment on the requirements for effective inventory management
Explain and apply the principles of:
- Different counting systems for inventory
- Keeping accurate inventory records
- Cycle counting
Understand and explain how to control service inventory
Understand and explain the advantages and disadvantages of holding inventory
Understand, explain and apply the principles and calculations of:
- Economic order quantities models
- Basic economic order quantity model
- Economic production quantity model
- Quantity discount model.
CHAPTER outline
6.1
6.2
6.2.1
6.2.2
6.2.3
6.2.4
6.2.5
6.3
6.3.1
6.3.2
6.3.3
6.3.4
6.3.5
6.3.6
6.3.7
6.3.8
6.4
6.4.1
Introduction
The nature and importance of holding inventory
Reasons for holding inventory
Objective function of inventory control
Inventory types
Control and turnover of inventory
Methods utilised to reduce stocks
Requirements for effective inventory management
Counting systems for inventory
Forecasting demand and information regarding lead time
Costs incurred when inventory is carried
Classification systems for inventory
Need for accurate inventory records
Cycle counting
How to control service inventory
Advantages and disadvantages of holding inventory
Economic order quantity models
The basic economic order quantity model
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6.4.2
6.4.3
Economic production quantity model
Classification systems for inventory model
Summary
Key terms
Review questions and activities
Case study
References
Websites
SETTING THE SCENE
As supermarkets spread in Africa, some farmers find it hard to compete
Supermarket chains are jockeying to serve millions of new customers in the developing world, including
Africa. Pick n Pay, which like many chains is based in South Africa, opened a store in Lusaka two years
ago and now has four stores in Zambia and two more to open.
In Zambia the farmers union is politically powerful. So when Pick n Pay opened its stores, the
government insisted it buy at least half of its goods from Zambian suppliers. Today, more than
three-quarters of the stores’ produce comes from within the country.
On their own, small farmers often struggle to supply the quantities and quality the big grocery chains
need. In Zambia some producers work together. Near Lusaka an independently owned pack house
consolidates produce from about 60 farmers who bring their tomatoes or onions in pickup trucks – or even
wheelbarrows – whenever they can. The pack house is where produce is prepped for supermarket shelves.
Down a dirt road near the pack house is a 6-acre farm owned by Arnold Chimfwembe, a tall and trim
62 year old. He used to sell vegetables at outdoor markets, but there were a lot of lean times. Then he
approached the pack house, and when the first Pick n Pay opened in Lusaka, it was his leafy greens that
made it on to the shelves. He now delivers to the pack house two or three days a week.
‘I think I’m one of the most consistent suppliers,’ he said.
One reason is that he’s organised four of his neighbours to grow vegetables too. So when the pack
house calls his cellphone with a big order, he can deliver. He says he earns a decent income.
‘The money that I get caters for my upkeep of the vehicle, electricity, things like that,’ Chimfwembe
said. ‘Then I’m very happy. I can do better – maybe go into other ventures, like keeping pigs or keeping
chickens.’
Research shows that across southern Africa, smallholders who sell to supermarkets improve their
incomes. But the ones who benefit are still a small minority. Chimfwembe said that if he lived five or ten
miles farther from the pack house, he wouldn’t bother taking his vegetables there.
‘It’s not worth it, because all that money will go to fuel,’ he said. ‘So that’s a big challenge.’
(SOURCE: Adapted from PBS Newshour, 2012. Available at: http://www.pbs.org/newshour/rundown/2012/09/supermarkets
.html)
6.1 Introduction
Inventory can generally be defined as a stockpile or store of goods. Stock holding can include small items
such as nuts, bolts and washers or large items such as machines, machine parts and assemblies of products.
The type of business that an organisation is involved with will determine the type of inventory held by the
organisation. For example, an organisation such as Langeberg Cooperation (KOO) will stock raw materials
(fruit or vegetables), work-in-progress (WIP) (half-finished products in the manufacturing process), and
finished goods (canned fruit) inventory. This KOO example is an illustration of how the typical
transformation process operates – from the inputs right through to the output of the process.
There is a school of thought that views inventory as any resource that has a monetary value and is idle. In
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this scenario, even labour and machines that are idle are classified as inventory. This view is too narrow – a
more correct viewpoint is that idle machinery and labour are seen as excess capacity, rather than as inventory.
A distinction must be made between inventory and capacity for the good management of an organisation.
The discussion above suggests that inventory is one of the most expensive assets of any organisation.
Investment in inventory can be as high as 50 per cent of the total investment of an organisation. For this
reason, the proper management of inventory is of vital importance. Before 1977, keeping large inventories
was a management tool to ensure that customer demand could be serviced. Nowadays, competition is fierce
as a result of globalisation. The reason for the sharp increase in inventory holding cost (the cost incurred for
the actual storage of the inventory over a specific time period) is the faster rate of obsolescence of products
due to the rapid progress of new technologies.
One way of reducing operating costs is to reduce stock holding. One consequence of this is that with the
reduced inventory of the product, a stock-out may take place. This may result in the production process
grinding to a halt (due to lack of raw materials) or an inability to satisfy customer demand (due to lack of
finished goods inventory). In this case, stock-out costs may be incurred. This type of cost may include lost
sales due to the unavailability of the product and dissatisfied customers who buy a similar product from
another organisation. Therefore, a balance must be found between stock holding and customer satisfaction. If
inventories are not managed properly, a low-cost strategy is almost impossible. Manufacturing organisations
need to decide whether certain inputs will be purchased or manufactured, and, once the decision has been
made, a proper forecast of demand must be done. Once the demand is known, the operations manager will be
able to determine the amount of inventory required to service that demand.
The influence of the high costs of inventory management has forced organisations to manage their supply
chains and quality more efficiently. By doing so, uncertainties are removed and the necessity for holding
large amounts of inventory disappears. Poor quality is the factor that is the greatest cause of uncertainty. The
factors that show there is poor quality in an organisation are late deliveries from suppliers, late deliveries by
the organisation to its clients, production schedules that are unworkable, and a constant fluctuation in
demand.
A good indication of properly managed inventory is the number of times that inventory is turned.
Previously, it was acceptable if inventory was turned two-and-a-half times but nowadays a norm of fewer
than five times is not acceptable. The result of the higher turnover is that the need for keeping high volumes
of stock no longer exists.
6.2 The nature and importance of holding inventory
It is almost impossible for any organisation to function properly without some form of inventory holding.
Unavailability of goods or services is a cause for customer dissatisfaction. Therefore, it is important that the
cost of holding inventory is calculated to determine the impact of these costs on the organisation.
One measurement that can be used is the return on investment (ROI) method. This method can be
employed because the monies paid for the inventory can be seen as an investment. The ROI can be calculated
by dividing the profits earned after the deduction of taxes by the value of the total assets. The larger the
reduction in the holding of inventory, the higher the ROI.
In the retail sector, an organisation such as Pick n Pay or Spar cannot function if inventory is
non-existent. The inventory held by these organisations is, in fact, their largest asset. Typically, a
manufacturing organisation may carry some or all of the following inventories:
• raw materials and any parts that have been bought in
• work-in-progress (WIP)
• finished goods in manufacturing and merchandise in the retail environment
• replacement parts for machines, tools and other supplies
• inventory in transit between the organisation and its customers – this inventory is sometimes known as
pipeline inventory.
No service firms carry any of these types of inventory. Service-sector organisations usually carry inventories
of supplies and equipment.
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6.2.1 Reasons for holding inventory
An organisation needs to hold at least some inventory for a number of reasons. One is that holding inventory
brings some flexibility to operations. Below we discuss the most common reasons for keeping inventory
(these reasons are summarised in Table 6.1).
In order to decouple the production process
This means that the different parts of the production process are separated into various parts. This type of
inventory will assist as a buffer between operations that follow one after another. This will ensure a smooth
operation of the production process. The buffer stock will ensure that other operations can continue if a
breakdown happens in a preceding operation. This type of stock is very expensive to carry and most
organisations are trying to do away with the reasons for breakdowns, rather than keeping buffer stock.
There is an insecure supply of raw materials
For instance, the operations manager might like to separate the production process’s reliance on any
particular supplier. This is achieved by having inventory of the raw material in stock. Even if late deliveries
do take place, there will be enough inventory to carry on with production until the new stock of raw materials
is received.
To distance an organisation from uncertain demand
Demand is generated when a customer demands a certain quantity of an organisation’s product. A customer
can be any person who places an order. This type of inventory is usually called anticipation inventory. It is
held in anticipation of orders that can be expected. In times of low demand, an organisation manufactures for
stock. When a period of high demand is experienced, the excess demand is satisfied from inventory.
To facilitate availability of a wide variety of products for the customer
This type of inventory is mostly found in retail outlets such as Pick n Pay, Edgars or Woolworths. These
types of organisation stock more than one type of product in a range of products. For example, a supermarket
chain has more than one brand of tomato sauce and a retail clothing shop stocks a variety of different makes
of denim jeans.
To take advantage of supplier discounts if certain order quantities are placed
Suppliers discount their products in proportion to the size of an order. For example, the item price of an order
for 1 000 items will be cheaper than an order for 500 items.
To avoid price increases
Most raw materials used in the manufacturing process are subject to regular price increases. Therefore, when
an organisation knows that a price increase is approaching, it will buy stock of raw materials to ensure that
these are obtained at the old price. By doing this, an organisation can sell its products at the same price for a
longer period and, maybe, more cheaply than its competitors, and this may increase sales.
Items are in transit
Items may be in transit between the manufacturers but not yet have been received by the customer. As we
discussed earlier, this type of inventory is called pipeline inventory because the customer is awaiting the final
delivery.
To smooth the production requirements
This is typical of an organisation that experiences seasonal demand patterns. In this instance, the
manufacturer will manufacture during the pre-season or low season to ensure that enough of the product is
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available during the peak season. This type of stock is known as seasonal inventory. Organisations that
manufacture sporting goods and equipment influenced by seasons have this type of inventory.
To prevent stock-outs from occurring
There are many reasons for the occurrence of stock-outs; two are that a supplier is late with deliveries or an
unexpected surge in demand for a product occurs. The reasons for a supplier being late with deliveries are as
varied as those for the occurrence of stock-outs. Some reasons for late delivery are labour unrest at the
supplier, and late delivery from the supplier’s suppliers.
The stock that is kept to prevent stock-outs is known as safety stock. This type of inventory is held in
addition to other stock holding in an organisation, and is expensive to hold.
To take advantage of ordering cycles
This is done to minimise the cost of purchasing and inventory holding. The organisation will purchase at
regular cycles in excess of immediate needs with the expectation that some of the order will have to be
inventoried for later use. The same will occur when it is economically sensible and viable to purchase at a
rate higher than the requirements of the customers. This is known as producing in economic lot sizes.
Therefore, orders will be placed in order cycles expressed in hours, days, weeks or months.
TABLE 6.1 Reasons for keeping inventory
MOST COMMON REASONS FOR HOLDING INVENTORY
•
•
•
•
•
•
•
•
•
•
In order to decouple the production process
There is an insecure supply of raw materials
To distance an organisation from uncertain demand
To facilitate availability of a wide variety of products for the customer
To take advantage of supplier discounts if certain order quantities are placed
To avoid price increases
Items are in transit
To smooth the production requirements
To prevent stock-outs from occurring
To take advantage of ordering cycles
6.2.2 Objective function of inventory control
The two types of stock holding are overstocking (too much inventory) and understocking (too little
inventory). When overstocking occurs, a large sum of funds is tied up. When too little inventory is held,
delivery dates can be negatively influenced and late deliveries may result. Other results of too little inventory
are lost sales, dissatisfied customers and bottlenecks in the manufacturing process. Of the two types of stock
holding, overstocking may appear more harmless than understocking, but this is not the case because the
hidden cost of this type of stock holding is extremely high. Inventory management concerns itself,
therefore, with two main areas:
1 Satisfaction of customers. This requires that the correct goods are available, in the right quantities, at the
right location, exactly when they are required.
2 The management of the inventory costs. Cost concerns are in the area of ordering and inventory
carrying costs.
Therefore, inventory management can be seen as the achievement of customer satisfaction while at the same
time keeping control over the costs associated with inventory. Two areas of concern must be addressed to
achieve this:
1 The timing of placing orders
2 The size of each order placed.
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Performance measurements have been developed to assist operations managers in managing inventories
better. A number of mathematical models are available to assist management in this endeavour. Customer
satisfaction is the most important measurement and can be measured by the following:
• Number of items that are on back order. Back orders are orders taken in one period, with deliveries
promised in a later period.
• Number of complaints received from customers.
• Number of times that an organisation turns its stock. This measurement is the ratio of the annual cost
of the goods sold in relation to the average investment in inventory. The ratio will indicate the number of
times that the stock is sold on a yearly basis. The higher the ratio, the more efficient the inventory
management function has become. There can be no specific number of inventory turnovers as this will
depend solely on the type of business in which the organisation operates. It is important to realise that the
longer the manufacture of a product takes, the lower the inventory turnover will be. In direct contrast to
the manufacturing sector, supermarkets have a very high turnover of stock because of the nature of the
business environment in which they operate.
6.2.3 Inventory types
We shall now discuss the four most common types of inventory held by an organisation.
• Inventory of raw materials. This is the inventory that has been purchased but has not yet been
transformed into finished goods. With the introduction of just-in-time (JIT) systems, organisations try to
move away from holding raw material inventories. They attempt to do this by ensuring that suppliers
supply only high-quality, correct quantities, and on-time deliveries. If this can be achieved, then this
distancing or decoupling will not be required.
• WIP inventory. This type of inventory is classed as goods that have entered the transformation process
but have not yet emerged from it. Some work has been carried out on the raw materials, but the products
are not yet ready for delivery to the customer. The main reason for WIP inventory is the cycle time in a
production process. Cycle time is the time that it takes an organisation to manufacture one complete
product. If the cycle time can be reduced, the WIP inventory will be reduced proportionally.
• Maintenance, repair and operating inventory. This type of inventory ensures that the machines of an
organisation can be maintained, repaired and operated at the desired levels. Mostly, maintenance cycles
are known but repair cycles are very hard to predict, as repairs are random events. By holding inventory
of spares, organisations can ensure that they minimise the impact of a breakdown on the production
process.
• Finished goods inventory. This inventory is the goods that are ready for delivery to the customer. These
products are kept in inventory because the future demand for them is unknown.
The classification of the types of inventory given above is arbitrary because the finished goods of one
organisation can become the raw materials of another organisation. For example, the finished product of an
upholstery shop can become the raw materials for a vehicle-manufacturing plant.
In the JIT system, the correct quantities are delivered on time where they are required. For this reason, the
need for warehouses has almost ceased to exist. In supply chain management (SCM), warehouses are known
by a variety of names, such as distribution centres or logistical centres. When an organisation takes control of
the management of inventory, it can then take control of the size and function of the warehouse.
6.2.4 Control and turnover of inventory
Manufacturers, wholesalers and retail organisations can use the turnover of inventory to measure the
efficiency of their inventory management systems. In most cases, this is the best indicator for an organisation
of the efficiency of its inventory management system. The amount of waste as a result of too much inventory
will be shown if this measurement tool is used. The tool can also be used to determine the overall
performance of an organisation’s inventory policies.
The lower the turnover of inventory, the poorer the performance of the inventory policies will be. From
an operational perspective, this method can be a better measurement tool than previously used financial
measures such as profitability and sales revenue.
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The main reason for the shift in measuring tools is the new manufacturing methods, such as lean
manufacturing, that organisations are employing. The new technology emphasises the continuous
improvement of production processes rather than the hiding of problems behind high inventory levels. As a
result of these new methods, inventory turnover is greatly improving at the same time.
Inventory turnover can be measured by dividing the cost of goods sold by the value of the average
inventory. This can be represented by the following formula:
Or:
Where:
T
= turnover
CGS = what it will cost an organisation to produce its goods or services
I
= the value of average inventory
WORKED EXAMPLE
This is illustrated by the following example: The Easy Rider Bicycle Company produces racing bicycles for
all the major racing events and top riders. A requirement is that the bicycle must be very light, and these
bicycles break easily. The cost of producing one bicycle is R3 000. The bicycles sell at a rate of 2 000 per
annum. On average, the inventory is worth R1 million. The inventory turnover can be calculated as follows:
The cost of goods sold (CGS)
= unit cost × annual sales
= R3 000 × 2 000
= R6 000 000
Therefore:
If the turnover shown in the example is measured against the average of worldwide trends of between three
and four turns per year, the performance of the Easy Rider Bicycle Company is exceptional. If lean
production and other improvement methods are employed, this can be increased to as many as 30 turns per
year.
When turnover is poor, for example three or fewer turnovers, this may indicate that the manufacturing
time is too long. Therefore, turnover will also measure the performance of the production process.
WORKED EXAMPLE
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A very good measure is given when turnover is done by category of inventory held, that is, raw materials,
WIP and finished goods, as well as total inventory holding. As an example of the computation, let us return
to the example of the Easy Rider Bicycle Company. The assumption is made that R250 000 of the average
inventory is finished goods inventory (FGI). A further R250 000 is raw material inventory (RM) and
R500 000 is WIP inventory. A further assumption is made that labour cost and overheads to transform raw
materials to finished goods is R2 000 000. The figures specified will be used to calculate the WIP turnover
(TWIP) as follows:
The turnover of raw material inventory and finished goods inventory can be calculated in the same manner.
Let us assume that the price of materials purchased is R2 500 000. This cost includes the overheads for
purchasing. The overhead cost for carrying finished goods inventory is assumed to be R750 000. Turnover
for raw materials (TRM) is calculated as follows:
The number of turns for finished goods inventories (TFGI) can be calculated in the same manner:
6.2.5 Methods utilised to reduce stocks
The lower the inventory in the supply chain, the more flexible the chain will become. Reduction in line side
and store stock is the key to cutting huge costs. Other methods used to reduce stocks include the following:
• A two-bin system. In this system, two bins are employed; each bin contains the same amount of parts
that will be used to manufacture an end item. It is important that both bins are of equal size. When the
manufacturing process starts, parts from the first bin are used in the manufacturing process. When the
inventory in the first bin is exhausted, the inventory in the second bin is used. At this time, an order is
placed to replenish the inventory for the first bin. This is a continuous process.
• Supply in line sequencing (SILS). With this method, the decision of picking the right parts for each
model of a product, for example a car model, is taken away from the line operative. Instead, all needed
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•
•
•
parts are delivered to match each particular model as it arrives on line. For example, SILS gave carmaker
Vauxhall the flexibility to assemble two Vauxhall models on the same line according to the demand of
the market (Linpac Materials Handling, 2005).
Kanbans. These are cards or other devices that a station uses to communicate demand for materials or
work from the station preceding it.
Milk runs. This method uses a route that involves the delivery of shipments and the pickup of inbound
materials in the same run or the daily replenishment of materials by suppliers (Inventory Operations
Consulting L.L.C., 2005).
Supplier sub-assembly of components on the organisation’s premises. With this method, suppliers
sub-assemble components on the business premises of the organisation they are supplying.
DISCUSSION
As supermarkets spread in Africa, some farmers find it hard to compete
Read the situation discussed in the setting-the-scene box at the beginning of the chapter. Answer the
following questions:
1 What do you think of Mr Chimfwembe’s strategies to ensure that he never runs out of stock to deliver
to the pack house? Do you think it is possible to develop a stock planning system for him?
2 What can the pack house do to ensure that it will always have the right stock on hand to satisfy its
customer, Pick n Pay?
6.3 Requirements for effective inventory management
There are two basic functions that management must perform regarding inventory:
• The first is to keep track of the entire inventory held by an organisation.
• The second is to decide how much to order and when the orders should be placed.
6.3.1 Counting systems for inventory
Two major types of counting system can be utilised when counting inventory: the periodic and the perpetual
counting systems. Every organisation maintains some kind of inventory. It is therefore of the utmost
importance that an organisation should employ one of these counting systems.
Periodic counting system
Periodic systems require regular inventory counts. This happens within predetermined periods – for example,
daily, weekly, monthly or quarterly. The time period is determined by the product to be monitored. The
information thus gathered is used in determining when orders should be placed. In this respect, this system is
similar to the perpetual system (which we discuss in due course), in that the information is used to determine
order sizes.
This method is very popular with small retail outlets, where managers count the inventory on the shelves
and in the stockrooms on a regular basis. Once the stock check has been completed, the manager can see
what has been sold and determine the future demand for all the products. Then the number of items to be
reordered can be determined.
Unfortunately, this type of system has a number of disadvantages. The main disadvantage is that there is
no control over inventory in the time between the periods that stock checks take place. Any discrepancies in
inventory holding will become apparent only at the next stock count. To reconcile errors at that point is an
almost impossible task. In many instances, these losses are written off. As a result of this poor control,
organisations using this method tend to carry higher inventory levels to prevent stock-outs from occurring.
This in turn leads to higher costs.
Perpetual counting system
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This counting system is also known as the continuous counting system. It is called perpetual (ongoing)
because the inventory records are updated each time an item is withdrawn from inventory. Therefore, the
system is able to provide an accurate inventory holding level whenever this is required. The system can be
used to establish when to replenish stock for inventory, namely when stock holding reaches a predetermined
level. The system will then indicate that a fixed quantity (called Q) has to be ordered. The biggest advantage
of this system is the amount of control over inventory it gives management. A second important advantage is
that the system prompts the purchasing department to buy new stocks at fixed order quantities. It means that
an optimal order size can be determined, which in turn minimises cost.
The biggest disadvantage associated with this system is that costs are added to enable an organisation to
have the information available for optimal use of this counting method. This is known as the cost of
information storage because this system requires a large amount of information to function properly. Even
though the perpetual system is computerised, inventory must be physically counted to ensure accuracy. The
physical stock check must be done to reconcile errors that may occur and to uncover losses due to theft,
spoilage (diminished quality) and any other factors that may cause inventory loss.
An example of a perpetual system is that used by banks. The records of clients’ accounts are constantly
checked to verify the accuracy of the inventory (money) available to the client. The records of the inventory
of the client are updated as soon as a deposit or withdrawal is made. On a regular basis, an audit (physical
stock count) will be performed on the account of a client to ensure that the information is correct.
Perpetual systems can range from the most rudimentary to the most sophisticated. An example of a
rudimentary system is the two-bin system that we discussed in Section 6.2.5. How does the purchasing
department know when to place an order for the replenishment of inventory? One way is the placement of an
order card at the bottom of the bin. The person who uses the last of the inventory must hand the card to the
purchasing department for the ordering of new inventory. A bin contains enough inventory to ensure that the
process does not run out if the replacement order is delivered late. The most important advantage of this
method is that no stocktake has to take place. Every time that a person visits the bin, the latest inventory level
is apparent. The main disadvantage of this method is that the stock card can be mislaid or not handed over to
the purchasing department for reordering purposes.
The type of business of an organisation might influence which type of perpetual system is utilised. There
are two basic types of perpetual system:
1 Batch perpetual system. With a batch system, the inventory withdrawals are updated in batches. For
example, whenever 20 withdrawals have taken place, these transactions are processed. This method might
result in exact inventory at any given time not being known. Because of the uncertainty about the exact
amount of inventory, when an increase in demand happens, there might not be enough inventory to
service the demand.
2 Online perpetual system. When an online system is used, transactions are processed immediately.
Therefore, the change in inventory availability is instantaneous and the system has the advantage of
accurate record keeping, but it is more expensive.
Many of the problems associated with the batch system have been eliminated since organisations introduced
bar-code systems. Before the introduction of bar codes, all retail and supermarket outlets used a periodic
inventory system. Now that bar coding is freely available, it can keep track of inventory and pricing. The bar
code can either be printed on the label of a product (for example, on tinned foodstuffs, compact discs or
chocolate bars) or can be attached to the item (for example, to clothing).
The speed and accuracy of laser scanners are not the only advantages of this system. Another advantage
is that management can continuously monitor stock levels of all items held in inventory. Therefore, the need
for periodic stock checks is reduced. The use of bar codes ensures customer service and satisfaction because
the probability that a stock-out will occur is minimised.
On the till slip a customer receives after payment for the purchase, the name and price of each product
bought appears.
Bar coding is not limited to the retail sector only. Any type of organisation – in either the manufacturing
or service sectors – can use universal product coding to assist it in managing inventory. In manufacturing,
unique bar codes for raw material, finished products, assemblies and WIP can be created to keep track of
each item in an organisation. This system can be used for the purpose of routing, scheduling and sorting
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products in a manufacturing environment. In pharmacies (part of the service sector), for example, bar codes
can be used to assist pharmacists in dispensing medicines and to reduce the occurrence of errors.
6.3.2 Forecasting demand and information regarding lead time
The main reason for having inventory is to ensure that customer demand can be satisfied the moment the
demand occurs. It is therefore important that organisations have accurate estimates of the quantity and timing
of demand. Another important fact that an organisation needs to determine is the time it will take to deliver
and receive orders. This is known as the lead time of an item. It becomes imperative that management is able
to manage the variability in the lead time of items or raw materials. The higher the variability between the
lead time and demand, the higher the levels of inventory holding need to be. This will minimise the
probability of a stock-out occurring and this fact illustrates the importance of managing forecasting and
inventory as a unit and not separately.
6.3.3 Costs incurred when inventory is carried
As was referred to earlier, a number of costs are associated with inventory holding and demand. The
following are the most common costs:
• holding cost
• ordering cost
• shortage cost.
Holding cost
Recall from our earlier discussion that holding cost is the cost incurred for the actual storage of the inventory
over a specific time period. Costs included here are:
• costs of insurance against theft and fire damage
• costs for the interest payable on loans to build the warehouse and stock it
• costs of depreciation of goods held in inventory
• obsolescence costs due to newer and better products coming onto the market
• opportunity cost because money is tied up in holding inventory and can therefore not be used where it
may be needed more urgently (for example, expansions cannot take place because funds are tied up in
inventory that has not been sold).
The holding cost incurred is directly related to the type of product held in inventory. For example, items that
can be easily carried out of a warehouse – such as tinned foodstuffs, calculators, cameras and clothing – are
more likely to be stolen by employees than motor vehicles or furniture are. This results in higher holding
costs.
WORKED EXAMPLE
The most popular manner of expressing holding cost is as a percentage of the selling price of that product.
For example, the holding cost for a television set can be expressed as shown below.
Assume that a television set sells for R5 000 and holding cost is expressed as 4 per cent of the selling
price per annum. To have one television set in inventory for a year will cost the organisation the following:
= R200 per annum
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Ordering cost
Ordering cost is the cost associated with the ordering and receipt of goods such as supplies, forms and
clerical support. When manufacturing of goods takes place, set-up costs are incurred. The reason for this is
that all machines must be prepared before any manufacturing can take place. Costs included in the set-up cost
are labour cost for the person who prepares the machine for production and lost time for production. There is
a correlation between set-up times and cost. Setting up a machine for production requires a large number of
labour hours. Labour is required even before the set-up of the machine takes place. For this reason it is
important that proper set-up planning is done. Things such as cleaning the work area of previous jobs,
withdrawing the new tools from the tool store, and completing the requisition for the raw materials can all be
done while the machine is still manufacturing the previous job. Using this method, a machine that needs two
hours for set-up time can be set up in as little as half an hour. Reducing the set-up times can be an effective
way of reducing the ordering cost of an organisation.
To minimise ordering costs, an operations manager must ensure that all procedures and processes are
functioning efficiently.
Shortage cost
Shortage cost or stock-out cost is incurred when demand exceeds supply. When a stock-out occurs, a
shortage for that particular product is the result. The costs that might be incurred here are:
• the cost of losing a sale due to unavailability of the product
• the loss of goodwill of the customer (which is hard to win back) as a result of the shortage
• the cost of lost production, which happens when there is a shortage of an item that an organisation uses
internally in its manufacturing process – the costs tend to escalate at an alarming rate
• downtime cost as a result of the lost production because the machines are idle and not producing. This can
run to thousands of rand for every minute the machine is idle (employees have to be paid and this adds
further to the cost).
The estimation of these costs is quite difficult, as operations managers would prefer to downplay the costs
that are incurred.
The discussion above makes it clear that operations managers should make cost control a priority. This is
another reason why inventory should be strictly managed. Inventory is not the responsibility of an operations
manager alone; it is a cross-functional responsibility and a problem that concerns every manager of every
department within an organisation. It often happens that the objectives of the operations, finance, marketing
and purchasing departments are at odds – each of these departments might hold a different view on the
necessity of holding inventory. Therefore, it is important for an organisation to put a strategy in place to
ensure the minimisation of cost. This strategy should take into account what is good for the organisation as a
whole without favouring any particular department. If such a strategy is implemented, it will ensure that all
the cost objectives are met.
6.3.4 Classification systems for inventory
There is one method of inventory classification that is subdivided into three categories. This classification
system is known as ABC analysis. The main purpose of ABC analysis is to assist management in improving
the management of inventory and to set the best possible policies for inventory holding. This analysis was
developed from the Pareto principle, or 80/20 principle. An Italian economist, Vilfredo Pareto, proposed this
principle in 1906. He studied why so few people in Italy were rich and the majority poor. In this study, he
found that 20 per cent of the people in Italy had 80 per cent of the wealth. Many other disciplines have
adopted this principle to explain particular phenomena. It has also found its way into operations management
and inventory management.
According to the Pareto phenomenon, there will always be a critical few and a trivial many. In terms of
inventory, the critical few are the items with the highest value and the trivial many are the lowest-value items
in inventory holding. From this principle, ABC analysis was developed. The father of ABC analysis, which
was first mentioned in Modern Manufacturing in July 1951, was H. Ford Dickie. This is still the most
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popular method for the classification of inventory. The main purpose of ABC analysis is the establishment of
inventory policies. Items held in inventory are not of equal importance to an organisation. Reasons for this
include the following:
• the cost of each item differs – expensive items are more important than cheaper items
• the potential earnings of each item differ – items with higher earning potentials are more important to an
organisation
• the cost of a stock-out of items differs – the higher the stock-out cost, the more important an item
becomes to an organisation.
The inventory management policies of an organisation are focused on the critical few or top 20 per cent
high-value items. It does not make sense to exert the same amount of effort and money in managing an item
worth a few cents as is spent on managing an item worth thousands of rand. For instance, a manufacturing
organisation will not manage nuts, bolts and o-rings worth R2 each with the same intensity as it manages
assemblies worth R5 000 or more per item.
Some organisations use different criteria to determine classification and do not necessarily use monetary
value. Influencing factors such as impending engineering changes to products, late deliveries, poor quality or
high unit costs might move an item from class C to class A. The main advantage of the classification system
is that it allows an organisation to set policies and establish controls over the different classes of items.
Whether or not all three classification categories are used depends solely on the organisation
implementing the system. It is important to remember though that even C-class items are not so unimportant
to an organisation that they can be forgotten. When a stock-out of an item such as a nut, bolt or o-ring occurs,
it could have dire consequences for an organisation – it could bring the production process to a complete
standstill. The costs involved in a case like this can be just as high as those involved in a stock-out of an
A-class item.
Policies driven by ABC analysis might include the following:
• When forecasting is done, more care is taken when a forecast is prepared for A-class items than for items
in the other two classes.
• The money spent and effort expended on the development of suppliers should be higher for suppliers of
A-class items than for suppliers of C-class items.
• The tightest possible controls must be put in place for all A-class items (less stringent controls can be set
for the other two classes) – in many instances, A-class items are kept in a locked area within a warehouse.
• The reasons for updating an item’s classification according to the ABC classification system are the risk
of the item becoming obsolete (the costs that will be incurred will be prohibitively high) and the distance
between supplier and the organisation (the further away a supplier is situated from the organisation, the
greater the probability that a stock-out is likely to occur).
The following are other steps that an organisation can take to ensure the proper management of inventory:
• make efforts to prepare better forecasts for inventory items
• improve physical control over items in inventory
• reduce the holding of safety stock.
How to conduct an ABC analysis
The first step in any ABC analysis is to determine the rand value of each item held in inventory. This is
achieved by multiplying the annual demand by the unit cost per item. Table 6.2 illustrates the principle
involved.
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TABLE 6.2 ABC analysis calculations
NO.
ANNUAL
DEMAND
×
COST/UNIT (RAND) ACTUAL DEMAND
VALUE IN RAND
CLASSIFICATION
1
1 500
×
100.00
150 000.00
A
2
600
×
160.00
96 000.00
A
3
2 000
×
22.00
44 000.00
B
4
400
×
48.00
19 200.00
B
5
1 200
×
15.60
18 720.00
B
6
650
×
14.21
9 236.50
C
7
2 200
×
0.70
1 540.00
C
8
200
×
9.44
1 888.00
C
9
1 400
×
0.52
728.00
C
10
275
×
0.67
184.25
C
10 425
341 496.75
Items that are identified as A-class items are the items with the highest annual demand in rand value (items 1
and 2 in Table 6.2). This is where the Pareto phenomenon comes into play. Items 1 and 2 constitute only 20
per cent (2 out of 10) of the items but 72 per cent of the total value of inventory holding. Items classified as
B-class items have only medium annual demand in rand value (items 3, 4 and 5 in Table 6.2). Expressed in a
percentage value, this class forms 30 per cent of total items held in inventory and contributes about 24 per
cent in value. The last class that can be identified is the C-class. C-class items are items of low value
(represented by items 6 to 10 in Table 6.2). In total, these items form roughly 4 per cent of inventory value
but 50 per cent of items held in inventory.
6.3.5 Need for accurate inventory records
An organisation may have the best inventory policies in place but these will be meaningless if management is
unaware of the amount being held as inventory. The actual amount of inventory often differs from that
reflected in the records kept. Record accuracy is a measurement of how well these two figures agree with
each other. It is important that record keeping is accurate as this will ensure that an organisation can focus its
attention on the items that need the most attention, to ensure availability. If this is neglected, the organisation
will have to keep inventory of items not used on a regular basis and will incur unnecessary costs. An
important issue that needs to be decided is the amount of error to be allowed and accepted by management.
An operations manager should determine the range of error that will be acceptable to the production process
and management.
There is a school of thought that argues that an organisation should strive for 100 per cent accuracy of
record keeping. In most instances, organisations might accept an error of between 1 per cent and 3 per cent.
On average, the majority of organisations will accept a 0.20 per cent error for A-class items, 1 per cent error
for B-class items, and a 5 per cent error for C-class items. The percentage allowable is only important to
individual organisations because the error percentage will be used to calculate the amount of safety stock to
hold to prevent stock-outs. For this reason, the error percentages should be dependable and should not be
changed at the whim of management.
Another reason for accuracy is that it enables managers to determine what to order when, the scheduling
of jobs, and the shipping of finished goods. Good inventory management requires good inventory records of
all the receipts and issues of inventory. To ensure record integrity, access to warehouses should be limited.
Too often, inventory disappears because unauthorised persons are allowed in warehouses. If everyone has
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access to the warehouse, inventory might be withdrawn for both legitimate and illegitimate reasons. As
records for especially illegitimate withdrawals are usually incomplete or non-existent, shortages will begin to
appear. To ensure that only authorised personnel can enter warehouses, warehouses should be properly
guarded. It is vital that the minimum number of people – a good rule of thumb is two – have keys to a
warehouse. Employees should be entrusted with the keys only if they are warehouse employees.
Good housekeeping is also a priority. A clean warehouse ensures that paperwork will not be lost amongst
other pieces of scrap paper. Once inventory has been allocated to a bin, only the correct amount of inventory
should be kept in that storage area. Overfilling of bins leads to inventory that is being kept on the floor area
being moved because it is in the way. It is also most important that inventory and bins are properly labelled
to ensure that warehouse staff do not have to search constantly for items.
6.3.6 Cycle counting
Regardless of how accurate an organisation may claim its inventory records are, their accuracy should be
confirmed through continuous audits known as cycle counting. Records are too easily manipulated for an
organisation to rely solely on records. In the past, most organisations undertook annual inventory audits. On a
yearly basis, the warehouse was closed to facilitate a stock count. This had an adverse effect on production. A
further serious shortcoming of this method is that inexperienced people are used during the stock count. A
better method is cycle counting. Cycle counting is a method of auditing inventory physically on a regular
basis, rather than once or twice a year. Determining how often cycle counting should be done has always
been a problem. The following are some of the rules most often used:
• Count after a very busy period of receiving and issuing inventory – it is at these times that the most errors
can occur.
• Count when the balance of inventory shows zero stock holding or if inventory is at very low levels.
• Use the importance (ABC analysis) of the items in inventory to determine the frequency of cycle
counting: important items should be monitored more frequently.
• Count when the inventory records reflect a positive balance but a stock-out is recorded. This will indicate
that a serious discrepancy exists.
ABC analysis can be used to assist in cycle counting. The main advantage is that inventory is counted in
cycles and records are then verified and inaccuracies documented. Simply documenting the discrepancies
serves no purpose; the discrepancies should be rectified once they have been documented. If nothing is done
to rectify the discrepancies, the purpose of cycle counting will be defeated. It is also important that the causes
of discrepancies are researched and traced to their origin. Once the causes are known, they should be
removed and rectified so that a similar problem cannot arise again. A general rule of thumb is to count
A-class items once a month, B-class items once a quarter, and C-class items once every six months. Below
we show, through the example of an organisation called Speedy Custom Build, the manner in which the
frequency and number of items to be audited can be calculated.
How to calculate the frequency and number of items to be audited
WORKED EXAMPLE
Speedy Custom Build (Pty) Ltd is an organisation that builds speciality vehicles on order for customers.
Peter Matlare, a trainee operations manager, has been given the task of instituting a proper policy for
inventory management. After doing thorough research into the matter, he has found the following
information. There are 11 250 items currently in inventory. Of this number, 2 750 are A-class items, 3 500
are B-class items, and 5 000 are C-class items. The inventory policies of the company state that A-class
items should be counted every 20 working days, B-class items should be counted every 60 working days,
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and C-class items should be counted every 120 working days. Peter must determine the frequency of the
counting exercise. He uses the method shown in Table 6.3.
TABLE 6.3 Method utilised by Peter Matlare to compute the frequency of counting items
CLASS
INVENTORY
HOLDING
POLICY
A
2 750
20 working days
B
5 500
60 working days
C
5 000
120 working days
ITEMS TO BE
COUNTED/DAY
Once the number of items to be counted has been calculated, management can decide where to start the count
arbitrarily. Management may decide that counting should be done sequentially, starting at bin number one
and ending at the last bin. Another method used is random counting. Counting will start at bin 5, then bin 12,
and so forth. This will be done until the entire inventory in the bins has been counted. Another popular
method of doing cycle counting is at the moment that an inventory item has been recorded. The method used
will be entirely the prerogative of management. None of the methods discussed here is patently better than
any of the others.
The advantages of cycle counting are given in Table 6.4.
TABLE 6.4 Advantages of cycle counting
•
•
•
•
•
Cycle counting ensures the accuracy of inventory records.
With cycle counting, there is no need to adjust inventory levels on an annual basis.
Cycle counting enhances the detection of errors that occur and ensures that remedial action is taken
timeously.
There is no need to close down the plant to facilitate cycle counting. Therefore there is no interference
with the production process.
Only trained warehouse staff members are allowed to do the audits. Mistakes will be minimised as a
result.
6.3.7 How to control service inventory
It is a misconception to think that service organisations do not keep inventory. Service inventory
management deserves special attention. Think about the large amounts of inventory held by big organisations
such as Dion, Makro, Game and other large supermarket chains. Clearly, managers in this environment
should know, understand and apply the principles of inventory management. In the food industry, for
example at Spur, Wimpy and McDonald’s, the proper management of inventory can make the difference
between the success and failure of the enterprise.
In the service industry, if inventory is sitting idle in a warehouse somewhere, that inventory is constantly
losing money. The possibility of the items being stolen (also known as pilferage) or damaged while in a
warehouse increases. Inventory is stolen regularly in the retail industry, where such theft is known as
inventory shrinkage. Shrinkage can also be the result of damage to goods or of paperwork being done
incorrectly.
Regardless of the name given to theft of inventory, inevitably an organisation will incur a loss. In the
retail industry, a loss of 1 per cent of inventory is seen as good, with the norm running as high as 3 per cent.
These losses have a direct influence on the profitability of an organisation. Therefore, the accuracy of
organisations’ records should be maintained at a very high standard. The following techniques can be
employed to ensure accurate records and the proper management of inventory:
• Very good control must be exercised on all shipments of goods received. In this respect bar coding is used
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when shipments are received and checked automatically. Then the receipts can be checked against the
purchase orders to ensure the correct quantities have been received. Properly implemented and
maintained systems ensure accurate records.
Control must be effective on all goods that leave the organisation. In most retail outlets in South Africa,
magnetic tags are attached to all items in the store. If a person attempts to remove goods from the store
without paying for them, an alarm sounds as the person leaves the store. Most outlets also employ
security guards both within the store and at all the exits. Retail outlets are aiming to make it as difficult as
possible for people to steal inventory.
The selection process for staff, the training of staff and discipline must be of a high standard. Although
this is not easy, it has become a necessity.
•
•
6.3.8 Advantages and disadvantages of holding inventory
There are various advantages and disadvantages of holding inventory. These are indicated in Table 6.5.
TABLE 6.5 Advantages and disadvantages of holding inventory
ADVANTAGES
DISADVANTAGES
•
•
•
•
•
•
•
•
•
The organisation can take advantage of
discounts from suppliers on quantities
purchased
Disruptions can be minimised in operations; any
interruption at a work station will not influence
the operations following it
Unexpected demand can be met
Some types of inventory form an integral part of
the system; without that inventory the system
will be unable to operate
Management can detach operations; buffer stock
can be placed between operations to achieve
this goal
Reduction of set-up times can be achieved with
sufficient inventory holding; every cost will be
reduced as a result
Inventory can be utilised to hedge against
inflation
Opportunity cost is incurred; this is the result of
monies tied up in too much inventory and no
money being available to buy new technology
•
•
•
•
•
•
There is an inherent risk that inventory items
can be damaged; the larger the inventory
quantities, the greater the risk of damage
Obsolescence and depreciation cause losses if
large amounts of inventory are held; this may
cause losses to the organisation
Inventory hides process problems
Many types of cost are incurred when large
amounts of inventory are kept
Inaccurate inventory records can cause low
productivity; this is caused by searching for
misplaced inventory
Too much inventory hides quality problems; this
is due to long delays as inventory replaces
inferior quality products
Flexibility in the process is jeopardised; new
technology cannot be utilised as obsolete
inventory must be utilised before it can be
replaced with the latest material
6.4 Economic order quantity models
We discuss three inventory models – economic order quantity (EOQ) models – in this section. EOQ
models are used to answer the important question of how much to order. The models are applicable to
independent demand.
The models we shall discuss are:
• the basic EOQ model
• the economic production quantity model
• classifications systems for inventory model.
6.4.1 The basic economic order quantity model
The basic EOQ model is one of the oldest and most often used methods of ordering and controlling
inventory. F.W. Harris developed the EOQ model while he was an employee at Westinghouse in 1915. This
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model and all of its derivatives are still widely used in industry for the management of independent demand.
As with all mathematical techniques, certain assumptions have to be made if the model is to operate properly.
These assumptions are as follows:
• No stock-outs should happen if orders for inventory are placed at the correct time.
• There is a known and constant lead time that never varies.
• Only two types of variable cost will be incurred: the set-up cost (or the cost for placing an order) and the
holding cost.
• All demand is independent, constant and known, without any variation.
• No discounts for quantities will be given.
• The entire inventory will be received at once and complete (the entire inventory is received in one batch
all at the same time).
• There will be only one product involved and no interaction will take place with other products.
The EOQ model is used to order a fixed order size, and the cost associated with ordering is minimised. As a
rule, the purchasing price per unit of an item held in inventory is not included in the total cost. The reason for
this is that the unit cost is not affected by the order size. The only time when the unit cost is affected is when
quantity discounts are taken into account. There is one instance in which unit cost is indirectly taken into
account. This happens when holding cost is expressed as a percentage of the unit price. The usage and
ordering of all inventories occurs in cycles. The cycle commences with the receipt of Q units of an item
ordered. The inventory will then be withdrawn over a period of time at a constant rate. The next order of Q
units will be placed with the supplier once just enough inventory is available to satisfy demand over the lead
time to receive that order. Now the assumptions that demand and lead time do not vary come into play. As a
result, a further assumption is made that the order will be delivered on time before the organisation runs out
of inventory. That will mean that just as the inventory on hand shows a balance of zero, the outstanding order
will be delivered.
The use of this model is an attempt to minimise inventory holding and prevent stock-outs from occurring.
This model further attempts to balance the cost of holding and the cost of ordering. It is a given that if the
order size increases, one of the costs will definitely increase while the other cost decreases. Consider this
example: if an organisation uses small order sizes, the average size of inventory holding is small. The result
of small order sizes is that orders must be placed more often. Therefore, the holding cost decreases but the
ordering cost increases. An order size should be found that does not require a few large orders or a large
number of very small orders.
The optimum order size will be heavily influenced by the magnitude of ordering and holding costs.
Carrying cost is usually computed on the average inventory that, in turn, is calculated as half of the order
quantity. In the basic EOQ model, the inventory on hand will then steadily decrease from the optimum Q
level until it reaches a level of zero units left. The annual holding cost can be calculated as follows:
Where:
Q = order size in units
H = holding cost
As can be seen from the formula, a linear function exists between the carrying cost and Q. This happens
because as Q increases, so will the carrying cost, and as Q decreases, so too will the carrying cost.
WORKED EXAMPLE
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Consider this example: imagine that the Super Widget Company has forecast an annual demand of 24 000
items for its product. The order size Q = 1 000 units with every order. This policy means that two orders per
month will have to be placed, so the ordering cost will be very high. If the organisation utilises a policy in
which Q = 2 000, the order frequency decreases to once a month. The cost of ordering can then be halved.
The impact is even greater when Q is increased to 4 000 items. Then only six orders per year must be
placed (one order every two months). This will decrease the ordering cost even further.
The number of orders to be placed per year can be calculated as follows:
Where:
D = annual demand
Q = order size
From the above formula, the annual ordering cost can be determined as follows:
Where:
S = cost per order
By combining the formulae for the annual holding cost and annual ordering cost, the total cost for the
annual ordering and holding cost of inventory can be calculated as follows:
Total cost (TC) = annual holding cost + annual ordering cost
This can be expressed as a mathematical formula as follows:
If all the relevant costs are known, this will enable the operations manager to calculate the optimal order
quantity. He or she can utilise the following formula to do this:
Where:
D = demand in units per year
S = ordering cost
H = holding cost
Q0 = optimal ordering quantity
To ensure that the calculations can be achieved it is important that the units for both D and H are the same.
It is also important to determine how often an order should be placed. This is known as the length of an
order cycle. This can be calculated using the following formula:
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Where:
Q0 = optimal ordering quantity
D = demand in units per year
The calculations of the various formulae that have been discussed thus far are illustrated in the next
example.
How to do calculations for the basic EOQ model
WORKED EXAMPLE
Consider the following example. A franchise of Tiger Wheel and Tyre in Johannesburg has forecast that it
expects to sell approximately 28 800 4x4 tyres during the next year. It has determined the annual holding
cost per tyre to be R48 and ordering cost to be R225. The franchise operates for 288 days a year. The
manager of the franchise would like to calculate the following:
1 The optimal EOQ
2 The number of times the franchise should reorder
3 The length of the order cycle
4 The total annual cost if the EOQ quantity is ordered.
Let us consider the solutions. Before any calculations can be attempted, it is important that all the relevant
information is specified as follows:
• Demand (D) = 28 800 tyres per year
• Holding cost (H) = R48 per tyre per year
• Ordering cost (S) = R225 per order placed.
1
Solution 1. The first solution to be computed is for the optimal ordering quantity for tyres:
Important note: It will be impossible to order 519.61 tyres. As a rule, any decimal number of 0.50 or
larger will be rounded up to the next integer (whole number). Therefore, the order will be rounded up to 520
tyres. Any decimal of less than 0.50 will be rounded down to the previous integer. This principle is applied
to all calculations done in this chapter.
2
Solution 2. The second solution to be computed is to determine the number of orders to place annually:
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3
Solution 3. The third solution to be computed is to determine the length of an order cycle:
A determination must be made as to what the length of 0.018 of a year will be. It is achieved as follows:
0.018 × 288 = 5.18 5 working days.
4
Solution 4. The fourth solution to be computed is the total cost:
Note: The cost of holding and ordering is an estimated figure rather than one that can be predicted or
calculated from past data or history. In most cases, holding cost will be a cost designated by management
rather than a computed cost. For this reason, the EOQ is then an approximated quantity rather than an exact
quantity. For this reason, rounding up or down of values is perfectly acceptable. If a value of three figures
after the decimal (as on a calculator) is used, there might be an impression that it is an exact value, which it
is not. Management and others who use the EOQ model should realise that it is quite flexible.
A review system that is continuous
The most limiting factor of the basic EOQ model is the assumption that demand will always be constant. In a
perfect world, this might be true, but it is not the case in the daily operation of an organisation. With the
continuous system (also known as the Q or fixed order system), the basic model is relaxed to the point where
random demand can be accepted. This results in a model that is flexible enough to be applied in industry.
None of the other assumptions used in the basic EOQ model are changed. When inventory is managed
properly, the decision to reorder is based on the total on-hand inventory, plus all the quantities of orders that
are outstanding. The outstanding orders are taken into account because they will arrive irrespective of
whether or not anything more is done about them. The total on-hand inventory and inventory on order is
known as the inventory position or inventory on hand (the more popular term). One of the mistakes
managers make most often in the management of inventory is to disregard the quantities that are on order.
It is precisely for this reason that the continuous system should be used. This system monitors inventory
on hand on a continuous basis after each inventory transaction. When the inventory on hand reaches a
particular point, known as the reorder point, an order for a fixed quantity will be placed. In the continuous
system, the inventory on hand will drop irregularly until the reorder point or RoP is reached. At the reorder
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point or level, an order for Q units will be placed. The lead time L will determine when the inventory that has
been ordered will be received. This cycle is repeated continuously. The Q system will always operate within
the two parameters of Q and RoP. The parameters will be determined using the following assumptions:
• The level for Q is set to the same level as that for the normal EOQ model where the average demand (D)
is used.
• The value of the RoP will be determined by the stock-out cost or the probability of a stock-out taking
place. The service level is also addressed by this method. The service level is the percentage of
customer demands that can be satisfied from inventory. When a 100 per cent level is achieved, all the
demands outstanding have been satisfied. The stock-out percentage will then be 100 per cent minus the
service level.
Service levels are measured in various ways:
• the percentage of time there will be inventory on hand
• the probability of filling orders from inventory while replenishment takes place
• a percentage of the demand satisfied from inventory during any given time period (this time period can be
a day, a week, a month or a year).
Each of the definitions given above will result in a different reorder point. Therefore, the reorder point RoP
can be calculated as follows:
RoP = m + s
Where:
m = mean demand over a specific lead time
s = the safety or buffer inventory
The safety stock (s) can be calculated thus:
s=z
Where:
z = the number of standard deviations required for a given service level
= the standard deviation of demand over lead time
The reorder point will be calculated from the average demand over lead time (m) plus a specified number of
standard deviations s of the demand over the lead time, that will protect the whole system from any stock-out
occurring. Therefore, if z is properly controlled, both the reorder point and the service level can be controlled
simultaneously.
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TABLE 6.6 Table of normal demand percentages
Z VALUE
SERVICE LEVEL
PERCENTAGE
STOCK-OUT PERCENTAGE
0
50.00
50.00
0.50
69.10
30.90
1.00
84.10
15.90
1.10
86.40
13.60
1.20
88.50
11.50
1.30
90.30
9.70
1.40
91.90
8.10
1.50
93.30
6.70
1.60
94.50
5.50
1.70
95.50
4.50
1.80
96.40
3.60
1.90
97.10
2.90
2.00
97.70
2.30
2.10
98.20
1.80
2.20
98.60
1.40
2.30
98.90
1.10
2.40
99.20
0.80
2.50
99.40
0.60
2.60
99.50
0.50
2.70
99.60
0.40
2.80
99.70
0.30
2.90
99.80
0.20
3.00
99.90
0.10
(SOURCE: Schroeder, R.G. 2004. Operations management – Contemporary concepts and cases, 4th ed. New York:
McGraw-Hill/Irwin, 39)
Table 6.6 provides percentages from the normal distribution. The percentages from the table indicate the
probability that any demand will fall within the specified number of standard deviations from the mean.
When a certain service level is desired, z can be determined using the table, and from this the reorder point
can be calculated. The example below illustrates this.
Computations for the continuous system (Q system or fixed order quantity system)
WORKED EXAMPLE
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The operations manager at Bokomo Foods, situated in Cape Town, manages a warehouse where the
breakfast cereal Weet-Bix is stored. The inventory has the following characteristics:
• Demand (D) = 200 cases per day
• Lead time (m) = 4 days to replenish from the factory
• of daily demand = 150 cases
• Service level desired = 96 per cent
• The carrying cost (i) expressed as a percentage of rand value per year = 20 per cent
• The unit cost (C), rand per unit = R10 per case
• The cost for placing an order is R20.
The following assumptions will be made:
• A continuous review system will be used.
• The warehouse will be open 5 days a week or 50 weeks a year or 250 days a year.
• Average annual demand
= 250(200)
= 50 000 cases per year.
EOQ computations:
Average demand (m) over lead time = 200 cases for 4 days. Therefore, it can be calculated as follows:
m = lead time × average demand
= 4(200)
= 800 cases
The standard deviation of demand over the lead time needs to be calculated. From the information above,
we know that the daily standard deviation of demand is 150 units, and that the lead time is 4 days. From
basic statistics, we know that if daily demand is independent, then the total variation of demand over the
lead time is equal to the sum of the daily variation, or as an equation:
2 demand over lead time
= 2 per day
The standard deviation of demand over the lead time is therefore the square root of the lead time in number
of days multiplied by the daily variation:
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The 95 per cent level of safety stock factor = 1.65 (from Table 6.6), the reorder point is computed thus:
RoP = m + z
= 800 + 1.65(300)
= 800 + 495
= 1 295 cases
This means that an order for 1 000 cases will be placed every time that inventory holding drops to 1 295
cases. This will result in 50 orders to be placed on average per year, or 1 order every 5 days.
A review system that is periodic
A periodic review system (or P system or fixed order interval system) is a system used to review inventory
holding of finished goods. The reason for using the periodic system is that most suppliers will deliver only at
fixed intervals. If a supplier delivers only once a month, the inventory is reviewed once a month. After the
completed review period, an order is placed. The assumption under which this system operates is one of
periodic inventory holding review, where the demand will always be of a random nature. Therefore, all the
assumptions, except for constant demand and no stock-outs, of the basic EOQ model remain valid for this
system as well. After a review period has taken place, the inventory levels will be replenished to their
original levels. This is known as the target level for inventory holding. The new levels will be high enough
to ensure that there will be enough inventory available until the next review period.
The lead time for the items that are on order is also included in this review period. The order sizes in this
model do not remain static but differ each time an order is placed. The quantity that is ordered is determined
by the quantity required to bring the inventory levels back to their normal levels. Just as in the continuous
system, the inventory decreases at an erratic pace until a fixed review time is reached (i.e. once a month). At
that time, a predetermined quantity is ordered to bring inventory levels back to normal levels. After a set
time, orders will arrive after lead time (L). Thereafter, the whole cycle will repeat itself. The P system differs
from the Q system as a result of the following:
• No reorder point exists in the P system – only a target inventory level is specified.
• There will be no EOQ as a result of the varying demand.
• In this system the order interval is fixed and not the order quantity.
Similarly to the Q system, the P system operates within two particular parameters, namely P and T. Using the
basic EOQ formula will approximate the optimal value for P. The EOQ model is related to P, as that is the
time between orders, and is calculated as follows:
The value for Q in the EOQ model will be substituted as follows:
Once the previous two formulae have been computed, the target inventory holding levels can be computed to
measure certain service levels. As has been stated, the inventory holding target will be set high enough to be
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able to cover the demand over the lead time and the review period. The stock will arrive within the lead time
specified for each item that has been ordered. To ensure a certain set service level, demand must therefore be
able to cover a time period P + L. This will be at the average level plus any safety stock that may be required.
The following formula will be used to calculate the requirements:
T=m+s
Where:
T = target inventory level
m = average demand over period P + L
s = required safety stock
It is important that the safety stock levels are set high enough for the service level that has to be achieved. To
compute the required safety stock levels, the following formula will be utilised:
s=z
Where:
= standard deviation of demand over the period P + L
z = safety factor
The target inventory can be controlled due to the fact that z can be controlled. Therefore, the service level
that is desired will be achieved. The same example that was used in the Q system will be used to illustrate
this case as well.
Computations for the periodic system (or P system or fixed order interval system)
WORKED EXAMPLE
Let us refer back to the Bokomo breakfast cereal problem we discussed earlier. The EOQ in the Q system
was computed to be 1 000 cases. The demand for Weet-Bix was 200 cases per day.
The optimal inventory holding review can be computed as follows:
The inventory holding target is computed by using the following formula:
T=m+s
Therefore, when the computation in the P system is undertaken, the average demand that will occur over the
total time period P + L = 5 + 4 = 9 days is:
m = 9(200)
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= 1 800 cases.
The standard deviation is computed as ’ also for the period P + L = 9 days, giving:
If a service level of 95 per cent is required, z = 1.65 as before, so that:
T = 1 800 + 1.65(450)
= 1 800 + 742.5
= 2 543 cases
The computation above shows that inventory will be reviewed every 5 days and, to ensure that service level
targets are maintained, a varying number of cases of Weet-Bix will be ordered – sufficient to reach the
target level of 2 543 cases.
There is another very interesting difference between the P and Q systems regarding the safety stock
required. In the P system, the safety stock is computed as follows:
s’ = z ’
= 1.65(450)
= 743 units
In the Q system, safety stock is computed as follows (refer to the calculations done earlier):
s =z
= 1.65(300)
= 495 units
It can therefore be deduced that the P system will always require more safety stock than the Q system. The
reason for this is that the P system must be prepared to defend inventory holding over a period of P + L,
while the Q system needs to defend inventory holding over a time period of only L.
P and Q systems
It is important to note that P and Q systems will operate only in an independent demand environment. These
two systems and their derivatives are widely used in industry. Choosing between the two systems is no easy
task. Mostly, the choice will be dictated by the economic and management practices of an organisation. The
following are conditions where the P system will be a better system to use than the Q system:
• Multiple items ordered from the same supplier. Delivery will then take place in the same shipment. It
makes sense for the supplier to consolidate the orders into one large shipment, for example, if a supplier
is supplying bolts of the same diameter but different lengths. Consolidation will result in the delivery of
the different lengths at a fixed interval, instead of delivery of the different lengths at different times.
• Monitoring of inexpensive items, for example nuts and bolts, only. Another prerequisite is that these
items should not be counted with a perpetual system. The bins in which these items are kept can be filled
at regular intervals, for example on a weekly basis. This will mean that the size of the bin will determine
the inventory holding target.
• When deliveries of inventory are required at specific times. This will include orders that have to be
placed at specific intervals. An example is breakfast cereal orders and deliveries to supermarkets.
The main advantage of the P system is that there are scheduled replenishments with minimum record
keeping. The main drawback is that the P system requires a larger safety stock holding than the Q system.
Therefore, it is more advantageous to use the Q system when high-value items are involved. The decision of
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the system type to be utilised by an organisation will be based upon the timing of the order placement and the
delivery of the order. The type of record keeping prescribed by an organisation’s inventory policies and the
cost and value of inventory will dictate which system should be utilised. In many cases, neither of the two
systems will be able to exist in their purest form. This will mean that only a hybrid of the two systems will be
able to function.
6.4.2 Economic production quantity model
In the economic production quantity (EPQ) model, inventory is received over a period of time rather than all
in one shipment. In this model, the assumption that delivery will occur instantaneously is not required. The
EPQ model will operate under the following assumptions:
• Inventory will flow continuously or will accumulate over a predetermined time period – this will occur
after an order for the replenishment of inventory has occurred.
• In this system, the items will be produced and consumed simultaneously – in the EPQ system the
production rate and demand rate per day are very important.
Because this system is ideally suited for a production plant, it is known as the economic production quantity
model. The total ordering cost is set equal to the holding cost. Solving this type of model requires the
utilisation of the same formulae that are utilised for the calculation of Q. The same basic assumptions that
were in operation for the EOQ model are applicable for the EPQ model, namely:
• No quantity discounts are granted.
• The usage rate of items is constant.
• Only one item is involved.
• The annual demand for an item is known.
• Ordering (or in this case set-up) costs are known and constant.
And then two further assumptions are required, namely:
• The rate at which items are produced is constant.
• The EPQ system’s usage of the items is continuous but production is periodic.
Therefore, it is inevitable that inventory build-up will occur. The build-up will be computed as the production
rate minus the usage rate. For example, if the production rate of an item is 100 items and the usage rate is 25
items, inventory build-up is expressed as 100 – 25 = 75 units per day. This will mean that 75 units will be
added to inventory every day. For as long as production continues, inventory will increase. Maximum
inventory will be held at the point where production is halted. Production will resume only once the entire
inventory has been consumed. No ordering cost will be involved because the company manufactures all its
own requirements. Set-up cost will be incurred instead.
In the EPQ model, the set-up cost replaces the ordering cost found in the basic EOQ model. The number
of runs required to meet demand depends on the run size that is produced. The larger the run size, the lower
the set-up cost per annum. The formula to compute the number of runs or batches can be expressed as
follows:
Where:
D = demand per annum
Q = quantity produced per run
Therefore, the annual set-up cost can be computed utilising the following formula:
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Where:
S = set-up cost per run
Total cost will be computed using the following formula:
Where:
TC = total cost
Imax = maximum inventory on hand
p
= rate of production or rate of delivery
u
= rate of usage
The economic run quantity will be:
with the variables as defined previously.
The cycle time must be computed as well. This is the time that elapses between the beginnings of each
run. This time can be seen as the function of the run size and the usage rate. The cycle time can be computed
utilising the following formula:
The time taken for the production of an item is known as the run time. It is the function of the run size, also
known as the lot size, and the rate of production. The following formula will be utilised to compute the run
time:
The second-last computation of this model is the computation of the maximum inventory holding. The
following formula will be utilised:
The last computation of this model is the computation of the average inventory levels. The following formula
will be utilised:
WORKED EXAMPLE
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The following example illustrates the calculations to be made when the EPQ model is utilised. The
Tswelopele Toy Company makes Madiba dolls for the local and overseas market. The company
manufactures all the parts of the doll, including the head. The organisation can produce 800 heads per day.
Assembly of the dolls takes place uniformly over the entire year. The carrying cost for each head is R1 per
year. To affect a set-up, the cost that will be incurred will be R45 per production run. Tswelopele operates
for a total of 240 days per year. Imagine that you have been appointed as the operations manager at
Tswelopele and that you have to compute the following:
1 The run size that will be optimal
2 The minimum annual total cost for carrying inventory and setting up machines for a production run
3 The cycle times for the optimal run size
4 The run time.
Solutions
Let us consider the solutions. It is important that all the costs to be utilised in the computations are specified
as follows:
• Demand (D) = 48 000 heads per annum
• Cost (S) = R45 per set-up
• Holding cost (H) = R1 per head per annum
• Production rate (p) = 800 heads per day
• Usage rate (u) = 48 000 heads per 240 days (recalculated as
heads per day)
1
Solution 1. The first solution to be computed is for the size that will be optimal:
Important note: It will be impossible to manufacture 2 400.62 heads and, as a rule, any decimal number of
0.50 or larger will be rounded up to the next integer or whole number, so the number of heads to be
manufactured will be rounded up to 2 401.
2
Solution 2. The second solution to be computed is for the minimum annual total cost for carrying
inventory and setting up machines for a production run:
The total for Imax is unknown at this stage and should be computed before the values for TC min can be
computed. Imax will be computed as follows:
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At this stage, the TCmin can be computed utilising the following formula:
3
Solution 3. The third solution to be computed is for the cycle times for the optimal run size:
Therefore, every 12 days a run to manufacture heads will be undertaken.
4
Solution 4. The fourth solution to be computed is for the run time:
Each of the production runs to manufacture the correct number of heads will take three days.
6.4.3 Classification systems for inventory model
Decision-making about managing inventory commences at the rudimentary level. At this level management
has to establish the quantities of inventory to be held. Organisations attempt to minimise the holding of
inventory by holding as little as possible. The management of inventory can be seen as both an art and a
science.
Management of inventory could entail the:
• counting of on-hand inventory
• placing orders to replenish inventory
• receiving orders placed to replenish inventory.
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Scarce resources (money, time and space) are consumed by holding inventory. Large amounts of inventory
held by an organisation cause the control of inventory to become multifaceted.
An inventory control system commonly utilised for inventory management is the ABC classification
system. It assists with the effective and efficient management of sizeable quantities of singular units. The
majority of organisations refer to stock-keeping units (SKUs). Organisations categorise the SKUs in three
main categories, namely class A (representing high monetary value items), class B (representing moderate
monetary value items), and class C (representing low monetary value items). ABC classification can be
defined as the grouping of SKUs or items in diminishing order of annual monetary value (rand) or any other
criteria as decided by the organisation.
The classification system is important to organisations in managing the hazard of losing track of on-hand
inventory. Suitable inventory strategies have to be developed to guarantee that high-value inventory is
accurately controlled. Without the strategies in place, organisations would waste effort and monies
controlling low-value inventory. ABC classification is the most often utilised system controlling inventory. In
the majority of cases, the annual monetary value of the inventory would determine the class that a particular
SKU will be. In some instances, organisations utilise an expanded classification system that includes reorder
point, two-bin system and material requirement planning (MRP) as strategies.
Criteria which could be utilised to replace the annual monetary value are demand value or demand
volume. Controlling of inventory can be seen as being a dual problem. One problem area is the correct
classification of the inventory. The second problem area is the setting of suitable strategies for each of the
classes identified. The ultimate goal of the classification system is guaranteeing effective and efficient
control.
The ABC classification system
A phenomenon of holding inventory is the distribution of value for SKUs. Studying the inventory value of
inventory, it becomes apparent that a small number of SKUs represent the largest monetary value.
Conversely, a larger number of SKUs represent a small monetary amount. Utilising an alphabetical symbol
(A, B and C), each class of inventory can be denoted. Experience has taught us that Class-A inventory
represents 15–20 per cent of total inventory holding. As a rule, Class-B inventory represents up to 30 per cent
of the total inventory holding cost. If the same rule is applied to the remainder of inventory holding, Class-C
items represent up to 50 per cent of total inventory holding.
Organisations can utilise other benchmarks to establish their classification of inventory. Another
benchmark that can be utilised is the sales volume of an item. Utilisation of sales volume will result in 70 per
cent of sales representing Class-A items, 20 per cent of sales representing Class-B items, and 10 per cent of
sales representing Class-C items. The values representing each class should be utilised as a guideline and not
an absolute benchmark. In the hubbub of a working organisation, the division would never be as neat as
discussed above. The first major goal of ABC analysis is the division of significant from insignificant SKUs.
The delineation of the classes would depend on the size of inventory holding. Another factor that would
influence the delineation is the available person hours required to manage the inventory. A major goal of the
classification system is to establish the degree of control for each SKU. When inventory has been classified
into the three categories or classes, the level of control for each can be established. A rule of thumb that can
be applied for control is that Class-A items are audited on a weekly basis, Class-B items fortnightly, and
Class-C quarterly.
A major function of the ABC classification system is the computation of safety stock for all SKUs. Safety
stock is the excess inventory held to mitigate a sudden increase in demand. It would guarantee that enough
inventories are available to satisfy the immediate demand placed by customers. Safety stock would likewise
negate the influence that longer than expected lead times would have on the replenishment of inventory.
Without the ABC classification system, it would be easy for organisations to assume SKUs are of identical
standing. As a result, the safety stock policy for all the SKUs is set equal. The major benefit of safety stock is
that the probability of a stock-out occurring is alleviated. The safety stock policy for Class-A items would be
high, Class-B items intermediate, and little or no safety stock for Class-C items.
Cohesive supply chain inventory management
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The cohesion of supply chain inventory management can be achieved through the continuous improvement
of inventory performance. Inventory improvement could be achieved through the amalgamation of
decision-making and implementation. Two major initiatives have been identified to achieve the above goal.
They are vendor-managed inventory and collaborative planning, forecasting and replenishment.
Before the advent of SCM, the sole responsibility for inventory management was vested with the
operations manager of an organisation. The inventory was located on the premises of the organisation and the
operations manager could control, replenish and manage the inventory. Vendor-managed inventory (VMI)
changed this practice as well as the overall duties and role of the operations manager in managing inventory.
Due to the advent of VMI, organisations do not keep inventory at their premises, but the onus of keeping
inventory has been moved to the supplier. The supplier is responsible for storage, management of inventory
and the movement of inventory in and out of their facility. The responsibility for replenishing of inventory is
vested at the supplier level. The supplier owns the inventory up to and including the point of customer
consumption of the inventory. A number of benefits have been identified for the supplier and customer if the
VMI model is utilised. They are:
• The customer avoids the costs that are usually associated with the holding of inventory.
• The responsiveness of the supplier to customer needs is increased by having representatives on the
premises of the customer.
• There will be direct cooperation between the planners of the two organisations as well as the on-site
representative – service delivery will improve due to a better understanding of the needs of the customer.
• The better understanding of the needs of the customer will contribute to a better understanding of
customer operations – the supplier will be able to improve on the replenishing schedules of inventory for
that particular customer.
• The supplier will be able to improve the productivity of its internal processes through the improved
internal processes.
There are some negative consequences when VMI is utilised. A major disadvantage is the blurring of
boundaries between the suppliers’ and customers’ management systems. The knowledge gained through this
interface can be detrimental to both the supplier and the customer. A second disadvantage is the secrecy
issue. The supplier and customer have free access to each other’s databases. As a result, either can glean
sensitive information that can be utilised to their advantage or to damage the other. The main impact will be
on the competitiveness of both. The result will be that the supplier and customer would have to commit to a
long-term relationship.
Collaborative planning, forecasting and replacement (CPFR) is another cohesion strategy for managing
inventory and the supply chain. During the last decade of the 20th century, producers of fast-moving
consumer goods collaborated to improve the availability of their products. CPFR utilises the method where
several merchandising associates conjoin information regarding planning and satisfying customer demand. A
benchmark is achieved through a blend of the outstanding procedures of the participating organisations. The
benchmarks that are developed are utilised for the management of the supply chain planning and execution
functions. It results in the improved availability of the products of the participants in CPFR. Conversely,
inventory holding costs as well as transportation and logistics costs will decrease.
Through the utilisation of this methodology, strategies are launched to facilitate close cooperation across
organisational confines. The CPFR methodology requires four joint actions:
1 Business to business tasks
2 Strategy and planning
3 Demand and supply chain management
4 Order execution and analysis.
The most important action is strategy and planning. At this stage the participants in CPFR have to create
policies governing their cooperative endeavours. The policies will create the correct product mix and
placement of products that form part of the alliance. Another policy that has to be created is how the
marketing for the products of the alliance will be achieved. The following could be included during the
strategy and planning phase:
• customer demand forecasting
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CHAPTER 8
Capacity planning
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
•
Define the term ‘capacity’
Understand the importance of capacity for the success of an organisation
Discuss the manner in which capacity can be implemented
Understand the critical capacity decisions
Understand the considerations that must be taken into account when capacity is determined
Understand the necessity for capacity measurement
Compute effectiveness, utilisation and capacity loads
Establish effective capacity
Strategise capacity
Discuss capacity needs predictions
Understand constraints on capacity and how to manage them
Develop alternative capacity plans.
CHAPTER outline
8.1
8.2
8.3
8.3.1
8.3.2
8.4
8.4.1
8.4.2
8.4.3
8.4.4
8.4.5
8.5
8.6
8.7
8.7.1
8.7.2
8.8
Introduction
Critical capacity decisions
Capacity measurement
Types of capacity measurement
Measuring effectiveness, efficiency, and load of capacity
Establishing capacity
Facility issues
Goods and service issues
Process issues
Employee issues
Operational issues
Strategy formulation for capacity planning
Capacity needs prediction
Constraint management
Barriers to the implementation of the TOC methodology
Drum, buffer and rope (DBR)
Developing alternative capacity plans
Summary
Key terms
Review questions and activities
Case study
References
Websites
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YouTube™
SETTING THE SCENE
Distribution centres lose nearly 3 000 hours a year on unproductive workflows
Intermec research reveals the true cost of inefficient processes and the challenges facing distribution centres
today. Warehouse and distribution centres are under increasing pressure to reduce costs and increase
margins. Recent Intermec research reveals that, in the last six months alone, nearly eight out of 10 (79%)
warehouse managers have been tasked with finding an average 19% cost saving from existing operations.
Despite this mounting pressure to cut costs and the need to find efficiency gains in every process, managers
admit to losing time and money through known inefficient workflows.
The survey base of 250 supply chain, warehouse and distribution managers stated that, over an 8-hour
shift, each worker loses an average of 15 minutes of productivity in an inefficient process. For a small to
medium-sized warehouse with 50 workers, this quickly adds up to nearly 3 000 hours a year, and could be a
significantly higher number in larger organisations.
Although most managers have been tasked with finding cost savings, close to one in three (30%) have
not conducted a review of workflow processes in their distribution centres within the past year. This is the
first step in identifying areas for improvement.
The majority of managers questioned believe the most inefficient workflow in an eight-hour shift to be
packing and loading (20%), closely followed by picking and inventory control (both 18%).
This belief is born from the data produced by companies that have recently conducted a workflow
process review, who say that inventory control (53%) and picking (47%) are the two areas where cost
savings could most easily be achieved.
Perhaps surprising, the research shows that, in companies that are yet to take action to improve
workflow productivity, there are high levels of resistance to the idea of carrying out a full review. Managers
who have not held a review in the past year say that only compliance (28%) or poor performance (27%)
would prompt them to do so today. The latter point is in stark contrast to those companies that have
recently conducted a review, and implemented process improvements as a result, who say that they are
mostly motivated by compliance issues (26%) or continuous improvement programmes (22%), and rate
poor performance as a very low (9%) driver for their action.
Whether they are prepared to conduct a review or not, the survey carried out by research firm Vanson
Bourne identifies the very clear pressures that warehouse and distribution centre managers are under.
Nearly all respondents appear to agree on the key to achieving this goal. When asked how to improve
performance across the warehouse and distribution centre, the overwhelming majority of managers (89%)
said they believed investment in new technology would enable them to claw back their lost time and ensure
greater worker productivity.
There is also increased awareness of the value that shaving just seconds off workflow processes can
bring. Nearly two-thirds (60%) agree that ‘large time and cost saving opportunities can be found in gaining
back mere seconds in operation workflows’. Examples of how to achieve this include having workers take
fewer steps, investing in faster label printing and quicker bar code label scanning, and eliminating battery
changes mid-shift.
Rudi Martin, Intermec South African Country Manager, said: ‘Warehouse managers are faced with
significant cost-saving challenges. This means they can’t afford to let such levels of time wastage continue.
Businesses should be looking at every workflow in detail on a regular basis to claim back the minutes and
seconds they need to achieve these savings. As this research shows, reviewing their technology
infrastructure may be the perfect place to start.’
(SOURCE: Intermec. 2013. http://www.intermec.com/public-files/case-studies/en/cs-Sand-Springs-Police.pdf)
8.1 Introduction
Management is often heard asking, ‘What is capacity?’ It is one of the most misunderstood terms in
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operations management.
The definition of capacity given in the box is the broadest
According to the South African Concise
possible definition of capacity, and should reduce some of the
Oxford Dictionary, capacity can be defined as
confusion around the term. For the purposes of operations
‘the maximum amount that something can
management, however, a more detailed definition is required.
contain or produce’.
Any definition of capacity must show a measurement of
capacity and must mirror the capability of an operation or
process to satisfy customer demand for the goods or services of
an organisation.
For example, when employees or customers of an airline such as kulula.com hear the organisation using
the term ‘seating capacity’, this means the limit in the number of people that can be safely fitted into an
aircraft. Loading excess passengers will be overutilisation of capacity. Therefore, a dangerous situation will
result and the overutilisation of the capacity could cause the aircraft to crash. This capacity computation will
also determine the number of flights that should be scheduled on a route to satisfy customer demand for seats
on that route.
It is clear that an operation or process must be able to produce the required product or service in a
predetermined time horizon. Due to its scarcity, capacity can be classified as a critical resource which must
be managed with great care – capacity is not infinite, but finite. Effective utilisation of capacity must result in
goods and services that will meet or surpass the timing prospects of the customer. Bearing in mind the
information given thus far about capacity, the following definition can be put forward.
Capacity is the highest possible perimeter or highest yield value of a specific operation, process or
system, articulated in a definite unit of time when the said operation, process or system is operating within an
ideal environment.
Capacity is influenced by the sort, quantities and timing of the facilities available to an organisation.
Optimal utilisation of capacity will be achieved if a suitable blend of facilities, equipment, machinery and
labour exists. It will guarantee that imminent and existing demand for goods or services will be satisfied.
Demand for products and services is not static. It changes constantly. For example, the demand for seats
on a flight is never the same. On some flights the demand is much higher than on other flights. Capacity is
never constant; it changes or oscillates according to demand. Capacity planning is part of the strategic
planning effort of every organisation and can never be left to chance. The aim of the strategic capacity plans
is to harmonise an organisation’s long-term competences with the forecasted demand. Demand and capacity
fluctuations can be a result of technology changes, changes in the external environment, and threats and new
opportunities.
The information we have discussed in this section can be explained by the following examples. The
airline kulula.com must determine the capacity of its aircraft to guarantee that enough capacity (seats) will be
available per flight to satisfy customer demand. Volkswagen South Africa must ensure that there will be
enough material, labour, equipment and machines available to produce the number of vehicles demanded by
its customers. Supermarkets (for example, Spar, Checkers and Pick n Pay) must ensure that sufficient
produce is available and that the location is such that capacity will be fully utilised.
Fluctuations in demand can cause an organisation to experience over- or under-capacity utilisation.
Under-capacity utilisation occurs when an organisation has more capacity available than is required. It will
result in an increase in the cost of production. The increase is due to idle capacity the organisation has to pay
for even though it is idle and nothing is produced. Over-capacity utilisation occurs when an organisation has
insufficient capacity available to satisfy demand. In this instance the facilities of the organisation will be
under constant pressure to produce even though there is insufficient time available. A result of overutilisation
is the loss of customers because the organisation is incapable of meeting their demand.
A number of very important questions must be addressed when capacity is planned. They are:
• What is the amount of capacity required?
• What facilities, equipment, machines and labour will be part of the planned capacity?
• Are the existing facilities adequate to satisfy existing and impending capacity requirements?
• Does the organisation predict any changes in existing and impending demand patterns?
• What type of capacity is required by the organisation?
• Should the organisation erect new facilities to meet impending demand?
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•
•
When and how will capacity be totalled to operations, processes and systems?
When will the organisation require the capacity?
It is important for management of an organisation to revise capacity plans frequently to guarantee the optimal
performance of every operation, process and system.
Economies and diseconomies of scale
There is a basic understanding that one has to grasp regarding economies of scale. It is that when the size of
a production unit or facility increases, the volume that will be produced will increase exponentially.
Conversely, the input cost will decrease exponentially for each unit produced. The phenomenon occurs as a
result of the lowering in operating costs and the cost of capital to develop the new facilities. A simplified
explanation is the fact that if production volumes increase, more units become available to enable defraying
of costs incurred. An increase in the size of the production unit and volume increases will result in a higher
utilisation of resources. The production units thus become more effective and efficient. There are a number of
reasons for the occurrence of economies of scale. The four most important reasons are:
1 Learning by employees. It is a known fact that the more often an employee does a task, the more
proficient that employee will become in completing the task. Through the learning process an employee
will be able to perform the same task in less time. Consequently, if production volumes increase,
employees must learn to cope with the increased workload. Through this process, learning occurs. If it
occurs over a sustained time period, the employees will become more proficient in completing their tasks
and attaining the new output levels. This is known as the learning curve.
2 Fixed cost allocation. Fixed cost can be defined as the costs that are incurred during the production
process that are not influenced by the volume of products manufactured. This type of cost could include
equipment depreciation, rent, paying taxes, insurance premiums, utility bills, and salaries for indirect
employees and managers. It means that there will be no or small variance in the increase in cost, whether
10 000 or 40 000 units are manufactured. As a result, a higher volume of products produced will result in
dispersion of the contribution of the fixed cost over a greater number of products. In simple terms, it
means that the unit cost per unit produced will decrease exponentially by the same percentage that
production volumes increase.
3 Purchasing costs decrease. Higher order volumes for raw materials, parts and sub-assemblies would result
in lower purchasing costs. Most suppliers are willing to offer organisations substantial discounts for
larger order quantities of raw materials, parts and sub-assemblies. In this manner, the suppliers can attain
their own economies of scale.
4 The cost incurred for enlarging facilities. The costs incurred during the enlargement of facilities do not
increase dramatically if the size of the facility increases. Hence it makes economic sense to erect a larger
facility from the start.
Diseconomies of scale occur when a production unit’s size increases beyond a tipping point. A major
contributing factor to diseconomies of scale is the fact that managerial know-how in managing large facilities
has become convoluted. Hence it would contribute to communication gaps in the organisation where goods
would be produced for which there are no market. Another contributing factor is the tardiness of the
decision-making process. There are certain external factors that may contribute to diseconomies of scale too.
For instance, the cost of the production unit will not be influenced by direct labour, equipment and capital
expenditure. External factors, for example transport cost of raw materials, parts and sub-assemblies, may
result in diseconomies of scale.
8.2 Critical capacity decisions
Influences will be brought to bear on the critical capacity decisions by the utilisation of the effective capacity.
This will be especially true in instances where organisations manufacture various products. When this is the
case, it is to be expected that one particular product will have higher production outputs than the remaining
products. Therefore it will become necessary for the operations manager to define capacity as a dimension of
time. For example, the capacity of a production line at Ford Motor Company of South Africa will be defined
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as 100 motor vehicles per 8-hour shift. The critical capacity decisions will be made to modify and utilise
capacity optimally.
Strategic capacity planning is undertaken over very specific time horizons, as follows:
• Long term. This horizon is longer than one year. The long time horizon is the result of the procurement
of the assets required, which is such that it cannot be done over a shorter period. In this time horizon,
assets such as buildings, equipment and machines will be included. The responsibility for the planning
and approval of the strategic capacity rests with the senior management team of an organisation.
• Medium term. Planning can be undertaken on a quarterly or monthly basis. The time horizon of this
planning can be between 6 and 18 months. Decisions made can include the hiring or dismissal of
employees, purchase of small equipment, and whether to utilise subcontractors to increase capacity.
• Short term. Here the length varies from 1 day to 30 days into the future. The decisions mostly influence
the scheduling of work within the production unit. The major purpose of this type of capacity planning is
to reduce the variance between the planned and actual output.
The critical decisions are illustrated in Figure 8.1.
FIGURE 8.1 Critical capacity decision-making interaction
The following factors must be taken into account when the critical capacity decisions are made:
• Capacity decisions have a major bearing on the financial performance of the organisation. As a result
progressive capacity planning is of the utmost importance.
• The availability of capacity will affect the production of an organisation. The higher the capacity
availability, the higher the input costs will be.
• The management of an organisation will be directly influenced by available capacity. Managing an
organisation with harmonised capacity is a great deal easier than managing an organisation whose
capacity is inequitable.
• Capacity planning requires long-term commitment of scarce resources. As a result it is almost impossible
to reverse capacity decisions once they have been taken.
• Capacity decisions influence the ability of an organisation to meet demand for goods or services.
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•
Capacity is a limiting factor in meeting demand. If sufficient capacity is available, an organisation can
reap tremendous benefits.
The availability of capacity determines the competitiveness of an organisation. When an organisation has
spare capacity available, it may prevent competitors from entering the market. The same holds true if an
organisation can add capacity at short notice. Therefore, the availability of capacity determines the speed
of the delivery of goods and services to customers.
The availability or non-availability of capacity determines the cost structure of an organisation. The goal is
always to harmonise capacity and demand. In such instances, the operating costs are minimised. In practice,
though, capacity and demand can seldom be harmonised perfectly, as both demand and capacity tend to
fluctuate.
8.3 Capacity measurement
The best-designed operations, processes and systems do not always perform as they should. To prepare
capacity successfully, managers have to figure out how to compute it. The blame for unsuccessful
functioning of the organisation can mostly be ascribed to capacity problems the organisation experiences. For
this reason, it is imperative that an organisation constantly measures the performance of capacity. The
measurement of capacity can vary from the relatively simple to the most complex measures. For example, if
an organisation manufactures a single product, only that product will determine the capacity of the
organisation. If the organisation manufactures numerous products – such as vehicle manufacturers do, for
instance – the measurement of capacity becomes more complex. The answer to the problem of capacity
measurement may be found in the fact that capacity should be stated in terms of the number of units produced
by the organisation. In the case of the vehicle manufacturers, capacity can be stated in terms of the number of
each model that will be produced. If a unit is the measurement of capacity, it is known as the input
availability to produce the desired output or rate of output per unit of time. An organisation has a certain
number of hours available for production, or an airline a number of seats per aircraft, and so forth. It can be
dangerous to have a single measure of capacity for an organisation. Each situation must be measured
individually. Table 8.1 illustrates the measures of capacity available to different organisations.
TABLE 8.1 Capacity measures per industry type
ORGANISATION
INPUTS
OUTPUTS
Restaurant (e.g. Spur, Wimpy,
McDonald’s)
•
•
•
•
Number of tables
Number of customers seated
Kitchen capacity
Labour capacity (waiters)
•
Quantity of customers served
per day
Commercial farm (e.g. ZZ2,
Monsanto)
•
•
•
Hectares of land available
Number of sheep
Number of cattle
•
•
•
Tons of tomatoes produced
Litres of milk produced
Kilograms of meat produced
Vehicle manufacturers (e.g.
Volkswagen, Ford, Toyota)
•
•
•
Worker hours
Machine hours
Size of facility
•
Number of vehicles produced
per shift
Supermarkets (e.g. Spar,
Checkers, Pick n Pay)
•
•
Square metres of floor space
Labour
•
Income created per trading
period
8.3.1 Types of capacity measurement
In an organisation various types of capacity measurement are available. In this section we discuss these.
Design capacity
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This is a hypothetical measure of capacity. It is assumed that a well-designed operation, process or system
will have a predetermined measure of capacity available to achieve its goal. This is always the higher
parameter or highest production tempo of an organisation. Management will have to assume that the work
setting for the organisation will be perfect. In most instances, organisations do not fully utilise the design
capacity of a process or machine. By doing so, an organisation utilises its capacity more effectively and
efficiently in the long term. It results from the fact that the equipment or machinery is not stretched to
breaking point. A plant, machine or process is operated at 80 per cent to 85 per cent of the designed capacity.
As a result, there is spare capacity available within the operation, process or system. This capacity will be
available at very short notice.
Effective capacity
This type of capacity is stated as the design capacity minus all the possible allowances. The allowances can
include absenteeism, personal time, maintenance and the production of scrap. This capacity can be described
as the possible capacity that an organisation can anticipate if all the existing constraints under which the
organisation is operating are taken into account. As described above, the effective capacity is always less
than the designed capacity.
Actual capacity
This represents the actual capacity available within an operation, process or system. It is stated over a specific
time horizon. For example, a manufacturing company has 2 000 hours available per week as capacity. Due to
various constraints, breakdowns, tea breaks, lunch breaks, shortages of materials, etc., only 1 500 hours of
capacity are available. This quantity of capacity is known as actual capacity.
Other constraints may interfere even more with the available capacity. These constraints will be discussed
in later sections. Some examples of these constraints are set-up times, production of inferior quality, an
inexperienced workforce, etc. The product mix manufactured also has an impact on the actual capacity
available to an organisation. The importance of actual capacity cannot be overstated. Ignorance of the actual
capacity levels results in the over- or underutilisation of capacity, with all their negative connotations.
Output capacity
This type of measurement is best applied to a single operation, process or system. This measurement can
further be utilised if the organisation produces highly standardised products. An example is the motor vehicle
manufacturing industry. Only one service or product is produced where a single product’s capacity will be
measured, namely vehicles produced. The number of vehicles produced per shift will be the measure of
capacity. The less standardised the output becomes, the less effective this type of measurement is.
Input capacity
This type of measurement is utilised by low volume, flexible processes such as customised products. An
example is the building of a house or office block. Measurements such as the number of employees required
to complete the job will be utilised. The problem with this type of measurement is that most organisations
like to measure some kind of output rate. Whatever the demand for the product, this demand will have to be
translated into some form of output rate if it is to be useful.
8.3.2 Measuring effectiveness, efficiency and load of capacity
The effectiveness and efficiency of capacity can be measured as well using a number of available
methodologies. The methodologies measure or define how well a system works by measuring efficiency and
utilisation. The measures are known as ratios and are normally stated as a percentage.
Capacity efficiency is the ratio of production output to effective capacity. It is a measure of effective
management in utilising effective capacity. It is calculated using the following formula:
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Where:
AC = actual capacity
EC = effective capacity
WORKED EXAMPLE
The effective capacity of a candy manufacturing company is 1 000 units of candy per hour. However, it
actually produces only 850 units per hour. Calculate the efficiency of the candy manufacturing company.
Solution:
Effective capacity or utilisation is the ratio between the expected capacity of an organisation and its design
capacity. It can be computed by the following formula:
Where:
DC = design capacity
Effective capacity is affected by an organisation’s product mix, production scheduling, age of equipment and
maintenance standards.
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WORKED EXAMPLE
A television manufacturing company has a design capacity of 50 televisions per hour, but due to intensive
quality control standards, it normally produces only 40 televisions per hour. Calculate the effective capacity
or utilisation of the television manufacturing company.
Solution:
Let us illustrate both the measures by means of an example. The workshop of a Volkswagen dealership in
Johannesburg would like to compute the efficiency ratio and utilisation ratio for the workshop. The
workshop manager has gathered the following information:
• design capacity of the workshop is 80 cars
• effective capacity of the workshop is 70 cars
• actual service rate is 66 cars for the past week.
Imagine that your task is to utilise the methodologies above and do as follows:
1. Compute the efficiency ratio of the workshop.
2. Compute the utilisation ratio of the workshop.
Solution 1. The first solution to be computed is for the efficiency ratio of the workshop:
Solution 2. The second solution to be computed is for the utilisation ratio of the workshop:
The load that an operation, process or system has to have can also be measured as part of the capacity
measurements. The load is characterised by the quantity of work that is incomplete and was created by the
input rate into the operation, process or system. The load is measured by the backlog that is present in the
system or the amount of work in progress (WIP) in the system.
Calculation of the lead time to service a backlog can be calculated as follows:
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Where:
BL = backlog in the system
C = capacity of the system
WORKED EXAMPLE
The computation will indicate the time it would take until the last customer in the operation, process or
system is served. Let us illustrate this by means of the following example:
Calculate how long it will take to serve the customers if the backlog is 10 customers with a capacity to
serve 20 customers per hour.
It will take half an hour to serve the customers that form part of the backlog in the system.
8.4 Establishing capacity
A number of factors influence effective capacity. In this section we discuss these factors.
8.4.1 Facility issues
The effective and efficient design of facilities has a high impact on the effective capacity. If a facility is
poorly designed, the effective capacity suffers as a result. The location of the facility also affects its
performance negatively. Issues such as transport costs, proximity to customers, supply of labour, and supply
of raw materials determine effective capacity. Ineffective layout absorbs more of the capacity and fewer
products are produced. Environmental issues can also influence capacity determination. Issues such as
heating, lighting and ventilation can influence employees’ rate of production and therefore the effective
capacity.
8.4.2 Goods and service issues
The design of the good or service establishes the amount of capacity it will require. The more elaborate the
design of the operation, process or system, the more effective capacity it will consume. The mix of the goods
and services also influences the consumption of effective capacity.
8.4.3 Process issues
The capabilities of the process to deal with the manufacturing quantities determine effective capacity. The
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lower the capability of the process in meeting demand, the worse effective capacity utilisation will be. The
capability of the process to produce quality products further establishes effective capacity. A process that
produces inferior quality products will be incapable of meeting quality standards and, as a result, will
consume more effective capacity.
8.4.4 Employee issues
The job content of the jobs that employees must do determines the consumption of effective capacity. The
more difficult the job, the more effective capacity will be consumed. The design of the job contributes
towards the establishment of effective capacity, as does the amount of training and experience of employees.
The more experience an employee gains in the job carried out by him or her, the less effective capacity is
consumed. The methodology of a learning curve is applicable in such an instance. The motivation of
employees plays an important part in establishing effective capacity.
8.4.5 Operational issues
The effective scheduling of work reduces the consumption of effective capacity. Inventory management has
an impact: readily available inventory consumes less than inventory that is constantly mislaid. Good quality
assurance is important when effective capacity is established: products of inferior quality must be reworked
and consume more effective capacity. Machinery or equipment breakdowns resulting from ineffective
maintenance programmes result in less effective capacity.
8.5 Strategy formulation for capacity planning
Capacity planning cannot be a success if it is not included in the organisation’s vision, mission and strategic
plans. Numerous factors influence the strategies an organisation may utilise in capacity planning, and an
organisation has to utilise certain suppositions and forecasts on the topics of long-term demand, changes in
technology, and competitors’ reactions to market forces. A key indicator in the behaviour of demand is the
speed at which it increases and grows; another is the changeability of the demand. The capital investment
required in erecting new and managing existing facilities influences strategy, as does the new-technologies
innovation rate prevailing in a particular industry. The manner in which the competitors react to the
innovations dictates the strategies that must be developed. Lastly, the availability of capital to achieve the
predetermined goals influences strategic planning. The strategies must operate within the constraints allowed
by available capital.
The following are the four important capacity decisions that must be taken into account:
1 The importance of maintaining a balance throughout the system
2 The flexibility of the system and the employees who operate within that system
3 Changes taking place within the system and the timing of these changes
4 Capacity requirements throughout the system.
The issues of expected demand and cost of capacity must be taken into account when capacity requirements
are established. Some organisations prefer to have excess capacity available for unforeseen emergencies. This
type of capacity is known as spare capacity. This means the available capacity is higher than the current
demand. Utilising the following formula, it can be stated as follows:
Spare capacity = Capacity – utilisation
The more uncertain the demand for a product, the greater the excess or spare capacity the organisation will
require. The more standardised the products that are manufactured by an organisation, the smaller the
required excess capacity will be. Any change envisaged for the organisation and the timing of such change
will be influenced by the availability of capital. The balancing of the system is achieved by an equitable
dispersion of the available capacity throughout the system. The capacity strategy implemented must satisfy
the demand requirements as stated by the customers of the organisation. Any changes in the capacity plans
influence demand, sales and cash flows, as well as the quality of products, maintenance and the supply chain
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in general. Before the general steps in capacity planning can be considered, the following four exceptional or
primary considerations must be adhered to:
1 Construct for transformation. In the globalised economy of the twenty-first century, change or
transformation needs to be anticipated. It is the responsibility of the operations manager to guarantee that
flexibility is part of the facilities and equipment of the organisation. Flexibility is achieved through the
analysis of various financial projections. It is important that facilities and equipment are designed in such
a manner that future changes can be incorporated seamlessly.
2 Appreciate the technology and capacity growth. Prior to a decision being taken on the subject of
capacity plans, a large number of alternatives will be considered. When the production volumes have
been decided, the number of alternative capacity plans is reduced. The available technology will establish
the growth by which the capacity can be reduced or increased. The increase or decrease in capacity is a
costly exercise for any organisation. Therefore, each of the options must be thoroughly investigated
before a hasty decision is taken. The ultimate responsibility for the correct technology and available
capacity remains the domain of the operations manager.
3 Best operating levels (BOL). The growth of technology and capacity is one of the most important issues
that will establish the optimum capacity operating levels.
4 Demand estimation accuracy. Good capacity plans commence with precise estimation of demand. The
life cycle of existing products also influences the capacity plan. If a product is to be phased out in the
near future, due to its position within the life cycle, capacity will be more readily available as the
phased-out product’s capacity will be available for something else.
The following secondary steps must also be considered during capacity planning:
1 Estimate future requirements
2 Evaluate existing capacity and facilities and identify any gaps
3 Identify alternatives that will support the organisation in meeting customer requirements
4 Conduct a full financial analysis for each alternative
5 Assess key qualitative issues for each alternative
6 Select the alternative with the best analysis for future utilisation
7 Implement the selected alternative
8 Monitor the results.
8.6 Capacity needs prediction
Long- and short-term influences must be taken into account when capacity plans are considered. The
determination of capacity requirements is a complex process. The most important determinant is the demand
that can be expected in the future. In the long term, the size of the facility must be considered when the
overall capacity levels are being considered. In the short term, the variation in the demand will have a large
influence on capacity requirements. The long- and short-term time horizons vary drastically from industry to
industry. It would be short-sighted to define specific time, as illustrated in Table 8.2.
TABLE 8.2 The variation in time horizons
TIME
ORGANISATION AND PRODUCT
Yearly
•
•
•
SABMiller – beer
kulula.com – airline
Eskom – power generation
Monthly
•
Standard Bank – transactions on customer accounts
Weekly
•
•
Spar – sales
JHB Metro Police – volumes of traffic
Daily
•
•
Telkom – calls by customers
Universities – classroom utilisation
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The availability and accuracy of forecasted demand determine the ease of capacity planning. Extremely
accurate data provide accurate capacity plans.
Long-term capacity requirements must have accurate demand forecasts for a very specific time horizon.
The demand forecast is transformed into a capacity plan. Trends must be identified at the onset and the
following basic rules must be addressed:
• The duration of the trend must be identified.
• The trend slope must be identified.
Short-term capacity plans are not influenced to the same extent by trends as the long-term capacity plans are.
Despite this, any variation in demand patterns is important when planning capacity. The variation can cause
capacity to be overextended at one point in time, and at the next cause idle capacity or underutilisation. Most
variations can be accommodated by the normal forecasting techniques available to organisations, as
explained in Chapter 5.
The irregular variations are the most problematic. They are nearly impossible to predict accurately.
Examples are major machine breakdowns, political upheavals and health scares.
8.7 Constraint management
To reduce the complexities of capacity planning, the theory of constraints (TOC) approach developed by Dr
Eli Goldratt might be helpful.
The methodology was popularised in the book The Goal, which Goldratt co-authored with J. Cox in 1984.
Goldratt expanded on the methodology in his publications It’s Not Luck (1994), Critical Chain (1997), and
Necessary But Not Sufficient (2000). Authors such as Kendall and McMullen utilised the methodology to
prescribe methods to improve systems and processes. It must be remembered, however, that a large number
of process improvement methodologies are available and that other approaches might serve a similar purpose.
The five steps of TOC are:
1 Identify. Every constraint present in the process must be clearly identified. Management and all
employees will know exactly what the obstacles are that they face.
2 Exploit. As soon as the constraints are identified, strategies must be expounded to conquer them. One
way of doing this is to manipulate the bottleneck. It can be accomplished through the design of timetables
that capitalise on the throughput rate at the bottleneck.
3 Subordinate. The available assets must be clustered around the expounded strategies to eliminate the
constraint. Decisions taken to exploit the throughput rate will be directed by step 2. The timetables that
result must guarantee that the non-bottleneck operations manufacture at the same rate as the bottleneck
operation.
4 Elevate. The capability of a system or process must be increased. Through the achievement of this goal,
the resultant influence of the constraint will be minimised within the system or process. The workload
within the affected operation can be offloaded to other operations. Management must make every effort
to increase the capacity of the bottleneck assets.
5 Repeat. When the constraint has been eliminated, the process has to be repeated to attack another
constraint. It is counter-productive for an organisation to allow apathy to develop regarding the
improvement of systems and processes.
Constraints can be tangible or non-tangible. Tangible constraints can be classified as systems, processes,
labour, raw materials, equipment and machines. Non-tangible constraints can be training, procedures and
drive.
The most important objective of every organisation is to be profitable. What this means is that the
organisation must not only make money to guarantee its survival, but must continually strive to increase the
profitability.
There are three major measurable categories through which profitability can be measured:
1 throughput rate
2 inventory
3 operating expenses.
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TOC tries to increase the throughput while at the same time reducing inventory and operating expenses. If the
waste that is produced by a process is high the throughput rate of that process will be low. Low throughput
rates will result in low profitability. The following constraints are identified as limiting the throughput rate:
1 A balance should be achieved in the process. Therefore the flow of work through the process must be
balanced, rather than the capacity.
2 Bottlenecks influence the throughput rate – the throughputs of assets that do not form part of the
bottleneck are limited by the bottleneck constraints and are not controlled by the assets.
3 There will be and always has been a clear division between the fabrication of assets and the exploitation
of assets.
4 Time lost in the bottleneck operation is time lost throughout the process. The throughput rate will suffer
as a result.
5 The rate of throughput and the amount of inventory within a process are dictated by the bottleneck
operation.
6 It is counter-productive to have a production batch and a transfer batch of equal size.
7 The process batch must never be experienced as a rigid quantity or time frame. The batch must be flexible
as it moves through the process.
8 Priorities for the process can be established once the constraints present within the process have been
studied and analysed.
Accepting the constraints described above, and operating within their scope, will result in synchronous
manufacturing. The result will be a well-balanced system or process that will realise the objectives of the
organisation. By using the TOC approach, attention is focused on the bottleneck so that capacity can be
increased relatively easily if required.
8.7.1 Barriers to the implementation of the TOC methodology
With any methodology that envisages change, barriers to the implementation of that methodology will be
created. The most important barriers to the implementation of the TOC methodology are:
1 Management concepts are predominantly focused on a less important and tertiary level.
2 Prescribed and unofficial procedures of an organisation are never addressed.
3 The methodology never measures the manner in which processes perform after implementation or the
manner in which management is remunerated for a successful implementation.
4 The management concepts common in an organisation are neglected.
5 The principles of the organisation are ignored.
Therefore, the analysis of methodologies is very important. In doing so, an organisation can decide which
methodology or combination of methodologies to implement. The methodology that has been discussed in
this chapter does not claim to have preordained answers to all the problems that can be experienced by an
organisation. Some problems may be solved by lean principles, others by six-sigma, and others by TOC. It is
important to compare the principles of the chosen methodology with the principles of the organisation. The
comparison will indicate whether the organisation has made the correct choice. Each of these methodologies
adds value to an organisation through the improvements achieved. Through the maximisation of the strengths
of each methodology, the benefits gained will be maximised as well.
8.7.2 Drum, buffer and rope (DBR)
The utilisation of DBR will be regulated by the five steps of the theory of constraints (TOC) as discussed in
section 8.7. Capacity constrained resources (CCR) would be the root of bottlenecks in the production system.
A bottleneck occurs at a machine or operation in the production system where the throughput level is lower
than at the preceding machines or operations. The result is a large amount of WIP at the particular machine or
operation. Through the application of DBR to the manufacturing process, the bottleneck machine or
operation could be identified. In the manufacturing and service industry it is certain that bottlenecks would
occur, and the bottleneck would influence the performance of the process.
Bottleneck management is of the utmost importance, because it is virtually impossible to eliminate a
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bottleneck from the system. Through the improvements that have been instituted, the effectiveness and
efficiency of the bottleneck machine or operation would be improved. Due to the improvements achieved in
the throughput capacity at the bottleneck machine or operation, the throughput capacity would improve too.
Improvements that can be achieved at bottlenecks are limited. If improvement efforts are taken a step too far,
the bottleneck would be displaced to another machine or operation in the production system. An operation
can be classified as a bottleneck when the operation chokes universal system performance.
As a result, a bottleneck machine or operation can be defined as the operation that impacts on system
performance at the highest level, where an improvement to that machine or operation would contribute to a
significant improvement in system performance. The following elements could be described as characteristics
of a bottleneck machine or operation:
• The machine’s or operation’s effective processing time would be higher than the non-bottleneck machines
or operations. The effective processing time is the adjusted time represented by certain occurrences, for
example, machine downtime, machine breakdowns and set-up times, as well as scrap production which
must be factored into process times.
• There will be a higher utilisation rate of resources at the bottleneck machine or operation.
• More WIP would accumulate before the bottleneck machine or operation than at the preceding machines
or operations.
• Fewer interruptions would occur due to material shortages at the bottleneck machine or operation than at
non-bottleneck machines and operations. It results from the high WIP inventory levels at the machine or
operation.
• The bottleneck machine or operation would create blockages to upstream machines or operations as well
as starvation to the downstream machines or operations.
The DBR system must be utilised in combination with optimised production technology (OPT) as discussed
above. The OPT system is an extension of the TOC methodology. DBR can be seen as the vehicle of
implementation for the TOC methodology. Hence, the machine or operation with the lower capacity will
regulate the pace of the throughput for the entire system. This machine or operation is called the drum.
Scheduling the drum machine or operation, finite capacity planning must be utilised. It implies that the true
available capacity would be utilised for the scheduling process. The buffer would be created to protect the
drum from being overutilised. As stated earlier, the buffer would be represented by the WIP inventory before
the drum. As a result there are many variations that could influence the effective operation of the drum. The
rope represents the input control in managing the drum. The logic of the rope is similar to that of just in time
(JIT). The buffer would be utilised to pull the rope to release the correct amount of materials, parts or
sub-assemblies to the bottleneck. Finite capacity measure are utilised to schedule work in the bottleneck.
DBR can be utilised in the environment of job shops and repetitive production systems.
8.8 Developing alternative capacity plans
Guaranteeing sufficient capacity is not an easy task. The most important factor to take into account is the
economic impact that the capacity plan will have on the organisation. The following are questions that must
be considered before a decision can be taken on a capacity plan:
1 Which option will be the most economical and realistic?
2 What will the cost of the capacity plan be?
3 What is the lead time in which the option will be available?
4 Will the plan be well suited to the current operations within the organisation?
The customer perception must always be taken into account. For example, if the capacity of Cape Town
International Airport has to be expanded by the building of a new runway, the property owners in the path of
the new runway may be very unhappy. The capacity increase will cause the values of their properties to be
reduced, and the noise of the aircraft will diminish the quality of life for the property owners. The result may
be that the property owners take the Airports Company of South Africa (ACSA) to court.
A number of methodologies are available to evaluate all the options available. The methodology used
most often is break-even analysis. The methodology computes a point at which income (revenue) and cost are
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equal. This can be in monetary values or units produced. This point is known as the break-even point. At
this point the organisation will not earn a profit but neither will it incur a loss. Any income above this point is
a profit earned by the organisation. The following information is required to compute the break-even point:
• Fixed costs (FC). An organisation always incurs this type of cost, irrespective of whether 0, 10 or 1 000
units are produced. These costs include rent, insurance costs and interest to be paid.
• Variable costs (VC). This type of cost varies significantly with the quantity of products produced by the
organisation. The more units produced, the higher the total variable costs. The two major costs that
contribute towards variable costs are labour and material costs.
• Selling price (SP). This is what the customer pays for a product.
With this information, the break-even point is computed as:
Total income (TI) = Total cost (TC)
The formula for calculating the break-even point is the following:
P * X = FC + VC * X
Where:
P = Price per unit
X = Quantity produced
TI = Total income = P * X (Price × quantity produced)
TC = Total cost
FC = Fixed cost
VC = Variable cost
A graphic illustration of the break-even point is reflected in Figure 8.2.
FIGURE 8.2 Graphic illustration of the break-even point
Given the formula, the break-even point can be calculated either in terms of units produced, or in monetary
terms. The unit break-even point (UBEPX = Number of units to be produced) is computed as follows:
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Where:
UBEPx = Number of units to be produced at break-even point
FC
= Fixed costs
(P – VC) = Price per unit minus variable cost per unit
The monetary break-even point (MBEPR = Rand value at break-even point) can be calculated as:
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WORKED EXAMPLE
The following example will illustrate the concept. Assume that you have your own business. The business
is baking home-made pies, which are distributed to local home industries, supermarkets and convenience
stores. Your annual fixed cost is R10 000 and direct labour is R3.50 per pie. The materials consumed per
pie are R4.50. Your pies are selling for R12.50 each. You are required to do the following:
• Compute the monetary break-even point
• Compute the unit break-even point.
Solution 1. The first solution to be computed is for the monetary break-even point, where the variable cost
is made up of the direct material and direct labour costs:
Solution 2. The second solution to be computed is for the unit break-even point:
The computations indicate that the break-even point will be R27 777.78. That means that you will have to
sell pies to the value of R27 777.78 to cover all your costs without earning a profit, as at that point Total
income (TI) = Total cost (TC). Conversely, you will have to sell 2 222 pies to break even. Every pie after
that will contribute towards profit. The number of pies to be sold has to be rounded down, as it is less than
0.50 decimal.
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CLOSING EXAMPLE
KFC moving into Africa
Yum Brands! Restaurants International continues to expand its KFC footprint on the African continent and
a carefully considered approach saw the number of KFC restaurants in new African markets grow to 63 at
the end of 2012. The figure excludes South Africa, Egypt, Morocco and Mauritius, which included brings
the total number of KFC restaurants on the continent to almost 900 outlets.
KFC General Manager of New African Markets, Bruce Layzell, says: ‘Africa is undoubtedly one of the
fastest growing regions globally and KFC is fully committed to harnessing this opportunity and building a
sustainable business model on the continent.’ This is further supported by the International Monetary
Fund’s report in October 2012, which highlighted that economic conditions in sub-Saharan Africa have
remained generally robust despite a sluggish global economy. The short-term outlook for the region remains
broadly positive, and growth is projected at 5¼ per cent a year in 2012–13.
African farmers have a chance to start making big money by selling their products to Yum Brands!
Chicken farmers in countries like Uganda, the Democratic Republic of Congo, Malawi, Angola and
Tanzania, to name a few, may be encouraged by the fact that if they developed their chicken farms, chances
are that they now have a customer willing to buy their produce in big numbers. There is a huge appetite for
KFC among African consumers, but in many cases growth is being held back by inadequate farming
capacity to supply the company with chickens and vegetables.
KFC is not looking only for chicken farmers in Africa. It is looking for those who can deliver in big
quantities other farm products like lettuce. In some places in Africa, KFC doesn’t serve lettuce on its
burgers. This is not to save on costs or due to a difference in local tastes, but rather because there are no
local lettuce producers who can supply the quantities and quality required by KFC.
According to Layzell, KFC has established a dedicated department to focus on all aspects of optimising
business in Africa, from marketing and supply chain, to infrastructure and human resources. Importantly,
Yum! Restaurant International’s formula for success relies on putting people capability first. ‘We have done
just that in our Africa markets and today we have trained about 2 100 customer-facing KFC employees and
100 above store and restaurant support employees,’ says Layzell.
Typical challenges such as power shortages, quality building materials and potable water have not
dampened KFC’s commitment to investing in Africa. KFC is steadfast in its strategic business approach to
making sure it does things the right way upfront. ‘We will continue to do the “hard yards”, which will set us
up for growth down the line. It’s a bit like climbing Kilimanjaro – make the end goal: thoughtfulness,
preparation and a steady gait will always beat fast and reckless,’ says Layzell.
(SOURCE: Developed from: KFC. 2013. http://www.kfc.co.za/zone/post/kfc-to-expand-steadily-into-africa/ & The London
Evening Post. 2012. http://www.thelondoneveningpost.com/business/kfc-looking-for-african-farmers-capable-of-supplying-it
-chickens/)
Summary
Capacity signifies a system’s feasibility for manufacturing goods or delivering services over a specific time
period. Capacity choices are essential because capacity is an upper limit on yield and the most important
decision factor of operating cost. Three crucial contributions to capacity planning are the type of capacity that
will be necessary, how much will be needed, and when it will be needed. Precise predictions are vital to the
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planning methodology. The capacity choices are tactical and long term in character. Any changes in capacity
will incorporate a hefty preliminary outlay of funds. Capacity planning is predominantly challenging in
instances where income will accumulate over a prolonged time and risk is the foremost consideration.
An assortment of issues can get in the way of effective capacity. These issues embrace resource planning,
arrangement of resources, human issues, product and service design, apparatus malfunctions, timetable
troubles and value contemplation. Therefore, the effective capacity is always less than the designed capacity.
The short-term considerations concern the disparity in capacity needs due to seasonal, chance and erratically
changing demand. In an ideal world, capacity is equal to requirements. As a result, an intimate connection
has been recognised between the planning of capacity and accurate forecasts. In assessing capacity options, a
manager must reflect on both quantitative and qualitative methodologies. The importance of the break-even
point cannot be overemphasised.
Key terms
Actual capacity: The capacity available within an operation, process, or system stated over a specific time
horizon.
Break-even point: The point where the organisation does not earn a profit, neither does it incur a loss.
Capacity: The highest possible perimeter or highest yield value of a specific operation, process or system,
articulated in a definite unit of time when the said operation, process or system is operating within an
ideal environment.
Capacity efficiency: A ratio of production output to effective capacity. It is a measure of effective
management in utilising effective capacity.
Design capacity: A hypothetical measure of capacity. It is assumed that a well-designed operation, process
or system will have a predetermined measure of capacity available to achieve its goal.
Diseconomies of scale: Occur when a production unit’s size increases beyond a tipping point.
Economies of scale: When the size of a production unit or facility increases, the volume that will be
produced increases exponentially.
Effective capacity: Also referred to as utilisation, it is a ratio between the expected capacity of an
organisation and its design capacity. This type of capacity can be described as the possible capacity that
an organisation can anticipate if all the existing constraints under which the organisation is operating are
taken into account.
Fixed cost: The costs that are incurred during the production process that are not influenced by the volume
of products manufactured.
Long term: This horizon is longer than one year. The long time horizon is the result of the procurement of
the assets required, which is such that it cannot be done over a shorter period.
Medium term: Planning can be undertaken on a quarterly or monthly basis. The time horizon of this
planning can be between 6 and 18 months long.
Short term: Here the length varies from 1 day to 30 days into the future. The decisions mostly influence
the scheduling of work within the production unit.
Spare capacity: The available capacity is higher than the current demand.
Review questions and activities
1 Explain in your own words the term ‘capacity’.
2 Identify the aspects that should be taken into account when critical capacity decisions are made.
3 Identify and discuss the steps that should be performed during the analysis of capacity measurement data.
4 Identify and describe the types of capacity measurement.
5 Identify and discuss the five steps of the theory of constraints (TOC).
6 Identify the constraints that limit the throughput rate of inventory.
7 Explain strategy formulation for capacity planning.
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CASE STUDY: CV HOSTEL CC
CV Hostel CC has been managing an old mine hostel close to a mine near Welkom in the Free State since
September 2013. The hostel has a capacity of 5 318 beds. At any given time about 10 per cent of the beds
may be unavailable due to routine maintenance. This reduced bed total is called the operational capacity.
CV Hostel aims to operate the hostel at between 80 per cent and 90 per cent of the operational capacity.
The 90 per cent utilisation rate is the accepted limit for the safe and efficient operation of the hostel. This
allows CV Hostel’s management the flexibility to adequately manage the cleaning of the hostel as well as
providing residents with a healthy breakfast and dinner. CV provides all the bedding and towels to
residents and these are washed on a weekly basis, usually on Mondays. CV employs a financial manager,
hostel manager, catering manager, head chef, five assistant chefs and 30 cleaning staff to ensure that the
hostel is managed effectively.
Operating above 90 per cent utilisation compromises the ability of management to manage the hostel.
If the hostel is operating at or close to 100 per cent utilisation, additional cleaning and kitchen staff has to
be employed.
Case study questions and activities
1
2
3
Compute the efficiency ratio of CV Hostel if the actual number of beds that are utilised amounts to
4 600.
Compute the utilisation ratio when this number of beds is utilised.
What type of factors do you think influence CV Hostel’s ability to operate at 95 per cent capacity?
References
1 Alexopoulos, K., Papakostas, N., Mourtzis, D. & Chryssolouris, G. 2011. ‘A method for comparing
flexibility performance for the lifecycle of manufacturing systems under capacity planning constraints’,
International Journal of Production Research, 49:11, 3307–3317.
2 Alfieri, A., Tolio, T. & Urgo, M. 2010. ‘A project scheduling approach to production and material
requirement planning in manufacturing-to-order environments’, Journal of Intelligent Manufacturing.
Springer Online.
3 Ceryan, O. & Koren, Y. 2009. ‘Manufacturing capacity planning strategies’, CIRP Annals-Manufacturing
Technology, 58:1, 403–406.
4 Corominas, A., Lusa, A. & Olivella, J. 2012. ‘A manufacturing and remanufacturing aggregate planning
model considering a non-linear supply function of recovered products’, Production Planning &
Control, 23:2–3, 194–204.
5 Geng, N. & Jiang, Z. 2009. ‘A review on strategic capacity planning for the semiconductor
manufacturing industry’, International Journal of Production Research, 47:13, 3639–3655.
6 Goldratt, E.M. 1997. Critical Chain. Great Barrington: North River Press.
7 Goldratt, E.M. 1994. It’s not Luck. Great Barrington: North River Press.
8 Goldratt, E.M., Schragenheim, E. & Ptak, C.A. 2000. Necessary but not Sufficient. Great Barrington:
North River Press.
9 Goldratt, E.M. & Cox. 1984. The Goal: A Process of Ongoing Improvement. Great Barrington: North
River Press.
10 Intermec. 2013. Distribution centres lose nearly 3 000 hours a year on unproductive workflows. [Online:
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see websites at the end of this chapter]
11 Jacobs, F.R. & Chase, R.B. 2011. Operations and supply chain management, 13th ed. New York:
McGraw-Hill/Irwin.
12 Karnik, A., Tallichetty, C.S. & Saroop, A. 2009. ‘Robust models for manufacturing capacity planning
under demand uncertainty’, Automation Science and Engineering, CASE, International Conference on
IEEE, 38.
13 KFC. 2013. KFC to expand steadily into Africa. [Online: see websites at the end of this chapter]
14 Krajewski, L.J., Ritzman, L.P. & Malhorta, M.J. 2008. Operations management processes and supply
chains, 9th ed. New Jersey: Pearson Prentice Hall.
15 Li, Y., Tarafdar, M. & Rao, S.S. 2012. ‘Collaborative knowledge management practices: Theoretical
development and empirical analysis’, International Journal of Operations & Production Management,
32:4, 398–422.
16 Martinez-Olvera, C. 2010. ‘Impact of the alignment between the strategic and operational levels of a
manufacturing enterprise’, International Journal of Production Research, 48:4, 1195–1215.
17 Moghaddam, M., Rabbani, M. & Maleki–Shoja, B. 2012. ‘Integrating lateral transshipment to aggregate
production-distribution planning considering time value of money and exchange rate’, International
Journal of Operational Research, 13:4, 439–464.
18 Oliva, R. & Watson, N. 2011. ‘Cross-functional alignment in supply chain planning: A case study of sales
and operations planning’, Journal of Operations Management, 29:5, 434–448.
19 Paton, S., Clegg, B., Hsuan, J. & Pilkington, A. 2011. Operations management. Maidenhead:
McGraw-Hill Education.
20 Riezebos, J. 2011. ‘Order sequencing and capacity balancing in synchronous manufacturing’,
International Journal of Production Research, 49:2, 531–552.
21 Swink, M., Melnyk, S.A., Cooper, M.B. & Hartley, J.L. 2011. Managing operations across the supply
chain. New York: McGraw-Hill/Irwin.
22 Tenhiala, A. 2010. ‘Contingency theory of capacity planning: The link between process types and
planning methods’, Journal of Operations Management.
23 The London Evening Post. 2012. KFC looking for African farmers capable of supplying chickens.
[Online: see websites at the end of this chapter]
24 Tseng, M.M. & Radke, A.M. 2011. ‘Production planning and control for mass customization – A review
of enabling technologies’, Mass Customization, 195–218.
25 Tu, J., Guo, R. & Fang, Z. 2011. ‘Capacity planning of ERP based on the state of manufacturing
resources’, Consumer Electronics, Communications and Networks (CECNet), International Conference
on IEEE, 134.
Websites
Visit the websites below.
http://worldacademyonline.com/article/18/1/capacity_management.html
www1.eere.energy.gov/manufacturing/tech_deployment/pdfs/10097517.pdf
www-935.ibm.com/services/us/its/pdf/g563-0339-00.pdf
www.teamquest.com/pdfs/whitepaper/tqeb01.pdf
www.teamquest.com/pdfs/whitepaper/tqwp23.pdf
www.teamquest.com/solutions/capacity-planning/
www.teamquest.com/webinar/062206/062206.html (presentation)
The websites below were last accessed on the dates given:
www.autodesk.com (September 2013)
www.boeing.com/commercial (September 2013)
www.bog.frb.fed.us (September 2013)
www.cimtech.com (September 2013)
www.crown.com (September 2013)
www.faa.gov/ats.asc (September 2013)
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www.graphisoft.com (September 2013)
www.intermec.com/public-files/case-studies/en/cs-Sand-Springs-Police.pdf (26 March 2013)
www.kfc.co.za/zone/post/kfc-to-expand-steadily-into-africa/ (8 April 2013)
www.promodel.com (September 2013)
www.simprocesses.com (September 2013)
www.thelondoneveningpost.com/business/kfc-looking-for-african-farmers-capable-of-supplying-it-chickens/
(8 April 2013)
YouTube™
These clips were last accessed in March 2013:
www.youtube.com/watch?v=Btx5s9htkRI
www.youtube.com/watch?v=m4NJnhekJPw
www.youtube.com/watch?v=w0cD26CLBA0
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CHAPTER 9
Aggregate planning
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
Define aggregate planning
Use mathematical techniques to solve aggregate planning problems
Use the various methods available for aggregate planning
Understand aggregate planning in the service sector
Identify the decision variables that play a role in aggregate planning
Discuss some of the strategies used to manage these variables
Understand the relationship between the various levels of planning
Compute the cost for aggregate plans
Understand the overall purpose and aims of aggregate planning
Understand the interaction between various functional areas within an organisation
Appreciate the importance of cooperation in doing aggregate planning.
CHAPTER outline
9.1
9.1.1
9.2
9.3
9.4
9.4.1
9.4.2
9.5
9.5.1
9.5.2
9.5.3
9.5.4
9.6
9.6.1
9.6.2
9.6.3
9.6.4
9.6.5
9.6.6
9.7
9.8
9.9
9.9.1
9.9.2
9.10
Introduction
Aggregate planning in service organisations
Aggregate planning concepts
Variables in aggregate planning strategies
Options available in managing an aggregate plan
Capacity options
Demand options
Strategies for uneven demand
Most popular strategies
A chase strategy
A level strategy
Combining pure strategies
Costs prevalent in aggregate planning
Employment and dismissal costs
Back ordering and stock-out costs
Subcontracting cost
Overtime and idle time cost
Inventory carrying cost
Part-time labour cost
Aggregate planning strategies: advantages, disadvantages, and uses
Choosing a strategy
Aggregate planning methods
Trial-and-error method
Mathematical methods
Aggregate planning in a service environment
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CHAPTER 9
Aggregate planning
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
Define aggregate planning
Use mathematical techniques to solve aggregate planning problems
Use the various methods available for aggregate planning
Understand aggregate planning in the service sector
Identify the decision variables that play a role in aggregate planning
Discuss some of the strategies used to manage these variables
Understand the relationship between the various levels of planning
Compute the cost for aggregate plans
Understand the overall purpose and aims of aggregate planning
Understand the interaction between various functional areas within an organisation
Appreciate the importance of cooperation in doing aggregate planning.
CHAPTER outline
9.1
9.1.1
9.2
9.3
9.4
9.4.1
9.4.2
9.5
9.5.1
9.5.2
9.5.3
9.5.4
9.6
9.6.1
9.6.2
9.6.3
9.6.4
9.6.5
9.6.6
9.7
9.8
9.9
9.9.1
9.9.2
9.10
Introduction
Aggregate planning in service organisations
Aggregate planning concepts
Variables in aggregate planning strategies
Options available in managing an aggregate plan
Capacity options
Demand options
Strategies for uneven demand
Most popular strategies
A chase strategy
A level strategy
Combining pure strategies
Costs prevalent in aggregate planning
Employment and dismissal costs
Back ordering and stock-out costs
Subcontracting cost
Overtime and idle time cost
Inventory carrying cost
Part-time labour cost
Aggregate planning strategies: advantages, disadvantages, and uses
Choosing a strategy
Aggregate planning methods
Trial-and-error method
Mathematical methods
Aggregate planning in a service environment
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9.10.1
9.10.2
Service demand management strategies
Service supply management strategies
Summary
Key terms
Review questions and activities
Case study
References
Websites
SETTING THE SCENE
SA banks to curb irresponsible lending
South Africa’s major retail banks and the Banking Association of South Africa (BASA) have signed an
agreement with the National Treasury aimed at improving responsible lending and preventing households
from becoming caught in a debt spiral.
The agreement calls for several measures to be taken, including a review of loan affordability
assessments, appropriate relief measures for distressed borrowers, reviewing the use of debit orders and
limiting the use of garnishee orders. It furthermore calls for doing away with illegal collection practices
such as keeping ID documents, bank cards and PINs, selling inappropriate credit products to maximise
margins, and extending unaffordable loans to pensioners and other social grant recipients.
‘The parties agreed that while there were currently no systemic risks related to unsecured or secured
lending, certain market behaviour could result in households, particularly poorer ones, getting caught in a
debt spiral.’ However, this may impact on the workforce and service delivery of retail banks and BASA.
It was recognised that although efficient regulation of South Africa’s banking sector limited the
incidence of poor credit practices, some practices were nonetheless “undesirable and reckless”.
(SOURCE: SANews. 2012. http://www.southafrica.info/services/consumer/banks-021112.htm#.UVGwNRf22LU
#ixzz2OeqjTzkc)
9.1 Introduction
Aggregate planning is capacity planning for the coming medium-term period, for example, 3 to 18 months.
Recall that capacity is the maximum output that can be produced over a given period of time, for example, an
hour, a day, a week or a year. Most organisations develop business plans for the long and medium terms.
This type of planning is necessary to set policies about what to manufacture and when.
Aggregate planning decisions are tactical decisions which define the parameters within which an
organisation will operate. The aggregate plan is the departure point from which the master production
schedule (MPS) is derived. Aggregate planning also makes an input into other important strategic decisions,
such as whether or not to add to existing capacity. Figure 9.1 shows how aggregate planning fits into the
sequence of an organisation’s planning activities.
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FIGURE 9.1 Aggregate planning’s position within the sequence of an organisation’s planning activities
Aggregate planning can be seen as matching demand with supply. The word ‘aggregate’ in this concept
implies that the planning is done for entire product lines or product families rather than individual products.
This planning assists an organisation to set overall output levels. For example, consider the efforts that might
be made by manufacturers such as SABMiller, Amalgamated Beverages Industries, and Ola Ice Cream in
trying to plan for higher demand as a result of a warmer-than-usual summer. All three organisations would
concentrate not on single products but on product families or lines. SABMiller would be concerned with the
overall demand for beer and not only Castle Lager, Amalgamated Beverages Industries with the overall
demand for soft drinks and not only Coca-Cola, and Ola with the overall demand for ice cream. This type of
demand is very dependent on seasonal variations. The highest demand is always during the height of
summer. If the summer is warmer than usual, then these companies can increase their market share if the
aggregate planning they do has made provision for this. However, if the summer is cooler than usual, they
might have too much inventory that they cannot sell. Therefore, the main task of an operations manager is to
develop aggregate plans to minimise the cost associated with these plans.
An operations manager attempts to meet the demand by juggling variables such as production rates,
labour, the levels of stock holding, and even subcontracting jobs when necessary. An aggregate plan should
always attempt to minimise the cost of production over the planning horizon. This may be an
oversimplification, however. Many factors might influence the aggregate plan, and not necessarily cost alone.
Other strategies might be to have a smooth production plan that does not deviate too much, to have level
employment levels, to avoid having high stock-holding levels, and to ensure a high level of customer service.
All organisations need to have strategic goals and plans. The aggregate plan binds these strategies and
plans together. In the service sector, the aggregate plan ties strategic goals and workforce schedules together.
A good aggregate plan requires the following:
• a logical unit of measure – either of sales or output – for a product (for both SABMiller and
Amalgamated Beverages Industries it might be cases of beer or soft drinks produced or sold)
• a valid forecast for the planning period
• a valid method of measuring the cost of the production of the product or products
• a planning model that combines the forecast made and the costs associated with production that will
produce a valid aggregate plan.
In conjunction with the requirements mentioned above, the following are characteristics of an aggregate plan:
• The time horizon for the plan is not longer than 18 months and the plan is updated regularly.
• Aggregate levels of demand are determined for one or very few categories of products or services.
• An assumption is made that the demand is fluctuating, seasonal or uncertain.
• It is possible to change both the supply and demand variables.
• A number of objectives are set by management – these might include such things as low stock holding,
excellent labour relations, minimisation of costs, flexibility in future output levels, and ensuring customer
satisfaction.
• The plan sees all facilities as fixed; they cannot be expanded or reduced.
9.1.1 Aggregate planning in service organisations
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In aggregate planning in service organisations, the first step is to determine the aggregate staffing levels.
Therefore, aggregate planning in services mostly focuses on workforce and customer scheduling. This can be
done on a daily or even an hourly basis. The workforce schedule is a product of the number of hours for
which the service is available to customers. Another variable might be the level of skill required for the
performance of the service. There are restrictions placed on service time that are not applicable to the
manufacturing sector. Consider the example of the scheduling of flight crews for aircraft of kulula.com.
According to law, flight crews are allowed to work only a limited number of hours before they must take an
enforced rest period. The managers doing the aggregate planning for kulula.com must adhere to these
restrictions. Similar restrictions apply to long-distance truck drivers. They are not allowed to drive for longer
than eight hours before they rest. These restrictions have great effects on the scheduling process for trucking
companies. Scheduling customers involves setting appointments or reservations for customers. Therefore
scheduling also involves setting priorities once these customers arrive.
DISCUSSION
SA banks to curb irresponsible lending
Read the situation discussed in the setting-the-scene box at the beginning of the chapter. Identify the
aspects that should be considered in developing an aggregate plan for one of the retail banks.
Solution:
The aggregate plan should include the following aspects:
• Different services delivered in the bank, such as tellers, information desk, customer services, support
services, credit applications and approvals, foreign currency, credit card, personal banking, corporate
banking, etc.
• Banking hours, including scheduling of staff on Saturdays and after hours, where applicable
• Skill levels and number of trained staff members for speciality functions, such as management, credit
applications and approvals, credit card section, personal banking, corporate banking, tellers, etc.
• Number of vacancies, where applicable.
(SOURCE: SAnews.gov.za)
9.2 Aggregate planning concepts
In aggregate planning, the resources required to manufacture an organisation’s products need to be combined
with the demand for the products. A planner determines a rate of output, considering the demand forecast,
capacity of the facility, other inputs, the number of people to employ, and the levels of stock holding. Then a
plan is drawn up for the next 3–18 months. The organisation will produce the required products according to
this plan. Aggregate plans are applicable not only to manufacturing facilities such as those of Coca-Cola,
Distell and KOO, but also to services such as education at, for instance, the universities of Cape Town,
Pretoria and South Africa, and hospital services such as those at Groote Schuur and Chris Hani Baragwanath
hospitals.
Let us consider some examples in further detail. Both SABMiller and Amalgamated Beverages Industries
produce beverages, one company’s alcoholic and the other’s non-alcoholic. The aggregate plan for both
companies will be similar in that both companies will produce a certain number of litres of beverage.
Therefore the aggregate plan for the family of beverages that they produce can be represented as shown in
Table 9.1.
TABLE 9.1 Aggregate plan for family of beverages
FIRST QUARTER
SECOND QUARTER
THIRD QUARTER
Jan
Feb
Mar
April
May
June
July
Aug
Sept
250
220
210
200
230
250
280
250
240
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The forecast shown in Table 9.1 is in thousands of litres. No distinction is made between the different types
of products produced. The demand shown represents the total demand for all the types of products
manufactured by each organisation.
In the service sector, the same principle as that shown in Table 9.1 applies. Consider the University of the
Witwatersrand as an example. Suppose that the university has 30 000 students. An aggregate plan will be
developed to accommodate the 30 000 students, irrespective of the courses for which they register. This plan
will be used to plan the number of lecture halls, lecturers and support staff. The demand for university
education tends to be low at certain times and will increase steadily up to a point and then decrease again.
How will this influence the workforce? The University of the Witwatersrand might do what many institutions
do under these circumstances: make use of tutors to take up the increase in demand. Once the peak – which
usually happens during test and examination cycles – has passed, the tutors will stop working for the
university until the next time they are required.
With regard to planning, aggregate planning clearly forms part of the bigger picture. It is useful to
remember that there are internal and external factors that influence all the plans of an organisation. Input for
the aggregate plan may come from many sources, such as the marketing department (demand), finance
department (budgets), human resources department (labour), and planning department (capacity
requirements). Without worrying too much about which types of product are involved, managers can express
capacity in terms of time (for example, hours for labour or machines), or in terms of a specific output rate
(for example, litres per hour). Therefore, it becomes necessary for managers to break down the aggregate
plan to determine what will be required for each of the products that has to be manufactured.
This process is called the disaggregation of the aggregate plan. From this information, the MPS will be
drawn up. The MPS, in turn, will be used as input for the MRP system. The procurement of raw materials or
manufacture of parts will be handled by the MPS for the manufacture of the final product, with dependent
demand received from the MRP system. The final step in this planning process will be the schedules for the
workforce and scheduling of products.
9.3 Variables in aggregate planning strategies
All demand follows particular patterns, and it is possible to forecast demand for a particular time in the
future, but there will always be some variations. Companies make use of three basic systems to take account
of variation in demand:
1 Make-to-stock. When the make-to-stock system is employed, only forecast figures are used because if
there is a variance it will be smoothed out by the items in stock.
2 Make-to-order. When the make-to-order system is used, only items that have firm orders will be
manufactured. Therefore, the demand for the product(s) is known and stock holding is not particularly
important.
3 Assemble-to-order. A combination of the above two systems can be used; this is known as an
assemble-to-order system. In this system, parts and sub-assemblies that have previously been
manufactured for stock are used to fulfil customer orders.
An aggregate plan is based on expected demand and not on known demand. It is therefore not unknown for
an aggregate plan to be based on a moving target, and we shall discuss some of the tools available for the
planner to provide for this.
Aggregate planning is used for medium-term planning, so it will be impossible to plan for or achieve
physical expansion of facilities, the closing down of existing facilities, or improvements in productivity. The
main reason for this is that the duration of the time required for implementing all the changes is too long. As
an example, imagine an organisation that would like to implement a total quality management (TQM)
system. The time available in the medium term is not nearly enough to fully implement such a system.
This is why it is important for planners to find the best, most effective way possible of varying monthly
volumes that will ensure that demand will be met. The planner has limited means available to manage the
aggregate plan. The variables used most often are inventory, production or throughput rate, the size of the
workforce, and, in some instances, subcontracting of products. It is an unfortunate fact that not all these
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variables are available to all organisations. Some variables we have discussed here are definitely not
available to some organisations in the service sector. For example, it would not be possible for a hospital or
doctor’s surgery to keep an inventory of the service that it renders.
All variables available to an aggregate planner to manage the plan incur some form of cost. Planners need
to make trade-offs between the costs of the various methods to ensure that demand is met. One such cost is
the cost of carrying inventory: capital is tied up in stock that has not been sold, and that capital could have
been used in better ways in other areas of the organisation.
Therefore, before generating an aggregate plan, an operations manager should answer the following
questions:
• If any changes do take place in demand, can inventories be used to absorb the difference?
• Can the variance in the demand be met by varying the size of the workforce?
• Will the use of idle time or overtime suffice, or should temporary staff be employed?
• If a stable workforce is required, can the products be subcontracted?
• Can the demand be influenced or managed by pricing strategies?
The operations manager has to manipulate all the controllable variables in order to ensure that the aggregate
plan meets the demand. In the next section, we examine in more detail all the options available to an
operations manager. We pay attention both to capacity options and to demand options in the management of
an aggregate plan.
9.4 Options available in managing an aggregate plan
There are two basic options from which an operations manager can choose:
• capacity options
• demand options.
These options are summarised in Table 9.2, and are discussed in more detail in Sections 9.4.1 and 9.4.2.
TABLE 9.2 Options available in managing an aggregate plan
CAPACITY OPTIONS
DEMAND OPTIONS
•
•
•
•
•
•
Making use of overtime or idle time
Making use of contract or part-time workers
Changing inventory levels as necessary
Subcontracting or outsourcing work to other
organisations
Managing the workforce by hiring and firing
employees
•
•
•
•
Mixing products or services to counteract each
other seasonally
Attempting to influence the demand for a
product
Utilising backlogs or back ordering during
peak-demand periods
Using different pricing strategies to stimulate
demand during periods of low demand
Creating new demand
9.4.1 Capacity options
In this section we discuss the basic capacity options from which an operations manager can choose.
Making use of overtime or idle time can vary throughput rate
This method is not as severe as other methods used to manage capacity. It can be implemented as selectively
as the organisation wishes. The workforce can be kept at a constant level if the operations manager
manipulates the overtime or idle time. When the demand is high, the workforce can work overtime to ensure
the demand is met. Overtime helps employees to earn extra money. A disadvantage, however, is that
employees might become accustomed to the overtime and might experience financial difficulties when it is
stopped. In some instances, unions might require that employees are not allowed to work more than a
predetermined amount of overtime.
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In times of low demand, the time worked can be cut back to ensure no overproduction takes place. If the
upswing in the demand is consistent and large over a long period, the operations manager should realise that
overtime alone will not suffice to meet the demand. The following are some disadvantages of overtime:
• the amount of money required to pay employees
• the fact that too much overtime wears employees out, which can lead to poor quality and a decrease in
productivity
• an increase in the overheads of the organisation.
If a downturn in demand is prolonged, the idle time must be absorbed somehow, which is easier said than
done. Most organisations do maintenance, training or process improvements during such periods.
Making use of contract or part-time workers
This can be more easily achieved in the service sector than in the manufacturing sector. The main
determinant will be the skill level required to perform a particular task. In both the service and manufacturing
sectors, contract or part-time workers usually fill unskilled jobs. This type of labour is usually found in
restaurants (for example, dishwashers and cleaners), retail stores (for example, cleaners and packers), and
supermarkets (for example, till-point packers and shelf packers). In the manufacturing environment,
examples of this type of labour are material handlers, loaders at loading docks, and loaders offloading
materials at receiving sections of stores. In South Africa, unions often view these types of employees with
suspicion, as they are not union members, and the unions also fear that employers will replace union
members with independent contractors, as these employees are known. These contractors cost less to employ
because employers do not have to contribute to pension funds and medical-aid schemes for the contractors.
Changing inventory levels as necessary
One way of using idle time is to produce for stock, that is, manufacture in low-demand periods and sell in a
high-demand period. This stock is kept in anticipation of future high demand. This method increases the costs
associated with stock holding.
The following costs are certain to increase: storage costs, handling costs, theft, obsolescence and
insurance, to name but a few. These costs can range from 15 per cent to 40 per cent of the value of the items
held in stock on a yearly basis. If no production for stock is undertaken, in high-demand periods the
organisation can lose money as a result of stock-outs. Sales and goodwill will be lost as a result of this.
This strategy can be followed by organisations in the manufacturing sector only. For example, during
low-demand periods, an organisation such as Simba-Lay’s (manufacturing) can store the potato chips that it
manufactures, but a medical doctor (service) cannot store his or her services in periods of low demand.
Subcontracting or outsourcing work to other organisations
Subcontracting is one way of gaining temporary capacity during peak-demand periods. Unfortunately, this
option has a number of disadvantages. These are:
• It can become a very costly exercise.
• The subcontractor might be a competitor and, in this way, the customer might unknowingly be introduced
to the competition.
• It is difficult to find a subcontractor who will produce on time and at the same quality as the organisation
itself.
Another avenue that can be followed is outsourcing, whereby a contract is negotiated with an outside
organisation to perform a particular portion of a job or service. For example, a number of organisations
outsource the entire IT department to an outside company. In this way, some capacity is freed for other work,
and the company can become more productive as it can focus on its core competency – capacity will thus
increase.
Managing the workforce by employing and dismissing employees
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This type of strategy can be employed only in a labour-intensive environment. From the start, it is important
to realise that this option will hardly ever work in South Africa because labour legislation in South Africa
makes this type of action very unattractive to employers. The basis of this option is hiring new workers
during peak-demand periods and laying them off during low-demand periods. If a strategy of hiring new
employees during peak-demand periods is followed, a presumption is made that there is a ready pool of
labour available. If there is a shortage, this will impact negatively on capacity.
A number of costs can be incurred using this strategy, for example:
• the cost of employing new employees
• the cost of training new staff – training does not come cheap
• the cost of recruiting employees.
Most organisations do not want to lay off employees because of the impact firing has on employees. The
following are some other disadvantages of laying off employees:
• New employees need training and extra costs will be incurred.
• Productivity will decrease in the initial period when training is taking place.
• Severance packages (which are agreements regarding money and benefits to be received by employees
being dismissed) are costly.
• It affects the morale of the remaining employees – they might wonder who will be next and when
retrenchments will happen again, and this will result in low productivity.
9.4.2 Demand options
In this section we discuss the basic demand options from which an operation can choose.
Mixing products or services to counteract each other seasonally
Most manufacturers strive to develop a mix of products that counteract each other on a seasonal basis. An
example is a clothing manufacturer that strives to produce both a winter and a summer range of clothing. The
same processes will be used to produce both lines of clothing, and therefore capacity use will be maximised.
Another source of demand for these types of organisations is to subcontract capacity to other organisations
that are experiencing a shortage of capacity. This can be achieved only if the other organisations use similar
processes.
Attempting to influence the demand for a product
During low-demand periods, demand can be influenced through sales, advertising, in-store promotions and
personal selling. The timing of such a strategy is of the utmost importance. Control over this type of strategy
is very low as the response of clients is difficult to manage. A misjudgement of clients’ responses to this
strategy can in fact worsen the situation. The demand might surface only in a much later period, when other
demand has increased again, with the result that capacity is stretched too far. For example, a much-utilised
method of advertising states that customers who buy one item of a product can obtain a second item of the
product at half price. Another offers cheaper prices for increased use of a service. For example, Telkom tries
to keep its demand level high by introducing such incentives as cheaper rates in Callmore time after a
particular time in the evening. Even this type of option may not always succeed, and if it does, it should be
measured against the opportunity cost of such a move.
Utilising backlogs or back ordering during peak-demand periods
A back order is an order that is accepted when the organisation knows that it cannot deliver the order at
present. An organisation might do this unintentionally or on purpose. This practice requires a customer to
wait for the product without losing his or her goodwill towards the organisation. Unfortunately, this happens
on rare occasions only. In most instances, backlogs or back orders lead to losses in sales.
Utilising different pricing strategies to stimulate demand during periods of low demand
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This is a method utilised often by the hotel industry to increase hotels’ occupancy rates during off-season
periods. During the off-peak periods, hotel rooms are available at a lower rate than the rate for which they are
charged out during high-season periods.
Many other types of organisation use the same type of strategy for off-peak times; examples are airlines,
such as SAA and kulula.com, or movie theatres and restaurants. For example, the Harbour House restaurant
at Kalk Bay Harbour in the Western Cape offers off-season, mid-week dinners that comprise a special
three-course menu at a price that is about the same as that charged for just one main course in the restaurant’s
high season.
Even though this strategy might succeed, it is also a strategy that should be measured against the
opportunity cost of such a move. The opportunity cost will represent the loss in profit that the organisation
might incur by using this strategy. This cost might also result in a loss of customers because there is not
sufficient capacity to service the increase in the demand if this strategy is used. Another very important issue
is the degree of price elasticity of the product that is discounted in this manner (price elasticity is a measure
of the responsiveness of the change in quantity demanded to the change in price). If elasticity is high, then
this strategy can be implemented quite successfully.
Creating new demand
Many organisations are faced with a situation in which they have to fulfil demand in peak-demand periods in
which the demand is very uneven. An example is the bus service rendered by a city council. The demand for
the services of the Johannesburg Metro Bus Service, for example, is very high during the morning and
afternoon rush hours. Every commuter would like to arrive at work on time and get home as soon as possible
after quitting time. During the day, the demand for this service declines dramatically. Most of the buses
(capacity) are idle during this period, so a strategy of creating new demand can be implemented. For
example, buses can be hired out to homes for elderly people to transport pensioners on shopping expeditions,
or to schools to transport pupils on field trips, or to hospitals to transport patients to and from the hospitals.
These services will be rendered at a lower tariff. In this manner, unused capacity can be utilised.
9.5 Strategies for uneven demand
In most instances, managers have to mix strategies to find an aggregate plan that will function optimally.
They mix the strategies discussed above to find the right ones for their organisations. Therefore, close
cooperation between the functional areas in an organisation must take place. The marketing department
should explore all the demand strategies available and include this exploration in the demand forecast.
9.5.1 Most popular strategies
An operations manager compiles an aggregate plan that incorporates all the information discussed in the
previous paragraphs. At this stage, the operations manager can use one or more of the capacity options
available to ensure that the aggregate plan is workable. The operations manager will concentrate on the
capacity strategies to achieve the balance, because capacity is the responsibility of the operations manager,
while demand management normally falls under the marketing department. Even though back orders are in
reality the responsibility of the marketing department, the operations manager can also use them as a strategy
to balance demand and capacity.
The following are the four most popular strategies followed in balancing demand and capacity:
1 Maintaining a level workforce
2 Producing at a steady output rate
3 Matching demand for each period
4 Combining all or some of these.
Strategies one to three are known as pure strategies and the fourth strategy is known as a mixed strategy. A
pure strategy focuses on one single point; a mixed strategy focuses on more than one point. The first two
strategies are also referred to as some form of level strategy, while the third one is a chase strategy.
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9.5.2 A chase strategy
Demands for certain periods in the aggregate plan are chased. That means that capacity has to match exactly
the demand in each period. There are a number of ways in which this can be achieved, for example:
• by employing or dismissing workers
• by utilising overtime
• by employing part-time labour or subcontracting work to other organisations.
This type of strategy requires that the size of the workforce is varied, and a typical example can be found in
the restaurant environment. Here, a skeleton staff and few waiters are employed in early morning and
afternoon sessions, while additional part-time waiters are used over the lunch period, and part-time waiters as
well as additional kitchen and cleaning staff during the evening peak time. These temporary or part-time
employees normally do not enjoy the same kinds of employment advantages, for example medical aid, as
full-time or permanent employees.
9.5.3 A level strategy
This type of strategy requires a level rate of output throughout the planning period. In this strategy, inventory
is used to balance the differences between demand and output. Vehicle manufacturers – such as Toyota,
BMW and Nissan – use this strategy of uniform production rates throughout the planning period. Therefore
the following may happen:
• The inventory of finished goods increases and decreases as required – in this manner a buffer is built up
that ensures that the demand from customers can be met.
• These organisations might endeavour to find alternative employment for their employees if there is a
prolonged period of a downturn in demand.
A requirement for a level strategy is that it must be possible to forecast demand relatively accurately, so that
the company can be certain that stock built up will be sold at a later stage. Having a stable workforce ensures
better quality products, minimises turnover of staff, reduces employees’ absenteeism, and helps to achieve
corporate goals.
There are a number of advantages that are hidden. They include the following:
• more experienced employees
• easier scheduling of jobs
• easier supervision.
Most organisations find the strategy of a level workforce very attractive because employing and dismissing
employees disrupts business. Therefore, management tries to find other methods of balancing demand and
capacity. It is, however, difficult to maintain a level output rate when there are variations in demand. As
discussed earlier, an organisation can use subcontracting, order backlogs or inventory to absorb fluctuations
in demand; each has its own disadvantages or difficulties.
The following are some areas of concern regarding the strategy of subcontracting:
• An investment has to be made to investigate possible subcontractors.
• An organisation may lose control over the output and its quality.
The following are some areas of concern regarding the strategy of using backlogs:
• It might cause the organisation to lose sales because products are unavailable.
• Customer service might suffer as a result.
• A large amount of paperwork is necessary to keep track of backlogged orders.
The following are some areas of concern regarding the strategy of using inventory:
• Investment of scarce capital is required for enough inventory to absorb fluctuations in the demand.
• Large storage facilities need to be erected, which will make a further demand on scarce capital.
The advantages and disadvantages of any strategy have to be balanced, and the impact on the overall goal of
the company taken into account. More often than not, companies combine different strategies to find a
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workable solution.
9.5.4 Combining pure strategies
Flexibility is required from managers when a chase demand strategy is used. In this type of strategy, the need
for keeping inventory is almost non-existent. This may result in savings to the organisation. One of the
greatest disadvantages is that there is very little stability in the production process. This constant feeling of
uncertainty might impact on employee morale. The employees might feel that they are in a constant battle to
meet demand. Many organisations prefer to combine the pure strategies to achieve their objectives in
balancing demand and capacity. This ensures greater leeway to managers when they deal with uneven
demand. However, it must be realised that if there is a lack of focus there might be an erratic response to the
flexibility of the demand.
9.6 Costs prevalent in aggregate planning
The main aim of aggregate planning is to minimise the cost of production. The assumption made by the
planners is that demand is static or fixed, or, at the very least, that the demand forecast is a given. For this
reason, it is assumed that plans do not need to be changed or moderated. It is therefore important for
managers to realise that all plans incur costs. We have referred to these costs in the course of our discussion,
but here we shall deal more specifically with these costs. The most common costs are summarised in Table
9.3 and elaborated on in Sections 9.6.1 to 9.6.6.
TABLE 9.3 Most common costs prevalent in aggregate planning
•
•
•
•
•
•
The cost of hiring and firing labour
Back ordering and stock-out costs
The cost of subcontracting
The cost of overtime and idle time
The cost of carrying inventory
The cost of part-time labour
9.6.1 Employment and dismissal costs
Many managers do not realise the hidden costs that can be incurred when hiring new employees or firing
current employees. Costs incurred when new employees are employed may include the following:
• training costs
• the cost of screening prospective employees
• the cost of recruiting prospective employees
• the cost of inefficient use of scarce resources during the training period.
The costs vary depending on the skill levels of the new employees. The costs for unskilled labour differ
significantly from those of top managers, for example, who are much scarcer and in higher demand. The
same principles are also present when employees are fired. Here the costs incurred include the following:
• the cost of settling the outstanding time left on employees’ contracts
• the cost of paying for leave benefits
• the cost of buying back share options
• the cost of severance packages that have to be paid to affected employees.
This list of costs is not exhaustive; costs vary from one organisation to the next.
9.6.2 Back ordering and stock-out costs
For both types of transaction there are costs involved, mainly because there is a reduced customer-service
level. This cost is very difficult to determine – the cost is the goodwill lost from customers who do not place
an order with the organisation again: money that could have been earned from demand does not materialise.
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Therefore, the cost should be seen as the cost of an order that would have been available in the future but has
to be forgone.
9.6.3 Subcontracting cost
This is the cost incurred because a third party has to provide the organisation with spare capacity. The third
party manufactures the product that should have been manufactured by the organisation. Subcontracting
products might cost an organisation either more or less than what it would cost the organisation to
manufacture the products in-house.
9.6.4 Overtime and idle time cost
Overtime must be paid over and above the normal wages paid to employees. The premium paid can be
anything from time-and-a-third to double time. The cost of idle time is that employees must be paid their full
salaries while they are unproductive.
9.6.5 Inventory carrying cost
This cost is incurred when products are held in inventory to satisfy demand or enable production. This cost
includes investment costs, cost of storage, cost of stock that is obsolete, and cost of items that deteriorate
while held in stock. This cost can be seen as the same as interest paid on a loan made by a bank: carrying cost
is expressed as a percentage of the value of the product per annum. These costs have already been discussed
in considerable detail in Chapter 6.
9.6.6 Part-time labour cost
The cost of this type of labour is usually lower than that of full-time employees. The reason for this is that the
rate of pay is lower and no payments are made towards leave benefits and company contributions to pension
funds and medical aid. In many instances, the number of part-time employees might be part of agreements
negotiated with unions. If this was not the case, an organisation might use part-time labour to the detriment of
full-time employees. This policy would be very short-sighted, as the full-time employees are needed to
ensure that the organisation’s production facility is utilised optimally.
9.7 Aggregate planning strategies: advantages, disadvantages and
uses
We have discussed various strategies, and have considered advantages, disadvantages, costs incurred and the
types of industry that can use each type of strategy. Table 9.4 summarises the points made in our discussion.
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TABLE 9.4 Advantages and disadvantages of various strategies in aggregate planning
OPTION
ADVANTAGES
DISADVANTAGES
USES
Manipulating inventory
•
No sudden change in
staffing
Production changes
gradually
•
•
Increased costs
Shortages and lost
sales
•
No inventory-related
cost
Produce only what is
required
•
Increased cost for
hiring, firing and
training
•
Applicable where a
large labour pool
exists
Can match seasonal
fluctuations
No training required
•
Increased cost for
overtime pay and
tired employees
Uncertain demand
will not be fulfilled
•
Can ensure
flexibility with the
aggregate plan
•
•
•
Poor quality
Less profit
Not fulfilling
demand
•
Difficult to utilise in
service industry
Mainly utilised in
production
•
Demand remains
uncertain
Difficult to match
demand exactly
•
Requires willing
customers that will
wait
Loss of goodwill
•
Mostly utilised in
manufacturing
•
Hiring and firing
•
•
Overtime or idle time
•
•
•
Subcontracting
Chasing demand
•
•
•
Smoothes output
Ensures flexibility
Capacity utilised
•
Back orders
•
Part-time workers
•
•
New ideas are
created
Using overbooking
to ensure demand
No need for
overtime
Capacity remains
constant
•
•
Might need outside
skills and facilities
not part of
organisation
•
•
Utilise resources
fully
Stable workforce
Risk is high as
products not freely
available
•
•
Not as costly
More flexible
•
Turnover of staff
increases cost
•
•
Unskilled labour
Large pool required
•
Mixed strategies
•
Applicable to
production only
Not for the service
industry
•
•
These strategies are not the only strategies that can be used. They are just those most frequently used by
industry.
9.8 Choosing a strategy
Before a decision can be made regarding a strategy, the policies and costs of an organisation must be taken
into consideration. A strategy that is outside the affordability of an organisation’s cost structure and policies
cannot be chosen. Policy might dictate that no wholesale lay-offs are allowed in times of low demand.
Lay-offs will then only be allowed under extreme conditions. In highly competitive environments,
subcontracting might not be an option, due to the secrecy that has to be maintained. For example, in the
vehicle-manufacturing and computer-software environments, competitors might have an opportunity to copy
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or even steal ideas from subcontractors. Agreements with unions about, for example, the employment of
part-time labour, the number of overtime hours to be worked, and when employees may be laid off can be
another constraint on the type of strategy employed.
9.9 Aggregate planning methods
A variety of techniques or methods are available to aggregate planners. These methods can be divided into
the following two main categories:
1 Trial-and-error method
2 Mathematical methods.
9.9.1 Trial-and-error method
When this method is employed, tables are developed that assist planners to compare the forecast demand
requirements visually with the capacity available in the organisation. The viability of each plan is measured
against the cost of the plan. The lowest-cost plan will be used. The main drawback of this type of plan is that
it does not necessarily produce an optimal plan.
The section titled ‘How to do aggregate planning using the trial-and-error method’ contains three worked
examples of this method. In the first example, steady regular output is employed – any demand fluctuations
will be absorbed by inventory. The second example uses a lower rate of output – overtime will be employed
to take up the slack. The third example uses temporary workers to take up any slack that may occur. In the
first two examples, some backlog will be allowed to balance demand and capacity.
The three worked examples that follow will attempt to illustrate the use of the trial-and-error method of
aggregate planning. The plan produced will be only as successful as the planner’s resourcefulness and
perseverance. The possibility does exist that the plans calculated in these examples might have lower costs if
someone else calculates them.
The whole purpose behind these examples is to illustrate the manner in which these plans are calculated
and not necessarily to obtain the lowest-cost model.
How to do aggregate planning using the trial-and-error method
WORKED EXAMPLE
Let us use the example of Distell, a manufacturer of alcoholic beverages. One of its most popular brands is
Klipdrift and Cola (popularly called Klippies and Cola). Imagine that the planner at Distell wishes to
prepare an aggregate plan for the next six periods. The forecast shown in Table 9.5 has been prepared for
Klipdrift and Cola. The forecast shows the number of cases that must be produced in each period.
TABLE 9.5 Forecasted demand
Period
1
2
3
4
5
6
Total
Forecast
2 000
2 000
3 000
4 000
5 000
2 000
18 000
Manufacturing this product will incur the following costs:
• Regular time = R4 per case produced
• Overtime = R6 per case produced
• Subcontracting = R8 per case produced
• Inventory = R2 per case per period on average inventory
• Back-order = R7 per case per period.
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Based on the aggregate plans and related costs for each of the following situations, which would be the least
expensive option?
• Level output
• Using overtime
• Using temporary employees
Solution A: Level output. The cases of Klipdrift and Cola must be produced at a steady rate of regular
time output. Any fluctuations in the demand must be absorbed using inventory but, in certain cases, it is
allowable to use backlogs to make up any discrepancies. As a steady rate of output is required, the use of
overtime and subcontracting is prohibited. At the beginning of period 1, no inventory is on hand. The level
output rate of the factory must be 3 000 cases per period using regular time (the required number of cases
that must be produced over the 6 periods is 18 000 cases, and dividing the total requirement of 18 000 by 6,
which represents the number of periods in the planning horizon). The management of Distell has
determined that no inventory holding will be allowed at the end of period 6. Workers for this line total 15
and each worker can produce 200 cases of Klipdrift and Cola per period.
TABLE 9.6 Aggregate plan – Example A
PERIOD
1
2
3
4
5
6
TOTAL
Forecast
2 000
2 000
3 000
4 000
5 000
2 000
18 000
Regular
3 000
3 000
3 000
3 000
3 000
3 000
18 000
Overtime
0
0
0
0
0
0
0
Subcontract
0
0
0
0
0
0
0
1 000
1 000
0
(1 000)
(2 000)
1 000
0
0
1 000
2 000
2 000
1 000
0
Ending
1 000
2 000
2 000
1 000
0
Average
500
1 500
2 000
1 500
500
0
Backlog
0
0
0
0
1 000
0
Regular
12 000
12 000
12 000
12 000
12 000
12 000
72 000
Overtime
0
0
0
0
0
0
0
Subcontract
0
0
0
0
0
0
0
Inventory
1 000
3 000
4 000
3 000
1 000
0
12 000
Back order
0
0
0
0
7 000
0
7 000
13 000
15 000
16 000
15 000
20 000
12 000
91 000
Output
Output –
Forecast
Inventory
Beginning
Costs
Total
The total of 18 000 cases represents the regular time output for Distell. The costs were calculated as
follows:
• Regular: 3 000 cases per period × R4 per case = R12 000
• Inventory: Average inventory holding per period × R2 per case per period
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•
Back-order cost in period 5: 1 000 cases per period × R7 per case = R7 000.
Once the plan has been completed, the costs on the horizontal axis must balance with the costs on the
vertical axis:
• Horizontal: R13 000 + R15 000 + R16 000 + R15 000 + R20 000 + R12 000 = R91 000
• Vertical: R72 000 + R12 000 + R7 000 = R91 000.
Solution B: Using overtime. The planner at Distell must review the plan in Example A because one
employee has resigned. Management has decided not to replace the employee and wants to make up the
difference in output by using overtime.
Instead of the previous output of 3 000 units per period, using steady rate of regular time output, the 14
remaining workers can produce only 2 800 units per period. The rest of the information remains the same.
The planner prepares a new plan and compares the costs with plan A’s.
TABLE 9.7 Aggregate plan – Example B
PERIOD
1
2
3
4
5
6
TOTAL
Forecast
2 000
2 000
3 000
4 000
5 000
2 000
18 000
Regular
2 800
2 800
2 800
2 800
2 800
2 800
16 800
Overtime
0
0
400
400
400
0
1 200
Subcontract
0
0
0
0
0
0
0
Output –
Forecast
800
800
200
(800)
(1 800)
800
0
Beginning
0
800
1 600
1 800
1 000
0
Ending
800
1 600
1 800
1 000
0
0
Average
400
1 200
1 700
1 400
500
0
5 200
Backlog
0
0
0
0
800
0
800
Regular
11 200
11 200
11 200
11 200
11 200
11 200
67 200
Overtime
0
0
2 400
2 400
2 400
0
7 200
Subcontract
0
0
0
0
0
0
0
Inventory
800
2 400
3 400
2 800
1 000
0
10 400
Back order
0
0
0
0
5 600
0
5 600
12 000
13 600
17 000
16 400
20 200
11 200
90 400
Output
Inventory
Costs
Total
The 200 cases lost due to the resigning employee were recouped by working overtime in periods 3, 4 and 5.
The total lost production recouped by working overtime in these periods was 1 200 cases. The overtime was
scheduled during periods 3, 4 and 5, as these were where the highest demand occurred. If the overtime had
been scheduled during periods 1 and 2, it would have resulted in an increase of inventory holding costs. If it
had been scheduled in later periods, the cost of backlogs would have increased. Both these consequences
would have made the plan more expensive. The cost for plan B is R90 400 and for plan A it was R91 000.
The difference is R91 000 – R90 400 = R600. Therefore, plan B is R600 cheaper than plan A.
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Solution C: Using temporary employees.
Distell has decided that temporary employees will be employed during the periods of highest demand:
• Assume that it will cost an extra R1 100 to employ and train a temporary employee
• The temporary employee can produce at a rate of 150 cases per time period, compared to the 200 cases
per time period produced by a full-time employee.
To determine the number of temporary employees to employ, the operations manager needs to divide the
number of cases that are short (1 200) by cases per part-time employee (150). Therefore, eight ‘temporary
employee periods’ are required. What this means is that Distell could either employ two temporary
employees, each one for four periods, or use four temporary employees for two periods each, etc. For this
example, let us assume that four employees will be employed in periods 4 and 5, the periods with the
highest demand.
TABLE 9.8 Aggregate plan – Example C
PERIOD
1
2
3
4
5
6
TOTAL
Forecast
2 000
2 000
3 000
4 000
5 000
2 000
18 000
Regular
2 800
2 800
2 800
3 400
3 400
2 800
18 000
Overtime
0
0
0
0
0
0
0
Subcontract
0
0
0
0
0
0
0
Output –
Forecast
800
1 000
(200)
(600)
(1 600)
800
0
Beginning
0
800
1 600
1 400
800
0
Ending
800
1 600
1 400
800
0
0
Average
400
1 200
1 500
1 100
400
0
4 600
Backlog
0
0
0
0
800
0
800
Regular
11 200
11 200
11 200
13 600
13 600
11 200
72 000
Overtime
0
0
0
0
0
0
0
Temporary
employees
0
0
0
4 400
0
0
4 400
Inventory
800
2 400
3 000
2 200
800
0
9 200
Back order
0
0
0
0
5 600
0
5 600
12 000
13 600
14 200
20 200
20 000
11 200
91 200
Output
Inventory
Costs
Total
Further comments on the three examples given above
The costs for each plan are thus as follows:
• Plan A is R91 000
• Plan B is R90 400
• Plan C is R91 200.
The most expensive plan is therefore plan C.
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The following assumptions have been made regarding the three examples:
• All the plans are feasible. This means that an assumption is made that there will be enough inventory to
absorb the fluctuations. It is assumed that the temporary workers used will be able to produce at the
required quality levels. It is also assumed that changes to the rate of output can be made when required.
• Build-up of inventories and use of the inventory will take place at a uniform rate. This implies that
the throughput rate in each period is exactly the same. Any backlog is treated as though it has been
present in the period in which it first appeared. The backlog will tend to build up towards the end of the
period.
• All costs incurred will be a linear function consisting of unit cost and the number of units to be
produced. This will ensure that what is planned for remains as close as possible to what happens in
reality. Cost can, therefore, be seen as a linear function.
• Unit costs are independent of the quantities produced. The costs calculated in each plan can be
regarded as the total cost of the plan.
• All the costs used in the calculations can be estimated to be reasonably true and the costs will
remain constant throughout the planning horizon. This means that an assumption is made that no
increases or decreases in cost will take place during the planning horizon.
• A constant throughput rate will be used for all periods. There will be no allowance for public
holidays, number of working days in each month, or any other contingency. This assumption is made for
the sake of simplicity.
In the three examples the following relationships are used:
• The number of employees:
Number of employees at end of previous period
+ Number of new employees at start of the period
– Number of fired employees at the start of the period
Number of employees in a period
Important note: In practice, an organisation will never hire and fire employees at the same time.
Therefore, one of the above terms will always be equal to zero.
•
Inventory holding at the end of each period:
Inventory at end of previous period
+ Production rate during current period
– Usage of inventory to satisfy demand in current period
= Inventory remaining at end of period
These plans normally use the average inventory for a period to calculate the inventory holding costs, or
The total cost that each plan will incur for a particular planning horizon can be computed as follows:
All output costs + Employee costs + Inventory costs + Back order costs = Total cost
The ways in which the costs are calculated and which costs are included are given in Table 9.9.
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TABLE 9.9 Calculating costs for aggregate planning
COST INCURRED
MANNER OF COST CALCULATION
Output cost
Regular time cost
Regular cost of each unit produced × quantity
produced in regular time
Overtime cost
Cost per unit produced in overtime × quantity
produced during overtime
Subcontracting cost
Cost to produce per unit × quantity subcontracted
Employee cost
Hire cost
Hiring cost × how many hired
Fire cost
Cost to fire an employee × how many fired
Inventory cost
Cost per unit per period × average inventory held
Back-ordering cost
Cost per unit short × quantity on back order
9.9.2 Mathematical methods
Several mathematical methods are available to assist aggregate planners in their planning task. These models
vary from the simplest to the most sophisticated computer models. We consider some of these models only
briefly in this section. The following models will be discussed:
• linear programming
• linear decision rules
• simulation models.
Linear programming
Whether organisations wish to maximise profits or minimise costs of scarce resources, the allocation of these
resources can be done optimally. The main aim with any aggregate plan is the minimisation of the costs of
the plan. As we have seen, the costs to be minimised are regular time, overtime, subcontracting, inventory
carrying and any other costs associated with the size of the workforce. The following constraints influence
the optimisation of the problem:
• capacity of the organisation
• inventory holding
• whether subcontracting can be done.
A transportation-type model can, therefore, be formulated. This is a linear programming model using
mathematical techniques to minimise costs. This will match capacity with demand at the lowest possible cost.
The planner must, as with the trial-and-error method, identify all the relevant costs. This must be done on a
period-by-period basis and for the available capacity. The most important disadvantage of this method is that
it assumes that a linear relationship exists amongst all the variables, which is not always the case. This
method is also incapable of adjusting output rates on a continuous basis. Only a single objective function can
be formulated. In the case of aggregate planning, it would be the minimisation of cost. In aggregate planning,
however, we have seen that a method is needed which allows multiple objective functions to be formulated.
WORKED EXAMPLE
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A calculator company produces a scientific calculator and a graphing calculator. Long-term projections
indicate an expected demand of at least 100 scientific and 80 graphing calculators each day. Because of
limitations on production capacity, no more than 200 scientific and 170 graphing calculators can be made
daily. To satisfy a shipping contract, a total of at least 200 calculators must be shipped each day.
If each scientific calculator sold results in a R2 loss, but each graphing calculator produces a R5 profit,
how many of each type should be made daily to maximise net profits?
The question asks for the optimal number of calculators, so the variables will be:
x = number of scientific calculators produced
y = number of graphing calculators produced.
Since negative numbers of calculators cannot be produced, the following two constraints exist:
x 0 and y 0.
But in this case, these constraints can be ignored, because it is already known that x 100 and y 80. The
exercise also gives maximums: x 200 and y 170.
The minimum shipping requirement is stated as: x + y 200, in other words, y –x + 200. The revenue
relation can be the optimisation equation: R = –2x + 5y. So the entire system is:
R = –2x + 5y, subject to:
100 x 200
80 y 170
y –x + 200
The feasibility region graph is indicated in Figure 9.2.
FIGURE 9.2 Feasibility region graph
(SOURCE: Stapel, E. 2006–2012. Linear programming: Introduction, 3. Purplemath: http://www.purplemath.com/modules
/linprog.htm)
When you test the corner points at (100, 170), (200, 170), (200, 80), (120, 80) and (100, 100), you should
obtain the maximum value of R = 650 at (x, y) = (100, 170). That is, the solution is ‘100 scientific
calculators and 170 graphing calculators’.
(SOURCE: Stapel, E. 2006 – 2012. Linear programming: Introduction. Purplemath: http://www.purplemath.com/modules
/linprog.htm)
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The linear decision rule
This method endeavours to minimise the total cost variables of an organisation. This is achieved by making
use of a set of cost-approximating functions. This method makes use of quadratic equations to solve the
problem of aggregate planning. Calculus can then be used to solve the problem because of the quadratic
equations that have been set up. In this method, two linear equations can be formulated simultaneously. One
linear equation can be used to plan the output rate for the organisation while the other equation can be used to
calculate the workforce for each of the periods.
This method is not used very often, and normally only as a benchmark method. Proposed methods are
benchmarked against this method to determine whether they are viable. The following three main limitations
apply when this model is used:
• There is a chance that this model will produce infeasible solutions to an aggregate-planning problem; the
solutions can become impractical.
• This method always assumes a specific type of cost function.
• A vast amount of effort must be expended to find the cost data used in this method.
Simulation models
A number of simulation models have been developed to assist with the solving of aggregate-planning
problems. Simulation is usually done using computer programmes that can be operated under a variety of
conditions in an organisation. In most cases, this produces acceptable aggregate plans for an organisation.
It appears that the mathematical models, as briefly mentioned in this section, are not widely used in
industry. Most organisations prefer the trial-and-error method. The main reason for this might be that the
trial-and-error method is easier than the mathematical methods to use and, through experience, the plans that
managers produce are quite accurate. Another reason for the mathematical methods not being used is the
assumptions they make. These assumptions, in most cases, appear to be unrealistic and the scope of what
these mathematical models try to achieve is too narrow.
9.10 Aggregate planning in a service environment
Services cannot be inventoried when future demand is anticipated, and therefore aggregate planning becomes
a challenge in a service environment. A planner should plan for sufficient service capacity to satisfy the
demand from customers. A trade-off between the cost of having an aggregate plan and having a satisfied
customer must be done very carefully. There can be high cost and excess capacity involved. Various
strategies are available to assist an operations manager to balance demand and capacity, and we discuss some
of these strategies in some detail in this section.
9.10.1 Service demand management strategies
Below we discuss some of the more widely used service demand management strategies.
Segmentation of customers
Consider the example of a dentist. A dentist serves both children and adults. Therefore the dentist can
schedule school children in the afternoons for check-ups and dental work. Adults can come at any time of the
day. Both segments of the market have to make follow-up appointments if longer procedures are required.
Most regular dental work is of a short duration, and this policy for managing service demand works quite
well. Optimisation of capacity takes place when the longer appointments are forced into the late mornings
and early afternoons.
Difference in pricing
Many service providers actively encourage customers to purchase the service at off-peak times.
Provide counter-seasonal services
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Many service organisations are bound by seasons. Examples are holiday resorts, universities and speciality
retailers, such as clothing stores that specialise in swimwear. When the peak season has passed, all these
organisations have excess capacity. By having counter-seasonal services, organisations might alleviate the
problem. For example, holiday resorts can start holiday clubs that offer special deals to people who are not
bound by school holidays and can take their holidays during off-peak periods – for example, the elderly and
people who do not have any childcare responsibilities.
Provide complementary services
Most hotels aim to offer complete packages to clients. Discount prices are offered on all meals and beverages
bought at the hotel’s restaurant. This is done to ensure that the guests’ money is spent within the hotel and
not at competing establishments. Some of the larger and more upmarket hotels also provide entertainment on
the premises. This is a further reason for guests not to look for entertainment somewhere else, and demand is
managed in this manner.
Utilise a reservation system
Most organisations within the service industry use reservation systems. For example, organisations such as
airlines, hotels, hairdressers, doctors and movie theatres all make use of some kind of reservation system.
These organisations do this to balance future capacity with future demand. If a customer cannot find a
reservation in one period, often he or she can be moved to another period. Most customers are willing to
move reservations around. Demand is thus smoothed and this is a convenient way for both customers and
service providers to manage demand.
There is one major disadvantage of using this system: customers who make reservations might not show
up. Particular solutions are available to service providers to minimise this problem. One remedy is the
charging of a standard fee if the reservation is not cancelled in advance. Airlines, for example, might sell
tickets that are not refundable, and therefore if passengers do not arrive, the passengers and not the airline
lose the cost of the ticket. This type of ticket is also usually not transferable to other flights. Another remedy
is overbooking to compensate for customers who do not arrive. If a service provider overbooks, certain costs
are incurred. One such cost comes from having to refund customers for services not rendered. More
damaging is the fact that a customer might not use this service provider in future. Doctors might charge the
full consultation fee if a patient does not cancel a consultation at least 24 hours in advance.
9.10.2 Service supply management strategies
Below we discuss some service supply strategies.
Schedule employees to ensure the demand patterns are met
Most managers at fast-food restaurants such as Wimpy, Steers and McDonald’s have more employees on
duty during peak times than during quiet times. These peak periods are usually during breakfast, lunch and
dinner times. Therefore, it makes sense that some employees finish their shifts shortly after such a
high-demand period comes to an end. This means that the wage bill can be managed as well.
Encourage customers to participate
Customers can render some of the services themselves. Consider an example of this at grocery stores. Each
customer can bag his or her own purchases instead of having an employee do this. Customers can ensure that
all the paperwork is completed when they apply for a loan at a bank, instead of the bank officer doing it. This
approach will not always work in South Africa because part of the population is illiterate. In some instances,
customers might lack the necessary training to be able to perform certain duties. Problems can also arise with
this strategy when customers try to cheat the system.
Contingent employees
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These are the employees who can be called in during an emergency. When demand for the service increases
unexpectedly, these people can be called in at very short notice to increase supply. This is a very popular
method of increasing supply for retail outlets. Temporary workers are employed over the festive season, for
example, to ensure that customers are serviced quickly. The same is done at holiday destinations during high
seasons, such as during school holidays.
Capacity that can be adjusted
When demand for a service is low, the employees can be used to do other tasks. For example, in the fast-food
environment, if employees are not busy serving customers, they can clean the restaurant. This strategy is
often seen in retail outlets such as Spar and Pick n Pay – staff not busy serving customers can wash and clean
the floors. In restaurants, the waiting staff can replace serviettes, cutlery and condiments in off-peak periods.
Capacity that can be shared
Consider an airline that overbooks flights: the airline moves excess passengers to competing airlines that
have spare capacity. Guesthouses, for example the Roman Rock in Simon’s Town, can do the same. If the
manager of Roman Rock finds that the rooms are overbooked, she might rebook guests, after negotiating this
with them, at another guesthouse, such as the Penguin Point Guesthouse, which is close by. Accountants
might do the same thing during the peak season of completing tax returns, airlines might cope with excess
capacity by leasing aircraft to other airlines, and universities might let out excess classroom space to other
institutions for special workshops.
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CLOSING EXAMPLE
Department of Health: eHealth strategy for South Africa
Effective monitoring of healthcare service delivery and overall performance of the health systems requires
functional health information systems capable of producing real-time information for decision-making.
Globally, Information and Communication Technology (ICT) has emerged as a critical enabling mechanism
to achieve this. This eHealth strategy for the public health sector in South Africa ushers in a new era of
optimism about the capabilities of our health information systems.
The eHealth strategy for the public health sector provides the roadmap for achieving a well-functioning
national health information system with the patient located at the centre. The Ministry of Health and the
NHC will closely monitor the implementation of this strategy, to ensure that previous errors do not revisit
us and that the strategy indeed supports patient care and healthcare management.
The World Health Organisation (WHO) defines eHealth as “the use of information and communication
technologies (ICTs) for health to, for example, treat patients, pursue research, educate students, track
diseases and monitor public health” (WHO, 2013).
Part of this strategy is to ensure that aggregate demand (thus aggregate data on patients) is provided to
ensure that medical services are delivered as and where they are needed. Three of the important strategies
related to aggregate planning that will be implemented are discussed in the sections below.
Investment, affordability and sustainability
Before beginning any eHealth project, financing must be procured and its sustainability protected over the
duration of the project. This requires proper planning and identification of benefits, so that value for money
and affordability are balanced and results delivered as quickly as feasible. There are relatively few
economic assessments of potentially beneficial eHealth solutions in the developing world. These are to
support “policy makers and health departments to make informed decisions when allocating scarce
resources” (Broomhead & Mars, 2012). The South African eHealth strategy will contribute to regional
efforts in this regard.
Capacity and workforce
Having adequate human resource capacity is essential to successful delivery on this eHealth strategy. This
involves developing career paths, training and skill retention strategies in order to build up a workforce that
can innovate, develop, deploy, maintain and support all eHealth interventions, especially health information
systems and health management information systems. Define a standardised eHealth competency
framework for health workers and health IT practitioners providing an understanding of required eHealth
knowledge, skills and attributes for each professional group.
Applications and tools to support healthcare delivery
There is a wide range of digital applications and tools with the potential to support and improve healthcare
delivery. The applications include electronic medical record systems, healthcare information systems,
surveillance systems, business intelligence for health, electronic content management, decision support and
knowledge management. Tools include software and hardware devices, especially those used in mHealth
and Telemedicine.
(SOURCE: National Department of Health. 2012. eHealth strategy for South Africa. Available at: http://www.doh.gov.za/docs
/stratdocs/2012/eHealth_Strategy_South_Africa_2012-2016.pdf.)
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Summary
We began this chapter by considering aggregate planning’s position within the sequence of an organisation’s
planning activities. We then briefly discussed aggregate planning in service organisations before going on to
explore aggregate planning concepts and the variables in aggregate planning strategies. We discussed options
available in managing an aggregate plan and looked at capacity options such as making use of overtime or
idle time to vary throughput rates, making use of contract or part-time workers, changing inventory levels as
necessary, subcontracting or outsourcing work to other organisations, and managing the workforce by hiring
and firing employees. We also discussed demand options such as mixing products or services to counteract
each other seasonally, attempting to influence the demand for a product, using backlogs or back ordering
during peak-demand periods, using different pricing strategies to stimulate demand during periods of low
demand, and creating new demand. We then explored strategies for uneven demand, including various
popular strategies, chase and level strategies, and combining pure strategies and went on to discuss the costs
prevalent in aggregate planning. Next, we considered the cost of hiring and firing labour, back ordering and
stock-out costs, the cost of subcontracting, the cost of overtime and idle time, the cost of carrying inventory,
and the cost of part-time labour. We then explored the dimensions of capacity for production and
reconsidered in summary aggregate planning strategies’ advantages, disadvantages and uses, and discussed
the choice of and explored aggregate planning methods such as the trial-and-error method (which we
discussed with the aid of several examples) and mathematical methods such as linear programming, the linear
decision rule, and simulation models. Finally, we returned to consider in more detail aggregate planning in a
service environment, where we considered service demand management strategies and service supply
management strategies.
Key terms
Aggregate planning: The process of developing, analysing and maintaining a preliminary, approximate
schedule of the overall operations of an organisation. This can be seen as matching demand with supply.
The word ‘aggregate’ in this concept implies that the planning is done for entire product lines or product
families rather than individual products.
Back order: An order that is accepted when the organisation knows that it cannot deliver the order at
present.
Chase strategy: When demands for certain periods in the aggregate plan are chased.
Disaggregation: When the aggregate plan is broken down to determine what will be required for each of
the products that have to be manufactured.
Level strategy or level scheduling strategy: This strategy requires a level rate of output throughout the
planning period.
Linear decision rule: This method endeavours to minimise the total cost variables of an organisation by
making use of a set of cost-approximating functions.
Linear programming model: This model uses mathematical techniques to minimise costs by matching
capacity with demand at the lowest possible cost.
Severance packages: Agreements regarding money and benefits to be received by employees being
dismissed.
Simulation models: Usually done using computer programmes that can be operated under a variety of
conditions in an organisation.
Trial-and-error method: Tables are developed that assist planners to compare the forecast demand
requirements visually with the capacity available in the organisation.
Review questions and activities
1 Differentiate between aggregate planning in manufacturing and aggregate planning in the service
industry.
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2 Identify and discuss the variables in aggregate planning strategies.
3 Explain the two basic options from which an operations manager can choose when developing the
aggregate plan.
4 Explain the major costs that must be taken into account when aggregate planning is attempted.
5 Identify and describe the various strategies available to manage demand.
CASE STUDY: VORTEX (PTY) LTD
Vortex (Pty) Ltd manufactures wooden boxes with lids. Vortex wants to plan ahead in order to address the
variations in the seasonal demand for its products. A planning horizon of 6 months is used. The following
table provides the aggregated demand for each month:
Forecasts for demand to meet:
TABLE 9.10 Aggregated demand for each month
MONTH
JAN.
FEB.
MARCH
APRIL
MAY
JUNE
TOTAL
Demand
1 000
1 200
1 500
1 900
1 800
1 600
9 000
Manufacturing this product will incur the following costs and related aspects:
TABLE 9.11 Costs and related aspects of manufacturing product
ITEM
NUMBER/COST
Regular time
R15/unit
Overtime
R20/unit
Inventory carrying costs
R10/unit/month on average inventory
Subcontracting costs
R30/unit
Back order
R40/unit
Capacity per worker in regular time
70 units/month
Regular production
1 400 units
Number of staff
20
Capacity per worker in overtime
10 units/month
Case study questions and activities
1
2
Explain which options of aggregate planning are available to Vortex that they can use. Which of
these methods would you advise them to use? Motivate your answer.
Apply the trial-and-error method and present an aggregate plan using the information provided and
calculating the costs involved in delivering the required units to meet demand.
References
1 Bicheno, J. & Catherwood, P. 2005. Six-sigma and the quality toolbox for service and manufacturing.
Buckingham: PICSIE Books.
2 Broomhead, S. & Mars, M. 2012. Telemedicine and e-Health, January/February, 18:1, 24–31.
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3 Chase, R.B., Jacobs, F.R. & Aquilano N.J. 2006. Operations management for competitive advantage,
11th ed. Maidenhead: McGraw-Hill/Irwin.
4 Cochon, G. & Terwiesch, C. 2006. Matching supply with demand – An introduction to operations
management, international edition. New York: McGraw-Hill/Irwin.
5 Davis, M.M. & Heineke, J. 2005. Operations management – Integrating manufacturing and services, 5th
ed. Boston: McGraw-Hill/Irwin.
6 Davis, M.M., Aquilano, N.J. & Chase, R.B. 2003. Fundamentals of operations management, 4th ed.
Boston: McGraw-Hill/Irwin.
7 Department of Health. 2012. eHealth strategy for South Africa. [Online: see websites at the end of this
chapter]
8 Dilworth, J.B. 2000. Operations management – Providing value in goods and services, 3rd ed. London:
Harcourt College Publishers.
9 Finch, B.J. 2008. Operations now – Profitability, processes, performance, 3rd ed. New York:
McGraw-Hill.
10 Gaither, N. & Frazier, G. 2002. Operations management, 9th ed. Cincinnati, Ohio:
South-Western/Thomson Learning.
11 Heizer, J. & Render, B. 2006. Principles of operations management, 6th ed. Upper Saddle River, N.J.:
Pearson Prentice Hall.
12 Hill, T. 2005. Operations management, 2nd ed. Basingstoke: Palgrave Macmillan.
13 Jackson, M.C. 2003. Systems thinking – Creative holism for managers. Hoboken, N.J.: John Wiley and
Sons.
14 Jacobs, F.R. & Chase, R.B. 2008. Operations and supply management: The core, international edition.
New York: McGraw-Hill/Irwin.
15 Knod, E.M. & Schonberger, R.J. 2001. Operations management: Meeting customers’ demands, 7th ed.
New York: McGraw-Hill.
16 Krajewski, L.J., Ritzman, L.P. & Malhorta, M. 2007. Operations management – Processes and value
chains, 8th ed. Harlow: Pearson Education.
17 Mullins, L.J. 2005. Management and organisational behaviour, 7th ed. New York: Financial Times,
Prentice Hall.
18 Reijers, H.A. & Mansar, L.S. 2005. ‘Best practices in business process redesign: An overview and
qualitative evaluation of successful redesign heuristics’, The International Journal of Management
Science, 33, 283–306.
19 Russell, R.S. & Taylor III, B.W. 2003. Operations management, 4th ed. Harlow: Pearson Education.
20 SA News. 2012. SA banks to curb irresponsible lending. [Online: see websites at the end of this chapter]
21 Schroeder, R.G. 2004. Operations management – Contemporary concepts and cases, 2nd ed.
McGraw-Hill/Irwin.
22 Slack, N., Chambers, S. & Johnson, R. 2004. Operations management, 4th ed. Harlow: Pearson
Education
23 Slack, N., Chambers, S., Johnson, R. & Betts, A. 2006. Operations and process management – Principles
and practices for strategic impact. Harlow: Pearson Education.
24 Stapel, E. 2006–2012. Linear programming: Introduction. Purplemath. [Online: see websites at the end
of this chapter]
25 Stevenson, W.J. 2007. Operations management, 9th ed. London: McGraw-Hill.
26 Vollman, T.E., Berry, W.L., Whybark, D.C. & Jacobs, F.R. 2005. Manufacturing planning and control
systems for supply chain management, 5th ed. New York: McGraw-Hill.
27 Waller, D.L. 2003. Operations management – A supply chain approach, 2nd ed. London: Thomson
Learning.
28 Wild, R. 2002. Operations management, 6th ed. London: Continuum.
29 WHO (World Health Organisation) 2013. eHealth. [Online: see websites at the end of this chapter]
Websites
Visit the websites below.
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under U.S. or applicable copyright law.
http://web.williams.edu/Mathematics/sjmiller/public_html/416/currentnotes/LinearProgramming.pdf
http://worldacademyonline.com/article/18/1/aggregate_planning_strategies.html
www.sce.carleton.ca/faculty/chinneck/po/Chapter2.pdf
www.sanews.gov.za/southafrica/banks-basa-treasury-agree-curb-irresponsible-lending
www.who.int/topics/ehealth/en/
The websites below were last accessed on the dates given:
www.carnivalcorp.com (September 2013)
www.carnivalcruise.com (September 2013)
www.doh.gov.za/docs/stratdocs/2012/eHealth_Strategy_South_Africa_2012-2016.pdf. (10 April 2013)
www.ibm.com (September 2013)
www.kellyservices.com (September 2013)
www.macys.com (September 2013)
www.mrpii.com (September 2013)
www.mysap.com (September 2013)
www.purplemath.com/modules/linprog.htm (19 October 2012)
www.rubbermaid.com (September 2013)
www.stg.co.uk (September 2013)
www.uoguelph.ca (September 2013)
www.wy.com (September 2013)
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CHAPTER 10
Short-term scheduling
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
•
Define scheduling as a function of the operations manager
Explain the importance of short-term scheduling
Discuss scheduling criteria
Describe how supply and demand influence scheduling
Explain the scheduling of operations in an organisation
Understand loading of work centres
Use and interpret Gantt charts
Understand and create sequencing diagrams for work centres
Discuss commonly used priority rules
Describe the limitations of rule-based dispatching
Understand constrained work centres
Explain services scheduling.
CHAPTER outline
10.1
10.2
10.3
10.4
10.4.1
10.4.2
10.4.3
10.5
10.6
10.6.1
10.6.2
10.7
10.8
10.9
Introduction
The importance of short-term scheduling
Scheduling criteria
The influence of supply and demand on scheduling
Supply uncertainty
Demand uncertainty
Dependent versus independent demand
Scheduling of operations in an organisation: high-volume scheduling
Scheduling of operations in an organisation: low-volume system scheduling
Loading
Sequencing
Limitations of rule-based dispatching systems
Constrained work centres
Services scheduling
Summary
Key terms
Review questions and activities
Case study
References
Websites
SETTING THE SCENE
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CHAPTER 10
Short-term scheduling
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
•
Define scheduling as a function of the operations manager
Explain the importance of short-term scheduling
Discuss scheduling criteria
Describe how supply and demand influence scheduling
Explain the scheduling of operations in an organisation
Understand loading of work centres
Use and interpret Gantt charts
Understand and create sequencing diagrams for work centres
Discuss commonly used priority rules
Describe the limitations of rule-based dispatching
Understand constrained work centres
Explain services scheduling.
CHAPTER outline
10.1
10.2
10.3
10.4
10.4.1
10.4.2
10.4.3
10.5
10.6
10.6.1
10.6.2
10.7
10.8
10.9
Introduction
The importance of short-term scheduling
Scheduling criteria
The influence of supply and demand on scheduling
Supply uncertainty
Demand uncertainty
Dependent versus independent demand
Scheduling of operations in an organisation: high-volume scheduling
Scheduling of operations in an organisation: low-volume system scheduling
Loading
Sequencing
Limitations of rule-based dispatching systems
Constrained work centres
Services scheduling
Summary
Key terms
Review questions and activities
Case study
References
Websites
SETTING THE SCENE
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Airports Company South Africa SOC Limited
Airports Company South Africa SOC Limited was formed in 1993 as a public company under the
Companies Act of 1973, as amended, and the Airports Company Act of 1993, as amended. Although the
company is majority owned by the South African government through the Department of Transport, it is
legally and financially autonomous and operates under commercial law.
Airports Company South Africa was formed to own and operate the nine principal South African
airports, including the three main international gateways of O.R. Tambo, Cape Town and King Shaka
International Airports. As well as providing world-class, secure infrastructure for airlines to transport
people and goods, the entity extends its responsibilities to include the promotion of tourism, the facilitation
of economic growth and job creation, and protection of the environment.
An airport is not only for air travellers: O.R. Tambo International, for instance, is host to about 30 000
people who go to work there every day to provide the multiple services that tend to be taken for granted
when visiting an airport. An airport is not just for flying: it is the heart of a network of transport arteries for
cars, trucks, buses, taxis and trains. Travellers are often accompanied by ‘meeters and greeters’, adding to
the community that goes to an airport to eat, to drink, to browse in the shops, refresh and relax, and, of
course, to fly! But flying is more than flying, it entails a number of actions to ensure that flights take off
and land on time, which includes inter alia facilitating the booking of passengers, counters, security gates,
ensuring that passengers that booked in get on the aircraft, handling of luggage, fuelling, maintenance,
take-off and landing schedules, air traffic control, and a whole list of other activities.
Airport operational efficiency is measured through different measures, with on-time performance being
the primary internationally accepted standard. On-time performance is measured by comparing the actual
off-block time (when aircraft pushes back) against the airline schedule time for a departing flight. The
measurement is done in accordance with the IATA (International Airlines Transport Association) universal
standard benchmark which considers a 15 minute deviation from the scheduled time as an on-time
departure.
In the tables below, the on-time performance (within a 15 minute deviation) of the five domestic
airlines is averaged for each of the three larger airports to produce on-time performance of that specific
airport. This is benchmarked against a target which is agreed upon by the airport stakeholders and an
indication of short-term scheduling that takes place at each airport.
TABLE 10.1 On-time performance for three larger South African airports April 2012 – February 2013
O.R. TAMBO INTERNATIONAL AIRPORT
HOME AIRLINE
AIRPORT TARGET
%
ON-TIME
PERFORMANCE
APRIL 2012 –
FEBRUARY 2013 %
ON-TIME
PERFORMANCE
FEBRUARY 2013 %
Airlink
85
94.04
93.97
British Airways
Domestic
85
89.13
88.50
Kulula.com
85
86.89
88.47
Mango.com
85
95.80
94.38
SA Express
85
87.59
88.73
South African Airways
85
91.59
91.34
Total
85
91.00
91.03
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CAPE TOWN INTERNATIONAL AIRPORT
HOME AIRLINE
AIRPORT TARGET
%
ON-TIME
PERFORMANCE
APRIL 2012 –
FEBRUARY 2013 %
ON-TIME
PERFORMANCE
FEBRUARY 2013 %
Airlink
87
98.60
97.37
British Airways
Domestic
87
89.25
89.45
Kulula.com
87
90.75
93.38
Mango.com
87
96.97
96.63
SA Express
87
88.20
85.52
South African Airways
87
94.54
93.24
Total
87
92.34
91.85
KING SHAKA INTERNATIONAL AIRPORT
HOME AIRLINE
AIRPORT TARGET% ON-TIME
PERFORMANCE
APRIL 2012 –
FEBRUARY 2013 %
ON-TIME
PERFORMANCE
FEBRUARY 2013 %
Airlink
89
93.71
91.79
British Airways
Domestic
89
89.39
89.44
Kulula.com
89
88.13
92.23
Mango.com
89
96.01
96.01
SA Express
89
88.77
86.09
South African Airways
89
96.93
97.17
Total
89
92.22
92.37
(SOURCE: Airports Company South Africa Limited. n.d. http://www.acsa.co.za/home.asp?pid=8372)
10.1 Introduction
When an organisation undertakes scheduling, it establishes the amount of resources that will be required and
the sequence in which they will be utilised. As this implies, when an organisation undertakes scheduling, it
determines the ‘when’ (the timing) and the ‘how much’ (the quantity) of equipment, facilities and all human
activities required.
The type of business an organisation is involved in does not play a major role in successful scheduling. In
a manufacturing environment, production must be scheduled. The scheduling department needs to develop
schedules for the workforce, machinery to be used, the procurement function, maintenance of the machinery,
and the demand for the product of the organisation. In a service environment such as a university, schedules
need to be prepared for lecturing staff, lecture halls, cleaning of facilities, printing of study material,
availability of staff during registration periods, student examinations, and so forth.
Therefore, scheduling can be seen as the final step in the whole transformation process of raw materials
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into final products and services. Recall that the transformation process takes place when inputs are
transformed through processes into outputs. Scheduling is part of the decision-making process and needs
proper consideration. Managers have to make a myriad of decisions regarding design of the process before
scheduling can take place. This means that if a process is not in place, no scheduling can be done.
Decisions that managers have to take concern the size of the workforce, the capacity of the organisation,
the type of machinery to be used, the type of maintenance to carry out and when to carry it out, and the type
of training to be given to the workforce. Constraints exist in any organisation, and the organisation has to
operate within these constraints. A constraint is a limitation that inhibits the alternatives available to an
organisation. Constraints can take many forms, for example, the availability of labour, materials, money,
capacity or anything that can influence production. The same applies to the scheduling of jobs. The
constraints placed on the scheduling department by other departments cannot be ignored.
Some form of trade-off must be accepted when scheduling is undertaken, as there are conflicting goals
that need to be satisfied. These conflicting goals include the efficient and effective utilisation of the
workforce, machines and raw materials. In contrast, the customers’ waiting time, the amount of inventory to
be kept, and process times must be minimised.
10.2 The importance of short-term scheduling
In most instances, organisations that do short-term scheduling use powerful computer software for this task.
Examples of such software are SAP, BAAN and Q-Music (there are a number of other software packages).
Due to the capabilities of this software, the satisfaction of customers has become somewhat easier for
organisations to achieve, and organisations that make use of the scheduling software have a competitive
advantage over competitor organisations that do not.
With the advent of computerised scheduling, flexible manufacturing systems (FMS) came into being.
An FMS is a group of machines that handles intermittent processing requirements and produces various
products that are similar. In the FMS environment, the final scheduling decisions happen only after thorough
studies of the schedules that have been produced by the computer software. A result of this type of
scheduling is that all requirements for the factory will be delivered using just in time (JIT), where advantages
include low set-up times, little or no work in progress (WIP), and high utilisation of machines.
Proper scheduling is important for the following reasons:
• If scheduling is achieved more effectively, all scarce resources will be used more efficiently. Capacity
will then increase more significantly for every rand invested. Lower costs will be the result.
• Faster delivery of customers’ goods will take place because of the flexibility of the system and the
capacity added. The result will be satisfied customers.
• Scheduling done correctly offers a competitive advantage for an organisation because it makes deliveries
dependable.
10.3 Scheduling criteria
Ensuring that the correct scheduling techniques are used is very important. The techniques employed depend
on the number of orders placed, the type of business and the complexity of the products manufactured. Table
10.2 shows the four main criteria that must be taken into account.
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TABLE 10.2 The four main scheduling criteria
CRITERION
CONSIDERATIONS
The time to complete a job should be minimised
The measure of performance is the average
completion time per job.
Utilisation of all resources should be maximised
With this measurement, the percentage that the
facility is utilised or actually used productively is
measured.
Inventory of WIP should be minimised
An indication in this criterion is the average number
of jobs at a particular work centre: the higher the
WIP inventory, the greater the number of jobs in the
whole system. Conversely, the lower the WIP
inventory, the fewer the jobs in the system.
The time that customers have to wait should be
minimised
Measurements in this case could be the length of a
queue, or the number of days that items are late.
It is quite clear that any scheduling approach should be simple, clear, easy to understand, easy to implement,
flexible and realistic. Clearly, the objective of scheduling should be the optimisation of the resources used to
ensure that the objectives of manufacturing are met.
10.4 The influence of supply and demand on scheduling
To be able to schedule any type of operation properly, managers need to know and understand the nature of
supply and demand. This is the planning and control phase of the process.
10.4.1 Supply uncertainty
Some types of operations are quite easy to predict and usually do not deviate from the plan. These types of
operations need very little control. In other instances, operations hardly ever stick to laid-down plans. To
ensure a dependable supply, all the transformed resources – the materials, machines, money and the
manpower (human resources) that will ensure the continuous production of goods and services – have to be
constantly available. A shortage of any of these will result in the interruption of the process; if any of these
are absent, no supply can occur.
10.4.2 Demand uncertainty
In some instances, demand is reasonably certain. Unfortunately, in most types of operations, demand tends to
be uncertain. Whenever an organisation plans to introduce a new product, there is uncertainty as to how well
the product will be received in the marketplace. For example, when Colgate launched the Herbal Colgate
toothpaste, the organisation was unsure about how the consumers would receive the product.
In the growth phase after any launch, it is difficult to predict demand: it may fluctuate widely from month
to month or even week to week. Another example is seen in the usage of electricity. Usually, the demand for
electricity is much higher in winter than in summer. This is known as seasonality of demand. In other
instances, the demand for a product will be steady day after day; an example is the demand for bread. In other
instances, demand might be completely unpredictable, even in the short term, while in certain types of
operations, prediction will be possible in some instances only.
The certainty of demand might also be influenced by how successful advertising campaigns for products
are. A very successful campaign may result in a steep increase in demand in a very short time period. For
example, when Volkswagen advertised its new Beetle design, the demand outstripped Volkswagen’s supply
considerably, and some customers had to wait (for months, in some cases) for their new Beetles.
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10.4.3 Dependent versus independent demand
Dependent demand is called dependent because it is certain that a demand will be placed on an organisation,
depending upon some factor that is known to the organisation. For example, the manager of the engine plant
at a motor vehicle manufacturer, such as BMW, will treat the demand for engines as dependent demand. It is
certain that he or she will know in advance exactly how many engines will be needed in a given period. To
forecast the number of engines, the manager can study the production schedules and determine exactly the
number of engines required. For example, if 200 vehicles are to be produced on a particular day, the manager
knows for certain that 200 engines will be required. Therefore, the demand in this case will be
straightforward and dependent on a known factor (the number of cars to be manufactured). At this stage the
engine plant manager can do his or her planning to ensure a constant supply of engines according to the
schedules. This will be the case for every part needed in the process of assembling a motor vehicle. As a
result, every order placed will be dependent on these figures. That is why, in large manufacturing plants,
schedules are changed only on rare occasions. For this reason, the planning and control function of dependent
demand should concentrate on the consequences that the demand will have upon an organisation’s
operations. An approach that can be employed to meet dependent demand is MRP, as discussed in Chapter 7.
While a motor vehicle assembly plant can predict with some certainty what demand will be, some other
types of operation cannot do so. The reason for this is that they have no forward visibility of demand in the
future. Examples are supermarkets such as Pick n Pay and Spar. Customers do not usually inform these
organisations in advance about the type of products they require. Therefore, these supermarkets usually guess
what the demand will be. Demand decisions are therefore taken on experience and the understanding the
organisations have regarding the business environment in which they operate. The planning and control
decisions are made independently of what is actually happening. These supermarkets run the risk that they
might not be able to satisfy customers’ need for a certain product. That would result in a lost sale: the
customer would go to a competitor to fulfil the need. This, then, is the nature of the beast that is the planning
and control of independent demand. An organisation operating in an independent demand environment will
need a great belief in forecasts, and will have to take risks.
10.5 Scheduling of operations in an organisation: high-volume
scheduling
The way an organisation does scheduling depends on the volume of the output (of both goods and services)
of the organisation. Therefore, scheduling in a job shop differs from scheduling done in a continuous
manufacturing environment. The main types of scheduling we shall discuss are scheduling in a high-volume
system and scheduling in a low-volume system. We begin by discussing high-volume scheduling.
In high-volume scheduling, decisions have to be made regarding the correct workloads for machines and
workers, as well as the sequence in which the jobs are done. In high-volume systems, there is a high degree
of standardisation of the equipment and the jobs undertaken. An example is seen in the motor vehicle
manufacturing industry, where a high degree of standardisation exists. Some parts can fit any type of model.
The main objective of scheduling in this type of environment is to ensure the smooth flow of products
through the process. This will ensure the highest possible utilisation of machines, people and materials. The
discussion above also applies to some operations in the service environment. Standardisation in services can
be seen in the fast-food industry. McDonald’s and Steers, for example, have standardised their foodstuffs to
such an extent that a number can be used to order each type of food – customers know exactly what to expect
if they order a particular number.
High-volume systems are also known as flow systems. A flow system is a high-volume system that has
standardised activities and equipment. Therefore, this type of scheduling is also known as flow-shop
scheduling. Examples of flow systems are those that manufacture motor vehicles, television sets and
appliances. The scheduling of process-type industries also falls under this type of scheduling. Examples of
process-type industries are petroleum refineries (such as Mossgas in Mossel Bay), sugar refineries (such as
those in KwaZulu-Natal and the Lowveld), mines (such as those in the Northwest and Free State provinces),
and fertiliser manufacturers (such as Sasol).
Even in service industries, high-volume systems are found. Some examples are lines in cafeterias at
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workplaces or institutions of learning, and the mass inoculation of babies for polio and other illnesses. Many
of the decisions that influence these systems are made during the design of the systems. These include
decisions impacting on the loading and the sequencing of jobs. Here highly specialised equipment is used, it
is arranged in a particular manner in the organisation, and there is a specific division of labour. All these
decisions are aimed at ensuring a smooth flow of goods, material and customers through the system.
Line balancing is a major tool that can assist during the design phase of the system. Line balancing is a
process in which tasks are assigned to workstations so that all the workstations have approximately the same
amount of work. A workstation is a working place for usually one person, where the person uses special
tools to complete a specialised job. Line balancing is achieved by the allocation of the required tasks to the
correct workstations so as to ensure adherence to technical limitations as well as ensuring the equal division
of work among all workstations. A balanced line will ensure the maximum utilisation of machines, people
and raw materials that will produce the highest possible rate of output.
One of the most important issues that designers of systems should take into account is the dissatisfaction
of workers with the repetition of their work. This is the result of the specialisation of jobs in this type of
system. The only manner in which the high rate of performance can be achieved is by breaking jobs down
into relatively simple tasks. Each of these tasks is allocated to different workers. For example, consider the
workers on a motor vehicle assembly line at an organisation such as GMSA. One worker fits only the wheels
to the car and another worker fits the seats. These workers do their specialised jobs every day for as long as
they are employed by the organisation, and this becomes highly specialised but extremely boring and
monotonous. This results in fatigue and high turnover of staff, which in turn leads to lower productivity and
the disruption of the smooth flow of jobs through the system. One method of remedying workers’ fatigue and
feelings of monotony in specialised jobs is job rotation, whereby a worker works on one job for a period and
then moves on to another job (or several others) for a time, before returning to the original job once again.
Even if systems are designed for the scheduling of jobs, the whole design cannot be devoted to a single
product or service. Consider the example of the Toyota motor vehicle assembly plant. Not one of Toyota’s
lines is solely dedicated to the manufacture of a single model. In fact, many different models are built on the
same line. At Volkswagen the Volkswagen City, for example, would be produced with different engines
available, from a 1 400cc to a 1 800cc model, from the CityROX to the CitySPORT. They all need different
engines and different sized rims, and the sportier models require different paint jobs. Regardless of how small
any change to a product is, that change must be scheduled. Every time a change takes place, different
materials, parts and processing requirements are needed. Therefore, the inputs, the process, the outputs and
the purchasing of raw materials need to be scheduled.
A major concern in scheduling is the possible disruption to the system. Things such as machine
breakdowns, materials not being available, absenteeism or industrial accidents all cause disruptions. It is
virtually impossible to increase the output of the system to compensate for this type of eventuality. The
simple reason for this is that flow systems are designed to produce at a steady rate. A number of strategies
can be employed to ensure the completion of jobs that fall behind when this happens. Two strategies that can
be employed are subcontracting and overtime, though the scheduling of subcontracting at short notice is not
very easy.
The opposite of what is described above can also occur. This type of problem happens when the output
required is less than what the system can produce. However, this type of problem is usually less severe than
the problems discussed previously. It is therefore not necessary to slow the rate of output. It is preferable to
keep the rate of output level per hour, but to produce for fewer hours. For example, the line will produce for
only six hours every day instead of for the usual eight hours.
In flow type organisations, there might be a need for automation and specialised material-handling
equipment. The best operation takes place when there is a highly uniform output. For this reason, the factors
shown in Table 10.3 play a major role in the success of the system.
TABLE 10.3 Success for automation and specialised material handling
FACTOR
CONSIDERATIONS
Minimise quality problems
Quality problems are some of the most disruptive issues of any process. In
most cases, quality problems usually require the process to be shut down.
Once a process is shut down, there is not only a loss of output, but also a
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waste of materials, labour and machine time. The resources that have been
used can never be replaced.
Carry out preventive
maintenance
This will ensure that machines and equipment function properly at all
times. The result will be the smooth operation of the process. There will be
no disruptions to interrupt the flow of work.
Ensure on-time delivery of
materials
When materials are unavailable, this leads to an interruption of the
workflow. This should be avoided. The conundrum is that if too much
inventory is kept, input costs will rise. Therefore an optimal quantity of
inventory must be found. Three methods of ensuring reliable supply of
materials involve the following:
• shortening the delivery lead-times from the supplier
• developing reliable delivery schedules for materials
• properly forecasting materials needs.
Optimise product mixes
A number of techniques are available to assist in this regard. One such
technique is linear programming. This technique will assist managers to
maximise the profit or minimise the cost involved in producing goods and
services.
Repair breakdowns as soon as
possible
The longer the period for which a piece of machinery or equipment breaks
down, the bigger the impact on production and therefore the schedules. For
this reason, organisations need to ensure that all critical spares are
available to repair machinery that is out of order.
Ensure properly designed
products and processes
The most important requirement here is to ensure that the product that has
been designed can be manufactured. If it cannot be manufactured easily,
there will be no smooth flow throughout the process.
DISCUSSION
Airports Company South Africa Limited (ACSA)
Read the situation discussed in the setting-the-scene box at the beginning of the chapter.
Answer the following question: What type of actions do you think may affect the scheduling of take-off and
landing of aircrafts by ACSA?
10.6 Scheduling of operations in an organisation: low-volume system
scheduling
Low-volume system scheduling usually applies to a job-shop type of operation. Here, products are made to
order, so no planning or manufacturing will take place before a confirmed order has been placed with the
manufacturer. A typical example of an engineering or job-shop organisation is one that reconditions motor
vehicle engines. If a head, for example, has to be reworked, the job will differ from engine to engine. More
work will be required on the heads of smaller engines than on those of larger-sized or truck engines. In this
system, one job differs considerably from the next. The needs might differ in as far as processing
requirements and the types of material required for each job are concerned. The time required to process each
job and the time required to set up the machines for each new job will differ, and in general the
unpredictability of the jobs to be received impacts negatively on the scheduling function. All the
above-mentioned considerations make it quite clear why scheduling jobs in a job shop is very complex. In
this type of environment, the following two very basic issues must be addressed:
1 Loading
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2 Sequencing.
10.6.1 Loading
First we discuss aspects of loading. We consider the following issues:
• what loading is
• Gantt charts, which managers use in making decisions about loading
• finite loading as opposed to infinite loading
• horizontal loading as opposed to vertical loading
• forward scheduling as opposed to backward scheduling
• input/output control.
What is loading?
Loading is assigning particular jobs to particular machines and workers. Most organisations have different
work centres where machines are grouped together. When loading takes place, the jobs are assigned to the
correct work centres. If a particular machine in a particular work centre can do only one particular job,
loading does not present a real problem.
The problem arises when one job can be done by more than one machine in different work centres. At
this stage, an operations manager can assign jobs to different work centres. Management should always strive
to minimise set-up time and cost when assigning jobs to work centres and should strive to minimise the idle
time of machines and work centres, and the time it takes to complete a job.
Gantt charts
Gantt charts are charts used to give a visual perspective of what can be expected, and are used widely in
loading and scheduling situations; with this type of aid, a manager can visualise what a schedule will look
like. Henry Gantt pioneered these charts in the early twentieth century for use in industrial scheduling. In the
majority of Gantt charts, a time scale is given on the horizontal axis and the resource scheduled is represented
on the vertical axis. The resources consumed are shown in the body of the chart.
Many managers use Gantt charts before the actual scheduling is done to ensure that they have eliminated
errors before actually scheduling the jobs. Therefore, this method uses trial and error. It cannot be
emphasised enough that managers should do scheduling on paper or in electronic format before actually
scheduling the jobs.
An example of Gantt chart scheduling is the scheduling used at a university when lecture halls are being
assigned. By first doing the scheduling using a Gantt chart, the manager responsible eliminates the possibility
that two lecturers will be assigned the same hall. Another example is the scheduling used in a manufacturing
set-up. All the machines and the jobs to be assigned can be represented on a Gantt chart. The possibility of
assigning more than one job to the same machine is thus eliminated.
Another type of Gantt chart commonly used is a load chart, which shows the idle times and loading
times for a list of work centres. Figure 10.1 depicts a typical example of a load chart.
FIGURE 10.1 A typical Gantt load chart
WORK
CENTRE
MONDAY
TUESDAY
WEDNESDAY THURSDAY
FRIDAY
Drilling
X
X
Job B
X
Job F
Boring
Job A
Job D
X
Job E
M
Milling
M
M
Job E
X
Job G
Deburring
X
Job H
Job D
Job B
X
In the chart in Figure 10.1, the following symbols are used:
• X: No jobs will be loaded on that work centre for that particular day
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•
•
Job A, Job B, etc.: A specific job has been loaded on the work centre and it is fully loaded
M: The work centre is unavailable due to scheduled maintenance being carried out.
On a Gantt load chart, the workload for a particular machine is shown. At the same time, idle time for that
particular machine can also be determined. Therefore, it is important that these types of charts are drawn up
for each work centre. The information that becomes available by using the Gantt chart will assist the manager
to utilise fully each work centre’s potential.
Finite loading
Another important distinction that managers need to make is that between finite loading and infinite loading
of jobs.
When finite loading is undertaken, the actual capacities available at each work centre and the actual time
taken for each job will be taken into account. This will assist management to avoid exceeding the available
capacity. An advantage of scheduling based on finite loading is that management can make a very detailed
projection of the capacity that will be consumed at each work centre. One drawback of finite loading is that
the schedules have to be updated regularly. In some instances, updates have to be done daily because, as
delays occur, the jobs have to be rescheduled to ensure a smooth flow of work through the work centres.
Infinite loading
With infinite loading, jobs are loaded onto a work centre without taking the available capacity at the work
centre into consideration. It is used simply to look at the required capacity, without being too concerned yet
about the feasibility or specific schedule with starting and ending times. One serious disadvantage of infinite
loading is the formation of queues. To try to minimise this disadvantage, managers use the priority rules
shown in Table 10.4 when they use infinite loading. Priority rules are simple data used to determine or
select the order in which jobs are processed.
TABLE 10.4 Priority rules utilised for scheduling
PRIORITY RULE
CONSIDERATIONS
First come, first served (FCFS) Jobs or customers are assigned to machines or servers in the sequence in
which they arrive at the work centre, machine or serving point.
Shortest processing time (SPT) Jobs that take the shortest time to complete are scheduled first at a
particular machine or work centre.
Earliest due date (EDD)
Jobs are done according to the due dates that have been promised to the
customer. The job with the due date closest to the day scheduling takes
place is therefore done first.
Critical ratio (CR)
Jobs with the smallest ratio of time remaining between the processing time
and the due date are processed first.
Slack per operation (S/O)
The average slack time available on each job is determined. This is
calculated by subtracting the remaining time for that particular operation
from the due date. The slack time per operation is calculated by dividing
the slack time by the number of remaining operations. It is important to
note that the operation currently being worked on must also be included in
the calculation.
Rush
The jobs of important customers are done first, and then all the remaining
jobs are done.
Vertical loading and horizontal loading
Regardless of whether finite or infinite loading is used within the organisation, it can be broken down further
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into two types:
• Vertical loading. When an organisation uses vertical loading, jobs are loaded onto a work centre job by
job. Vertical loading is usually used in conjunction with infinite loading, as this type of loading does not
take the capacity of any work centre into account.
• Horizontal loading. When an organisation uses horizontal loading, the job with the highest priority is
loaded first. Thereafter, the job with the second highest priority follows. This pattern will carry on until
the job with the lowest priority is loaded last. Whereas vertical loading can be associated with infinite
loading, horizontal loading can be associated with finite loading.
The result of horizontal loading might be that a job is kept waiting at a work centre even though the work
centre is idle. The reason for this is that the machine is kept idle for a job with a higher priority, which is still
being worked on at another work centre.
This scenario will not occur if vertical loading is used. Even though a higher-priority job might arrive at
any moment, the work centre will be fully loaded with the jobs already at it. If and when the higher-priority
job arrives, it will have to wait for the next available machine.
It may be argued that horizontal loading takes a global view of loading and vertical loading takes a local
view. The factors shown in Table 10.5 are indicators used to determine which method of loading should be
used.
TABLE 10.5 Indicators utilised to resolve which method of loading to apply
•
•
•
•
•
•
The cost involved for the higher-priority job to wait its turn at the work centre
Any disruptions to the process that might occur if any one of the methods is preferred above the others
The cost of idle time at the work centre
The number of jobs that flow through the work centre
The number of work centres the job has to flow through
The chances of finding other jobs if a customer cancels a job because the job had to wait its turn at the
work centre
From the above, it is quite clear that the decisions that have to be made are complex. Because infinite loading
allows the overloading of work centres, managers have to be willing to make unpopular decisions, such as the
following four:
1 Move jobs to other similar work centres
2 Move jobs to other time periods at the same work centre
3 Require the workforce to work overtime
4 As a last resort, subcontract the excess jobs.
Options three and four are the only two options that increase capacity in real terms, while the first two simply
mean a different schedule.
By using finite loading, a fixed upper limit is put on the available capacity. For example, a large medical
practice might decide to have a fixed number of doctors available throughout the day. Whatever that number
of doctors is will form the upper limit of the available capacity of the doctors to see patients. A similar
situation might exist in a manufacturing concern in which all the jobs have to pass through one particular
work centre where a highly specialised machine is in operation. This type of machine is usually operated 24
hours a day. As this is the upper limit of capacity for this machine, finite loading would be the best method to
use to load the machine.
Forward scheduling and backward scheduling
Before scheduling can be attempted, a decision about the two general methods available to achieve this needs
to be made. The two general methods are:
• Forward scheduling. When forward scheduling is done, scheduling moves forward from a certain point
in time. The usual departure point is the date of receipt of the order. Scheduling thus is undertaken from
receipt date to delivery date.
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•
Backward scheduling. With backward scheduling, the scheduling is done from the due date backwards.
When using either forward scheduling or backward scheduling, a manager can make use of a schedule chart
to keep track of all the jobs that have been scheduled. A schedule chart is another type of Gantt chart. It
shows the jobs or orders in progress and also indicates whether or not these jobs or orders are on schedule.
On the vertical axis, all the current jobs in process are represented. On the horizontal axis the available time
is represented. At one glance, a manager can determine which of the jobs are on schedule and which are
behind schedule.
Even though nobody can dispute the advantage that can be derived from using Gantt charts, they
unfortunately have a number of limitations. These are:
• They need to be updated on a regular basis – if this is not done, the chart is not current and cannot be used
for the purpose for which it was intended.
• They do not include or show the cost involved in any alternative method of scheduling.
• They do not show that the processing times of the same job may vary from one work centre to the next.
For example, work centre A might be able to process the job faster than work centres B and C are able to
do. The evaluation of alternatives, therefore, becomes more complex.
Even though it might not be the best method for managers to use, the Gantt chart is still a popular tool used in
industry for scheduling.
Input/output (I/O) control
We now discuss input/output (I/O) control, which is an effective system that allows personnel from
production to manage workflow through work centres by keeping track of all the jobs added and completed
by a particular work centre. In any scheduling environment, it is very important to measure queue lengths and
throughput rates at work centres, and I/O control can be used for this purpose. If I/O control is used, the time
that jobs or people spend in queues (also known as waiting lines) will be strictly controlled. Queuing can
refer to jobs or people waiting in a queue to be served. If no control is in place the result of queuing is that
demand outstrips capacity because a job spends so much time in the queue that a backlog forms at a work
centre. This may result in a particular work centre being overloaded. In contrast, work might arrive more
slowly than was originally anticipated. Therefore, the work centre will be underutilised.
Neither of the two scenarios discussed above is advantageous for an organisation. The ideal situation is to
strike a balance between the two. If this can be achieved, capacity at work centres can be used more
effectively and efficiently.
Below we indicate how I/O control works and show the calculations required by the use of I/O control.
Table 10.6 shows a typical example of an input control report and Table 10.7 shows a typical example of an
output control report. In both these reports, each deviation is calculated by simply subtracting the actual
output from the planned output. The cumulative deviation is calculated by adding each successive deviation
to the total of the deviations preceding it.
TABLE 10.6 A typical example of an input report
PERIOD (AN HOUR, DAY, WEEK, ETC.)
1
2
3
4
5
6
Planned
1 000
1 000
900
900
1 000
900
Actual
1 500
950
800
880
930
940
Deviation
+500
+50
–100
–80
+70
+40
Cumulative
deviation
+500
+550
+450
+370
+440
+480
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TABLE 10.7 A typical example of an output report
PERIOD (AN HOUR, DAY, WEEK, ETC.)
1
2
3
4
5
6
Planned
1 000
1 100
1 000
950
1 000
1 200
Actual
1 000
1 000
950
800
1 100
1 150
Deviation
0
–100
–50
–50
+100
–50
Cumulative
deviation
0
–100
–150
–200
–100
–150
Each of the reports (Tables 10.6 and 10.7) shows whether there is a backlog that has to be processed. If the
cumulative deviation is negative, it means that actual output is behind and that orders need to be expedited if
the due date is to be reached. A positive number would indicate that the workstation is ahead of schedule. It
is clear from the figures in these tables that the manager can now plan according to the deviation between the
planned and actual performance of a particular work centre. These charts can assist the manager in
determining the problems that exist at the work centre.
10.6.2 Sequencing
We now discuss sequencing, which is the second very basic issue, in addition to loading, that must be
addressed in low-volume system scheduling. In discussing aspects of sequencing, we consider the following:
• what sequencing is
• basic steps in sequencing
• priority rules
• some assumptions applied when sequencing rules are used
• how effective sequencing can be measured by performance measurements
• how to do sequencing utilising the different priority rules.
What is sequencing?
Whereas loading determines the workload of machines or work centres, sequencing determines the specific
machines or work centres to be used. Sequencing determines the order in which machines will be used.
Basic steps in sequencing
Firstly, sequencing determines the order in which a job will be handled by different work centres. Thereafter,
sequencing determines the path the jobs will follow within a particular work centre from machine to machine.
In the ideal situation where work centres are not overloaded and all jobs require exactly the same
processing time, sequencing is not difficult at all. However, if work centres tend to be heavily loaded and
jobs do not have the same processing times, the order in which these jobs are sequenced becomes of the
utmost importance. This is especially true when a large number of jobs of different lengths are processed.
Sequencing determines which job is processed first, second, third and so on. It impacts heavily on the
satisfaction of customers regarding the dates on which their jobs are delivered.
Priority rules
It is at this stage that the priority rules that we discussed earlier will come into effect. These priority rules are
simple to use. Most of these rules are applied on a trial-and-error basis. One of the most basic assumptions of
priority is that the cost of set-up is independent and is not influenced by the sequence of the schedule through
work centres or machines. The due dates and processing times for every job become very important
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information. That is why, in these situations, managers use job times: job times include set-up and
processing times. If all the jobs that require the same set-up are scheduled together, this leads to a reduction
in set-up times. Unfortunately, the priority rules discussed here do not take this into account.
The rules can be divided into either local or global rules:
• Local rules are those rules that take into account circumstances only for local conditions in a work centre
or at a particular machine. FCFS, SPT and EDD are local rules. Local rules are used more frequently than
global rules because they require less effort. Local rules can be used with great success in operations in
which bottlenecks occur.
• Global rules are those rules that take into account circumstances at multiple work centres or machines.
Critical ratio (CR), S/O and rush are global rules. What complicates the use of global rules is the fact that
all the jobs do not require the same processing times. Therefore, managers use different sequencing rules
for different jobs at different work centres.
Some assumptions applied when sequencing rules are used
When sequencing rules are used, some assumptions need to be made. The list that follows details these
assumptions:
• The number of jobs is known. Once processing of the sequenced jobs has started, no new jobs arrive.
Cancellation of jobs is not allowed.
• No machine breakdowns, accidents or worker absenteeism will take place. Therefore there will be no
interruptions.
• The processing times used are seen as deterministic rather than as variable.
• Regardless of the order in which jobs are sequenced, set-up times remain independent.
Measuring the effectiveness of sequencing
How effective sequencing is can be measured by performance measurements. The following performance
measures are the most frequently utilised:
• Job flow time. This is the length of time that a job spends at a work centre or machine. Not only actual
processing time is included, but also waiting time, transportation time, waiting time to repair breakdowns,
and so forth. Therefore job flow time can be expressed as the time that elapses from the arrival of the job
at a work centre or machine until the job leaves that work centre or machine. Managers can determine the
average flow time for a particular work centre or machine by dividing the total time taken for all jobs by
the number of jobs at that work centre or machine.
• Job lateness. This is the length of time by which the date the job was promised to a customer will be
exceeded. In simpler terms, this is the difference between the due date and the actual delivery date.
Another term that can be used for job lateness is ‘tardiness’. In this case, only jobs that are in actual fact
late are included in the calculations. If any job is early, a zero will be allocated to that job, meaning that it
is not late.
• Makespan. This is the time required to complete a group of jobs. This is a simple calculation done by
making use of the time that elapses between the times that the first job of that group arrives at the work
centre or machine and the time the last job in that group is completed.
• Average number of jobs. All the jobs that are in a work centre or at a machine at any given time are seen
as WIP and classified as WIP inventory. To compute the average work in progress, the following
equation can be utilised:
How to do sequencing using the different priority rules
WORKED EXAMPLE
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The following worked example shows how sequencing is done using the different priority rules. Imagine
that you have been appointed as the operations manager for the Super Widget Company, which
manufactures widgets used in various other products.
As it is operating in a very competitive environment, Super Widget cannot afford not to meet its target
dates. You have to sequence six jobs through a work centre. The six jobs waiting at the work centre and
their processing times are given in Table 10.8.
TABLE 10.8 Job information
JOB NUMBER
PROCESSING TIME IN DAYS DUE DATE IN DAYS
1
2
13
2
14
22
3
10
10
4
16
23
5
11
48
6
18
53
Required
Assume that the order of arrival for the jobs is as shown in Table 10.8. As the operations manager, you are
required to determine the sequence, average flow time, average days late and average number of jobs at the
work centre. You have to make use of the following sequencing rules:
1 FCFS
2 SPT
3 EDD.
Solution 1. The first solution to be computed is for the FCFS rule. The FCFS rule is one of the easiest rules
to schedule – the sequence will be exactly as given in Table 10.8, namely 1, 2, 3, 4, 5 and 6. The
effectiveness measures are computed as depicted in Table 10.9.
TABLE 10.9 FCFS performance
JOB NUMBER
PROCESSING
TIME (1)
FLOW TIME (2)
DUE DATE (3)
DAYS LATE
(2–3)
1
2
2
13
0
2
14
16
22
0
3
10
26
10
16
4
16
42
23
19
5
11
53
48
5
6
18
71
53
18
Total
71
210
58
The effectiveness measures of this schedule are calculated as follows:
• Average flow time = 210 ÷ 6 = 35 days
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•
•
Average tardiness = 58 ÷ 6 = 9.7 days
Average number of jobs = 2.96 (Makespan = 71 days, therefore average number of jobs at the work
centre = 210 ÷ 71 = 2.96)
Solution 2. The second solution to be computed is for the SPT rule. The job sequence for SPT is 1, 3, 5, 2,
4 and 6 (see Table 10.10).
TABLE 10.10 SPT performance
JOB NUMBER
PROCESSING
TIME (1)
FLOW TIME (2)
DUE DATE (3)
DAYS LATE
(2–3)
1
2
2
13
0
3
10
12
22
0
5
11
23
10
13
2
14
37
23
14
4
16
53
48
5
6
18
71
53
18
Total
71
198
50
The effectiveness measures of this schedule are calculated as follows:
• Average flow time = 198 ÷ 6 = 33 days
• Average tardiness = 50 ÷ 6 = 8.33 days
• Average number of jobs = 198 ÷ 71 = 2.79
Solution 3. The third solution to be computed is for the EDD rule. The job sequence for EDD is 5, 1, 3, 2, 4
and 6 (see Table 10.11).
TABLE 10.11 EDD performance
JOB NUMBER
PROCESSING
TIME (1)
FLOW TIME (2)
DUE DATE (3)
DAYS LATE
(2–3)
5
11
11
10
1
1
2
13
13
0
3
10
23
22
1
2
14
37
23
14
4
16
53
48
5
6
18
71
53
18
Total
71
208
39
The effectiveness measures of this schedule are calculated as follows:
• Average flow time = 208 ÷ 6 = 34.67 days
• Average tardiness = 39 ÷ 6 = 6.5 days
• Average number of jobs = 208 ÷ 71 = 2.93
The results of these calculations are summarised in Table 10.12.
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TABLE 10.12 Summary of performances
RULE
AVERAGE FLOW
TIME
AVERAGE
TARDINESS
AVERAGE NUMBER
OF JOBS
FCFS
35
9.7
2.96
SPT
33
8.33
2.79
EDD
34.67
6.5
2.93
As illustrated in the example, depending on the priorities inside the company, different rules perform better
or worse. It is clear that in the example, the first-come-first-served (FCFS) rule constantly has the highest
averages. Normally, the FCFS rule is one of the worst rules to use in terms of tardiness and WIP or queue
length, but it still is probably the only one used where people service is concerned, for instance the service at
the check-out tills of the local supermarket. For example, if you only have one item in your basket, with five
people all with trolleys in front of you, system-wide performance rules would indicate that you should be
served first, yet chances are that no one will allow you to jump the queue.
If customer service in terms of due date performance is important, then the EDD rule is best, while more
internal measures like WIP favour the SPT rule.
10.7 Limitations of rule-based dispatching systems
As can be seen from the computations given earlier, all the scheduling techniques that have been utilised are
rule based. Unfortunately, these techniques have a number of serious limitations:
• Scheduling is dynamic, which means that change is inevitable. For this reason the rule used needs to be
revised at regular intervals to meet changes in the process, equipment and product mix.
• These rules are static. They cannot look forward or backward. For this reason, bottlenecks or idle
equipment in other work centres cannot be seen by any of the other work centres.
• Scheduling rules are incapable of seeing beyond due dates. The scheduling rules are unable to distinguish
the relative importance of two orders with the same due dates. In the eyes of the scheduling rules, both
are equally important.
10.8 Constrained work centres
Operations managers need to identify the constraints on any process, or the things that will impact negatively
on the throughput rate of the process. The theory of constraints (TOC) represents the body of knowledge that
deals with all issues that limit an organisation’s ability to meet its obligations. We have already alluded to
TOC in previous chapters, but insofar as scheduling is concerned, there are two types of constraints:
• Physical constraints. These might include availability of employees, raw materials and suppliers.
• Non-physical constraints. These might include procedures, employee morale and employee
empowerment.
Both of these constraints can occur at a work centre and need to be dealt with, as bottlenecks in any type of
operation are constraints that impact on the effective and efficient operation of any process. As an example,
assume that a factory has four different assembly lines for four different components. Each of the
components will follow a different assembly process on the different lines, but all these components have one
common process, namely heat treatment. Therefore, all the different assembly lines will converge at the
heat-treatment plant. The result will be a bottleneck, as the heat-treatment plant does not have the capacity to
handle all the components – it limits the output of not only that work centre, but all of the lines.
Why does a bottleneck occur? The main reason is that the work centre at which the bottleneck forms has
less capacity than the work centres before and after it. Regardless of how well a process has been designed,
the process does not remain balanced for long. By changing product mixes often, and by changing volumes
and products, bottlenecks are created and often occur in more than one place over a period of time.
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Process-focused operations such as hospitals, airlines, factories and restaurants are very prone to the
formation of bottlenecks. For example, in a manufacturing process there is an operation that processes work
at a slower rate than the rest of the operations in the process. Therefore, the slower operation will cause work
to pile up in front of the slower operation. The operations that follow after the bottleneck will find that they
do not have enough jobs to process due to the slower operation.
The following are the various methodologies available to deal with bottlenecks:
• Capacity at the bottleneck constraint can be increased. To achieve this objective, capital investment is
required, and more labour needs to be employed. This solution requires a reasonable time span to
implement fully.
• A bottleneck can be managed through the cross-training of employees to ensure that sufficient labour is
available at the bottleneck operation.
• Work normally scheduled for the bottleneck can be rerouted to similar operations or can be routed to
subcontractors.
• Non-value adding operations, such as inspections and product tests, have to be situated before the
bottleneck operation. This results in the rejection of products of inferior quality before these products are
allowed into the bottleneck. Therefore, valuable time is not wasted on such products.
• Work should be scheduled in such a manner that the throughput rate matches the capacity available in the
bottleneck operation. The result will be that less work is scheduled for non-bottleneck operations.
From the theory of constraints methodology the drum, buffer and rope methodology has been developed to
manage bottleneck operations more efficiently. The bottleneck or drum drives the throughput rate of that
particular process. The drum beat is represented by the schedule that has been developed for the process. It
can be seen as the pace at which the particular process will produce. The buffer is represented by the
inventory that is held in the process. The inventory ensures that capacity within the process is optimally
utilised. The rope represents the synchronisation of the work within the process. The rope is the manner in
which the products are moved through the entire process.
10.9 Services scheduling
The scheduling of services differs from the scheduling of the production of goods in the following ways:
• The main emphasis in manufacturing is the scheduling of materials, but in services it is the personnel who
must be scheduled.
• There is hardly any inventory in a service environment.
• Services are highly labour intensive and therefore the staffing levels might differ from time period to time
period.
As a result of the above, it is a constant battle to ensure that labour capacity meets customer demand. In most
service industries, demand is managed by making use of an appointment system. Fluctuations are a normal
occurrence in any service environment, and can be managed to a certain degree by making use of an
appointment system (as in a doctor’s practice) or a reservation system. This type of system is used in hotels,
restaurants and motor vehicle rental businesses. The FCFS sequencing rule is usually used for scheduling in
the service sector, even though we showed in the example that it is a very inefficient rule in terms of
operational efficiency – it is, however, regarded as fair to everyone. By employing extra part-time workers,
managers can increase the capacity of a service. This is usually done in high-demand periods.
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DISCUSSION
Developing a work schedule for Peter Black’s restaurant
Peter Black wanted to start a restaurant and wanted to know what the most important part of running a
restaurant would be. He soon found out that developing a staffing schedule was essential to operating the
restaurant. This was due to the fact that a schedule not only delineated which employees would work the
daily shifts, but it was also a crucial way to anticipate the daily sales, control labour costs and ensure that
all parts of the restaurant have the help they need to run smoothly. The most important goals of the
restaurant schedule included guest satisfaction and controlled labour costs. However, Peter was still
working at finding the right staffing balance to ensure quality of service provided to his guests at the
restaurant, and keeping labour costs under control.
The main issue Peter had to avoid was the temptation to overstaff, which could help to provide
improved attention and service to guests. He soon realised that this would result in labour costs and
diminished profits. Cutting staff to the extent that the restaurant would be understaffed was not an option,
as it would not have been fair to his staff to expect them to work longer shifts, resulting in them deciding to
leave. Peter soon realised that finding the balance and the perfect staffing levels for his establishment
depended on the people he hired, the restaurant’s patronage, his budget allowances and a few other factors.
Answer the following questions:
1 Give Peter advice on which factors he should consider in developing a work schedule.
2 Do you think that developing a schedule for a restaurant is different to developing a schedule for a
manufacturing company? Why?
CLOSING EXAMPLE
The Department of Home Affairs is to roll out a new queue system at its branches
The Department of Home Affairs is in the process of rolling out a new electronic queue management
system, which will involve visitors to branches receiving numbers according to their place in a queue. The
new system has already helped to reduce the time that members of the public spend waiting in queues at the
branches where it has been implemented.
The system will also assist the department by feeding back information such as how long people waited
in queues and how many people visited each branch. The department will also have programmes through
learning centres aimed at developing their work ethos, customer interaction, as well as equipping them with
all the skills they need to deliver an accurate and effective service. A large number of the people working in
many of the rural offices come straight out of school with little work experience. The learning centres will
help to prevent situations where actions can be considered as rudeness, due to a person feeling out of his/her
depth.
(SOURCE: SANews. 2010. http://www.sanews.gov.za/south-africa/home-affairs-roll-out-new-queue-system-0 )
Summary
We began this chapter by defining scheduling and discussing the importance of short-term scheduling. We
then explored scheduling criteria and considered the influence of supply and demand on scheduling. We
discussed supply uncertainty, demand uncertainty, and dependent versus independent demand, and
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considered high-volume scheduling in detail. We went on to discuss low-volume system scheduling. We
began by considering loading, looking at Gantt load charts, infinite and finite loading, vertical and horizontal
loading, the priority rules used by managers when they use infinite loading, indicators used to determine
which method of loading to use, and decisions managers need to make regarding loading. We examined how
to do the calculations associated with I/O control and looked at typical examples of an input control report
and an output control report. We then discussed sequencing as the second main issue managers have to deal
with when doing low-volume system scheduling. We explored the basic steps in sequencing and showed the
impact of using different priority rules. We considered the limitations of rule-based dispatching systems and
ended the chapter with a discussion of constrained work centres and services scheduling.
Key terms
Backward scheduling: The scheduling is done from the due date backwards.
Constraints: The things that will impact negatively on the throughput rate of the process.
Finite loading: The actual capacities available at each work centre and the actual time taken for each job
are taken into account.
Flexible manufacturing system (FMS): A group of machines that handles intermittent processing
requirements and produces various products that are similar.
Flow system: A high-volume system that has standardised activities and equipment.
Forward scheduling: Scheduling moves forward from a certain point in time.
Gantt chart: Charts used to give a visual perspective of what can be expected; used widely in loading and
scheduling situations. With this type of aid, a manager can visualise what a schedule will look like.
Global rules: Rules that take into account circumstances at multiple work centres or machines.
Horizontal loading: The job with the highest priority is loaded first.
Infinite loading: Jobs are loaded onto a work centre without taking the available capacity at the work
centre into consideration.
Job flow time: The length of time that a job spends at a work centre or machine.
Job lateness: The length of time by which the date the job was promised to a customer will be exceeded.
Job time: Includes set-up and processing times.
Line balancing: A process in which tasks are assigned to workstations so that all the workstations have
approximately the same amount of work.
Load chart: Shows the idle times and loading times for a list of work centres.
Loading: Assigning particular jobs to particular machines and workers.
Local rules: Rules that take into account circumstances only for local conditions in a work centre or at a
particular machine.
Non-physical constraints: These constraints might include procedures, employee morale and employee
empowerment.
Physical constraints: These constraints might include availability of employees, raw materials and
suppliers.
Priority rules: Simple data used to determine or select the order in which jobs are processed.
Queuing: Can refer to jobs or people waiting in a queue to be served.
Schedule chart: Shows the jobs or orders in progress and also indicates whether or not these jobs or orders
are on schedule.
Sequencing: Determines the specific machines or work centres to be used, as well as the order in which
machines will be used.
Vertical loading: Jobs are loaded onto a work centre job by job.
Work centre: An assigned working space where machines are grouped together.
Workstation: A working place for usually one person, where the person uses special tools to complete a
specialised job.
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Review questions and activities
1 Distinguish between the different scheduling criteria for short-term scheduling.
2 Explain the influence of supply and demand on scheduling.
3 Identify the factors that play a major role in the success of flow/high- volume systems and what the
considerations are for each factor.
4 What are Gantt charts and what are their uses in scheduling?
5 Identify and discuss the performance measures used to measure the effectiveness of sequencing.
6 Understand and create sequencing diagrams for work centres.
7 Describe the limitations of rule-based dispatching.
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CASE STUDY: GAUTRAIN SCHEDULING EXPERIENCING SOME
STRAINS
The Gautrain is a proud landmark of Gauteng and emblematic of the immense economic potential and
progress of the province. Commuters must be assured of a safe, accessible, reliable and efficient public
transportation network.
However, the following factors have played a role in dissatisfaction with the services and schedules of
the Gautrain:
Available parking
An average of 39 000 passengers per day use the service, but there is parking space for only 10 000
vehicles at the various Gautrain stations. Many commuters, frustrated at long queues and signal delays, had
to go back to the roads they wanted to avoid. Bombela, the company that operates the Gautrain, confirmed
that there were problems with parking, especially at the Rhodesfield, Centurion, Hatfield and Pretoria
stations. They have introduced Gautrain buses from the start to address the parking problems.
Gautrain bus routes and schedules
The peculiarity of the Gautrain bus routes and the inconsistent bus schedules also frustrate commuters and
contribute to the parking overcrowding problem. Bombela’s claim that the bus network is a viable
alternative to the parking problem is short-sighted. The revision of the system’s reach is long overdue, by
admission of the Gautrain Management Agency.
Overcrowding on peak-hour trains
Continued significant overcrowding on peak-hour trains remains a great concern with passengers piling
into carriages contesting for limited seating and standing room. The packed trains during peak hours pose a
safety risk and are a disaster waiting to happen.
Cable theft from railway service
Usually travelling at a speed of 160 km/h, the Gautrain could only move at a speed of 30 km/h because of
the 370 metres of stolen signalling cable between Midrand and Samrand on 20 March 2013. Several other
routes were also disrupted, as the signalling cable is an essential part of ensuring safe railway movements.
According to Bombela Concession Company (Pty) Ltd, the cables were stolen overnight. Bombela
indicated that they have implemented all reasonable measures, including deploying additional rapid
response teams to ensure the security of the rail reserve. They appealed to the government to solve the
problem of cable theft as its ‘consequential costs to the economy are enormous’. In spite of these problems,
the Gautrain is still able to run on schedule and they are now working on solutions regarding the above
issues.
(SOURCE: Developed from: Times Live, 2012, Democratic Alliance, 2012 & Humanipo, 2013. http://www.timeslive.co.za
/thetimes/2012/10/10/gautrain-under-strain, http://da-gpl.co.za/?p=1376 and http://www.humanipo.com/news/4761/SA-cable
-theft-hits-Gautrain-causes-delays)
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Case study questions and activities
1
2
3
Discuss why proper scheduling is important for the Gautrain.
Discuss the influence of supply and demand on the scheduling of the Gautrain buses.
Discuss the type of scheduling that could be applied by the Gautrain Management Agency in
scheduling trains, and what factors should be considered during this scheduling.
References
1 Airports Company South Africa Limited. n.d. Airports Company South Africa Limited (ACSA). [Online:
see websites at the end of this chapter]
2 Bicheno, J. & Catherwood, P. 2005. Six-sigma and the quality toolbox for service and manufacturing.
Buckingham: PICSIE Books.
3 Chase, R.B., Jacobs, F.R. & Aquilano, N.J. 2006. Operations management for competitive advantage,
11th ed. Maidenhead: McGraw-Hill/Irwin.
4 Cochon, G. & Terwiesch, C. 2006. Matching supply with demand – An introduction to operations
management, international edition. New York: McGrawHill/Irwin.
5 Davis, M.M. & Heineke, J. 2005. Operations management – Integrating manufacturing and services, 5th
ed. Boston: McGraw-Hill/Irwin.
6 Davis, M.M., Aquilano, N.J. & Chase, R.B. 2003. Fundamentals of operations management, 4th ed.
Boston: McGraw-Hill/Irwin.
7 Democratic Alliance. 2012. Parking problems least of Gautrain strains. [Online: see websites at the end
of this chapter]
8 Dilworth, J.B. 2000. Operations management – Providing value in goods and services, 3rd ed. London:
Harcourt College Publishers.
9 Finch, B.J. 2008. Operations now – Profitability, processes, performance, 3rd ed. New York:
McGraw-Hill.
10 Gaither, N. & Frazier, G. 2002. Operations management, 9th ed. Cincinnati, Ohio:
South-Western/Thomson Learning.
11 Heizer, J. & Render, B. 2006. Principles of operations management, 6th ed. Upper Saddle River, N.J.:
Pearson Prentice Hall.
12 Hill, T. 2005. Operations management, 2nd ed. Basingstoke: Palgrave Macmillan.
13 Humanipo. 2013. SA cable theft hits Gautrain, causes delay. [Online: see websites at the end of this
chapter]
14 Jackson, M.C. 2003. Systems thinking – Creative holism for managers. Hoboken, N.J.: John Wiley and
Sons.
15 Jacobs, F.R. & Chase, R.B. 2008. Operations and supply management: The core, international edition.
New York: McGraw-Hill/Irwin.
16 Knod, E.M. & Schonberger, R.J. 2001. Operations management: Meeting customers’ demands, 7th ed.
New York: McGraw-Hill.
17 Krajewski, L.J., Ritzman, L.P. & Malhorta, M. 2007. Operations management – Processes and value
chains, 8th ed. Harlow: Pearson Education.
18 Mullins, L.J. 2005. Management and organisational behaviour, 7th ed. New York: Financial Times,
Prentice Hall.
19 Reijers, H.A. & Mansar, L.S. 2005. ‘Best practices in business process redesign: An overview and
qualitative evaluation of successful redesign heuristics’, The International Journal of Management
Science, 33, 283–306.
20 Russell, R.S. & Taylor III, B.W. 2003. Operations management, 4th ed. Harlow: Pearson Education.
21 SA News. 2010. Home Affairs to roll out new queue system. [Online: see websites at the end of this
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chapter]
22 Schroeder, R.G. 2004. Operations management – Contemporary concepts and cases, 2nd ed. London:
McGraw-Hill/Irwin.
23 Slack, N., Chambers, S. & Johnson, R. 2004. Operations management, 4th ed. Harlow: Pearson
Education.
24 Slack, N., Chambers, S., Johnson, R. & Betts, A. 2006. Operations and process management – Principles
and practices for strategic impact. Harlow: Pearson Education.
25 Stevenson, W.J. 2007. Operations management, 9th ed. London: McGraw-Hill.
26 Times Live. 2012. Gautrain under strain. [Online: see websites at the end of this chapter]
27 Vollman, T.E., Berry, W.L., Whybark, D.C. & Jacobs, F.R. 2005. Manufacturing planning and control
systems for supply chain management, 5th ed. New York: McGraw-Hill.
28 Waller, D.L. 2003. Operations management – A supply chain approach, 2nd ed. London: Thomson
Learning.
29 Wild, R. 2002. Operations management, 6th ed. London: Continuum.
Websites
Visit the websites below.
http://southafrica.smetoolkit.org/sa/en?gclid=CLCV_bC6nrMCFU3HtAodHScABw
www.acsa.co.za/home.asp?pid=8372
www.decisionsciences.org/DecisionLine/Vol40/40_5/dsi-dl40_5books.pdf
www.enotes.com/operations-scheduling-reference/operations-scheduling
www.pathfindersolutions.co.za/index.php?page=operations_schedule
www.sanews.gov.za/south-africa/home-affairs-roll-out-new-queue-system-0
www.soteica.com/descargas/S_SOM_brochure.pdf
www.teamquest.com
The websites below were last accessed on the dates given:
http://da-gpl.co.za/?p=1376 (10 April 2013)
www.asprova.com (May 2008)
www.humanipo.com/news/4761/SA-cable-theft-hits-Gautrain-causes-delays (10 April 2013)
www.ilog.com (May 2008)
www.mech.kuleuven.ac.be/pma (May 2008)
www.production-scheduling.com (May 2008)
www.timeslive.co.za/thetimes/2012/10/10/gautrain-under-strain (10 April 2013)
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part
04
Continual improvement
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CHAPTER 11
Lean systems strategy for operations
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
Explain what the prerequisites for a lean system are
Explain the success factors for lean implementation
Understand and describe the different strategies to implement lean manufacturing
Understand and explain the seven most common wastes in manufacturing
Understand and explain the different costs linked to wastes in manufacturing
Identify the elements of a lean system
Understand and discuss the different techniques that can be used to implement lean manufacturing
Identify the success factors necessary for lean manufacturing.
CHAPTER outline
11.1
11.2
11.3
11.4
11.4.1
11.4.2
11.4.3
11.5
11.6
11.7
11.8
11.8.1
11.8.2
11.8.3
11.8.4
11.8.5
11.8.6
11.8.7
11.8.8
11.9
Introduction
The methodology of lean production
Lean objectives
Strategies, tactics and measures to achieve lean status
Penetration strategy
Stabilisation strategy
Growth strategy
The seven most common wastes
Costs incurred as a result of waste
Achieving lean status
Lean techniques
Standard times
Kaizen
Matching demand and production
Kanban
Standardisation
U-shaped production lines
Involvement of employees
5S methodology
Success factors for lean implementation
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
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SETTING THE SCENE
Justice dept wins award for ‘lean thinking’
The Department of Justice and Constitutional Development (DoJ & CD) has been awarded the Lean
Institute Africa Diamond Award 2012 in recognition of their efforts to improve service delivery. In 2011
the DoJ & DC piloted a project, which used lean management to improve service delivery in child
maintenance administration at a district court. The DoJ & CD took a further step towards improved service
delivery in 2012 by introducing lean practices as part of their maintenance turnaround strategy in nine
district courts around the country.
Lean thinking is a management system that focuses on continuous improvement of service provision
by eliminating waste and poor flow through work processes. The lean practices used in the project included
taking measurements on daily operational performance trends, displaying the data visually in graphs to
check whether standard work is done, as well as weekly meetings by frontline staff to review performance
and take corrective actions where necessary. Marked improvements were made in waiting time. At one
court, delays in paying out monthly child maintenance were reduced by 66% from the first to the third
quarter of 2012.
Dr Anton Grütter, Director: Learning Development of the Lean Institute Africa at the University of
Cape Town’s Graduate School of Business described the process as a change from traditional management
to a management approach that relied on systematic, evidence-based problem-solving. ‘It is not merely a
mind-set change, but also a switch to a new set of management behaviours, which is never easy, but the
first steps have been taken at the Department of Justice and Constitutional Development’.
‘Lean management is a proven method to improve operational performance, provided the new work
behaviours are maintained, which could take years to institutionalise. That the department is willing to
undergo such a challenging transformation process is very admirable,’ he said.
Russel Mudzunga, a maintenance officer at the Moretele magistrate’s court, said the project helped the
maintenance staff to identify a number of challenges and provided specific processes to follow. ‘We had a
serious shortage of maintenance and investigation officers, but since the project started, the maintenance
office has improved dramatically,’ he said. The office has now been equipped with two staff members who
are legally qualified to assist. ‘The pilot helps in terms of recording and updating monthly reports. It is also
simple to see how many orders are obtained, cases opened and applications made via the system,’ added Mr
Mudzunga.
Amongst other things to be achieved in the 2012/13 financial year is the development of monitoring
tools to measure progress on implementation of the project, as well as conducting project evaluation for the
nine pilot courts. The team will strive to roll out mediation services in maintenance courts and facilitate the
appointment of more maintenance and maintenance investigating officers.
(SOURCE: Developed from: Msungwa, G. 2012. Maintenance turn-around project continues to bear positive results. http:/
/www.justice.gov.za/docs/articles/2012-mnt-strategy.html and SANews. 2012. Justice dept wins award for ‘lean thinking’ http
://www.sanews.gov.za/south-africa/justice-dept-wins-award-lean-thinking)
11.1
Introduction
The environment in which organisations operate today has changed immeasurably. The lean philosophy is the
most important development in operations and supply chain during the last half-century. Scarce resources are
becoming scarcer and organisations have to utilise them prudently. A systematic approach is required to
manage and optimise these scarce resources. The nature of the competitive environment in which
organisations operate makes it compulsory for organisations to produce more with fewer resources. Lean
production occurred because, due to the increase in competition, manufacturing and services organisations
realised that wastes in operations impact negatively on their bottom line. Consequently, organisations
emphasise low inventory holding, efficient processes, high quality and effective use of all resources and this
has evolved into an enterprise-wide framework known as lean systems. It is a methodology that can be
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utilised in tandem with other methodologies to achieve the desired process improvements that have become
imperative in the 21st century. The methodology was originally developed in Japan as just-in-time (JIT).
By the 1990s the original methodology was further refined by the Toyota Motor Corporation, and the
Toyota production system (TPS) was the result of lean production. The focus of the lean methodology is the
elimination of any form of waste from a process or processes. As a result, any operation or task that is
superfluous to the process must become a target for improvement or even elimination, as every operation and
task must add value to the process.
The opinion that the methodology of lean production is mainly utilised to manage inventory is erroneous.
Although the lean methodology was developed for the manufacturing sector, it has become popular with the
service sector too, as is evident from the introductory setting-the-scene case study.
Lean status can be achieved through the elimination of waste from every sphere in the organisation. The
result will not only be improved processes, but also improved quality, productivity, inventory levels and
employee participation. The principal result that will be achieved is a severe reduction in the cost of
production and managing the organisation.
11.2
The methodology of lean production
The methodology of lean production impacts throughout the organisation. Therefore, implementing the lean
production methodology affects both the principal as well as the secondary processes within the organisation.
To remain competitive all processes must be rigorously interrogated to determine whether they are
performing optimally.
Utilising lean methodology, all types of industries will be changed irrevocably when it is implemented.
The most important advantage that can be derived is the combination of craft and mass production. Another
advantage includes a better choice of products from which consumers can choose. A further advantage is the
nature in which work in an organisation is carried out. Through lean production, areas such as efficiency,
quality and response to customer demand are improved.
A number of positives can be gained from implementing lean production. The first positive is the
participation of employees in the effort of continuous improvement. The second positive is that employees
will be more than willing to participate in problem-solving. Improvements will be achieved through job
enlargement and cross-training. Since the phrase ‘lean production’ was coined, the methodology has
undergone an evolution that led to the current authoritative methodology that assists organisations to become
more competitive. The majority of organisational leaders perceive the methodology of lean production as an
almost instantaneous to all the problems experienced by the organisation. It is still debatable whether senior
management understands what is entailed when an organisation endeavours to obtain lean production status.
Lean production was developed from the Toyota production system (TPS). The following four
prerequisites for a lean system can be identified:
1 The content, sequence in which tasks must be completed, the timing of the tasks and the outcome that is
desired must be specified clearly.
2 The internal and external customer connections must be specified exactly in the areas of the number of
employees required, the manufacturing method to be utilised, as well as the timing of production.
3 All process flow in manufacturing must be uncomplicated and follow the shortest possible route through
any process – therefore, any task should be routed directly to a machine and employee.
4 Improvements to the process must be of a scientific nature and must be implemented at the lowest
possible level in the organisation.
To facilitate the above-mentioned, TPS requires that problems should be identified immediately in all the
activities performed in any process. The moment that a gap is identified between the requirements of a
specific process and the actual production achieved, that gap should immediately be corrected. The following
differentiation between JIT, lean production and TPS can be made:
• JIT places the emphasis on continuous improvement.
• Lean production emphasises the need of an organisation to understand the customer.
• TPS places the emphasis on employee empowerment as well as employee learning.
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11.3
Lean objectives
All organisations, whether involved in manufacturing products or delivering services, have profitability as a
common objective. The success of the profitability objective will be measured by the sustainability of the
profit over the long term. Achieving this objective will guarantee the prolonged existence of the organisation.
The following aspects are important to sustain continuous profitability over an extended period of time:
• The quality of the product must be of a very high standard and customers must experience these products
as the best in their category.
• Cost in producing these products must be on a competitive footing with the competition –
non-competitiveness will result in customers procuring the product from the competition.
• Whatever type of manufacturing an organisation is involved in, it will contain a certain amount of service.
• The product mix must be on a competitive footing with competitors.
A successful lean production system will result in a reduction of costs and a guarantee that the organisation
will remain competitive and able to achieve the profitability objective. Lean production will inter alia offer
customers a variety in the choice of products desired as well as in the quantities they require. The expectation
will not be that the customer has to pay for the small lot sizes in which the products are produced merely
because the customer desired variety. Flexibility of the organisation in fulfilling the new needs of the
customer is another benefit of lean production. As a result, the organisation will be able to meet the
customers’ desired changes in a very short time cycle. Short cycle times can be achieved through small lot
size production.
The lean production methodology becomes important as a larger number of competitors enter the
marketplace. As a result, all costs must be reduced on a continual basis. In the age before intense
competition, prices were determined by adding the required profit to the cost of the product. Recently,
competitiveness has increased dramatically where the customer dictates the level of quality that is required in
a product or service. The result was that the formula to calculate profit had to change. The formula that is
used at present is price minus cost. In achieving competitiveness, the implementation of the lean production
methodology becomes advantageous. Lean production has three very important tenets, namely value
definition, waste elimination and employee support.
11.4
Strategies, tactics and measures to achieve lean status
The most important mission of lean production is eliminating waste. Once waste is eliminated, the value of
the product or service will be enhanced for the organisation’s customers. Competitiveness stems from the fact
that provisional improvements are created in the areas of cost, quality and speed. It is known as provisional
because the competitors of the organisation will implement similar strategies to remain competitive. In any
organisation employees must foster a culture of continuous improvement. The result will be that employees
will make an effort to ensure that continuous improvements are attempted every day.
The value of lean production lies in the fact that the methodology is not simply applicable to the
manufacturing environment. The methodology can be applied to all other spheres of business. A successful
lean production system is characterised by carefully integrating operations management and general
management practices, resulting in a process requiring mutual respect between management and the
workforce.
The lean journey in an organisation can start off in three ways, by implementing either total production
maintenance (TPM), total quality management (TQM) or just-in-time (JIT) (see Figure 11.1).
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FIGURE 11.1 Lean production interaction with other techniques
Figure 11.1 furthermore indicates that employees are central to the success of all the methodologies that can
be utilised to obtain lean status. The commitment of employees cannot thus be overemphasised.
Three major strategies are required for the implementation of a lean production system, namely
penetration, stabilisation and growth strategies.
11.4.1
Penetration strategy
During the implementation stage, management and employees are introduced to the methodology of lean
production. The following penetration strategies could be utilised:
• Focus on training for all levels of employees in the organisation. The training effort will focus on how the
system will operate once implemented. The benefits that will be obtained from implementing the system
will be discussed in detail. Training will be given in the techniques, concepts and tools that will be
utilised in each department during the implementation phase.
• Select work areas where improvement projects will be implemented. It must be done in selected product
or process value chains. The improvements must be implemented as close as possible to the customer and
then implemented backwards to the origin of the process.
• Resident experts at each stage of the product or process improvement must be developed and put in place.
The experts have to manage and continue with the penetration strategy through the stabilisation strategy
and the growth of capabilities and capacity.
11.4.2
Stabilisation strategy
The second strategy in the improvement process to be utilised is stabilisation. The penetration and
stabilisation strategies will always overlap. The stabilisation strategy is utilised to stabilise the production and
support processes. This strategy is needed as discipline, and predictability is called for in order to accomplish
JIT/lean production status. The following tactics can be utilised to accomplish stabilisation:
• JIT/lean production concepts and methodologies must be entrenched in the system – the concepts and
methodologies must be applied on a daily basis.
• Standardisation of components, parts and processes will guarantee stabilisation.
• All the gains that have been accomplished must be cemented and no degeneration to previous wasteful
methods must be allowed.
• Employees and the business systems must be such that the two entities will support all improvements that
are planned for the future.
11.4.3
Growth strategy
The JIT and lean production system would have identified the opportunities to increase the capabilities and
capacity of the organisation. The initial major objective of the JIT and lean production system was the push
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towards continuous improvement. To accomplish the strategy of continuous improvement, the following
enablers can be identified:
• Identification and elimination of waste by utilising the improvement methodologies of JIT and lean
production systems.
• The management team of the organisation must be experienced, committed and educated to be champions
of JIT and lean systems.
• Reward systems must be developed that will reward and cultivate the required behaviour from employees
to guarantee success.
• Project management must be effectively and efficiently utilised to communicate, educate, configure,
execute and improve all the identified processes.
11.5
The seven most common wastes
The methodology of lean production has identified seven common wastes that are present in every process.
This is illustrated in Figure 11.2.
FIGURE 11.2 Seven most common wastes
The importance of fully understanding the characteristics of wastes cannot be overemphasised. The seven
deadly wastes that were identified are:
1 Overproduction waste. Overproduction waste will occur when a product or products are produced
before required or produced in excess of the predicted demand. This will severely curtail the available
capacity and resources to produce goods that are actually required by customers. It may also lead to cost
when inventoried components are damaged, when goods are shipped to customers before the due date
in order to guarantee customer due dates are met, or when overproduced products are eventually sold at
reduced prices.
2 Waiting time waste. Waiting time waste usually occurs when waiting occurs at any time in a process.
This could be waiting of customers, customer orders, inventory, finished goods or workers in the process.
This is also known as queuing. During the waiting period no value is added to the product or service
delivered to the customer. Workers may become idle waiting for inventory to reach them, and the direct
result is a long lead time. The completion time for such a product will be very difficult to predict.
Consequently, the costs will increase because more inventories are required to ensure on-time delivery of
orders.
3 Transportation waste. The major offender in transportation waste is the excessive handling of the
materials, components or products. This could be due to poor layout of the facility, which may require
employees to transport goods and WIP through the facility without any value being added to the product.
Disadvantages of excessive handling could be goods damaged in the transport process, more time is
added to the operation which will be added to the lead time, and labour cost may increase as well as the
cost of equipment and fuel. Transportation waste cost can thus be equated with that of waiting time waste.
The sourcing of raw materials can also increase the transportation costs if suppliers are far and could
create an inventory pipeline.
4 Processing waste. Processing waste occurs where the process does not add value to the product, or where
the value added is exceeded by the cost that is added. Unclear customer requirements could cause
manufacturing to add unnecessary processes, thus adding to the cost of the product. A valuable method
for determining the wastage that occurs during any process is business process re-engineering (BPR).
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Wastages must be identified and eliminated immediately, as the wastages will consume labour and
processing time, will be harmful to quality, and will expend time on expensive machinery while no value
is added to the product.
5 Inventory waste. Inventory waste is not the inventory held to ensure production that will satisfy
customer orders, but inventory that is held in excess of required inventories. The excess inventory, of
which buffer stock is an example, will have a negative effect on cost, lead time, quality and flexibility (as
discussed in Chapter 2). The more reliable the system becomes, the less excess inventory will be
carried. It will happen as a result of business performance improvements through BPR or TQM.
6 Unnecessary motion waste. Unnecessary motion waste is always induced by humans and is a direct
consequence of the manner in which the employees perform their tasks. It is particularly true where the
tasks that employees perform are of a highly repetitive nature. As a result of poor or ineffective job
design, a significant waste of labour and other scarce resources occurs. The eradication of ineffective
labour usage will result in freeing more capacity. Therefore capacity as a scarce resource can be
utilised in a prudent manner.
7 Product defect waste. Product defect waste may influence customer satisfaction which could in the end
result in customers severing their relationship with the organisation. Product defects could lead to costs
for repairing the product and the wasting of raw materials and labour, processing time and capacity. As
inferior quality products cannot be sold, it is impossible to offset the manufacturing cost for such products
through sales. Capacity that is supposed to be utilised to manufacture goods that can be sold to customers
at a profit, must be used instead to repair items at no cost to the customer.
11.6
Costs incurred as a result of waste
Each of these wastes will result in unnecessary costs. The costs that are incurred as a result of waste are:
• Carrying cost. Carrying cost is also known as cost of delay or holding cost. The name is derived from
the delays that are caused to the workflow through the processes when that workflow is interrupted.
When raw materials are converted to finished products by being processed rapidly through the
transformation process, costs will decrease accordingly. Therefore any inventory held that is idle incurs
cost that can exceed the unit price of that product. Therefore, the cost is known as carrying cost. The
reason for the name is that inventory must be physically inventoried in a storage area for a given period
of time. Carrying cost can be divided into three different categories, namely raw material cost, finished
goods cost and WIP costs.
• Ordering cost. Ordering cost will be incurred when placing and receiving items that have been ordered
from a vendor. The size of and frequency with which orders are placed will influence ordering cost.
Shipping cost and the cost involved in preparing invoices and conducting inspection may also add to
ordering cost. Inspection costs will be incurred for both goods received as well as goods dispatched.
• Shortage cost. Shortage cost is also known as stock-out cost. It is incurred when the demand for a
product exceeds the supply of that product. The reason for it happening is as a result of the uncertainty of
demand. A stock-out also occurs as a result of the organisation running out of inventory and no inventory
is available to ship to customers.
• Actual purchasing cost. Actual purchasing cost is a direct consequence of the amount of inventory held
by an organisation. As a result, actual purchasing cost will only be incurred in certain instances. The most
common occurrence of the cost is where an organisation purchases in bulk so that it can claim quantity
discounts. Therefore the organisation will pay less per unit, but will incur higher holding costs. An
in-depth analysis and cost trade-offs must be computed before a decision is made to buy in bulk.
• Idleness cost. Idleness cost is incurred as a result of any type of delay. For customers idleness cost is very
difficult to determine. The most common cause for a customer to be idle is as a result of the non-receipt
of the products that have been ordered from a supplier.
• Obvious costs. Obvious cost is also known as capital cost, the reason being that very scarce working
capital is tied up in holding inventory. Obvious cost can be a double-edged sword when an organisation
attempts to minimise capital costs. If no or little inventory is held, other costs can be incurred. When too
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•
•
much inventory is held, capital cost will be incurred. The reason for the conundrum is simply that no
matter what quantity of inventory is held, costs will be incurred. Therefore the organisation must make
every effort to find the correct balance between holding inventory and cost incurred.
Semi-obvious costs. Semi-obvious cost will be incurred as a result of material obsolescence and the
incorrect management of inventory. The cost includes the inventory planning cost, inventory
record-keeping cost and the cost of physically counting inventory. Semi-obvious cost is incurred as a
result of employees that are not physically involved in handling and managing inventory but who
participate in the indirect management of said inventory. These employees are usually far removed from
the actual warehouse. Obsolescence cost will be incurred if an organisation has inventory that cannot be
used as a result of the material being superseded by improved material, and it usually occurs after
materials have been held in a warehouse for many years. The longer material is held in inventory, the
higher the probability that the material will become obsolete. The majority of organisations do not write
off obsolete material on a yearly basis. As a result, obsolescence cost does not have an impact on the
costs on a year-to-year basis.
Hidden costs. Hidden cost is the result of the accumulation of carrying costs and other related costs. A
typical example is where inventory will be released to the shop floor for a specific job. Due to
interference by management, instruction will be dictated that the material must be issued to a different
job. The result will be that the material will be idle at the machine waiting for the original job to
commence. The idle material occupies precious space at the work centre. The inventory is known as WIP.
As a result, WIP can be found in all manufacturing organisations. These types of inventory can
accumulate to form a major component of the hidden carrying cost. In most instances organisations
neglect to include the WIP cost to the inventory holding cost of the inventory in the warehouse.
DISCUSSION
Justice dept wins award for ‘lean thinking’
Read the situation discussed in the setting-the-scene box at the beginning of the chapter. Answer the
following questions:
1 What type of strategy/strategies did the DoJ & CD follow in implementing lean management within the
department and its district courts?
2 What type of wastes and costs did the DoJ & CD eliminate?
11.7
Achieving lean status
Lean production can be equated to an umbrella that will cover the entire organisation. When lean production
is utilised as an improvement methodology, all the available methodologies must be utilised. If all the
methodologies are not utilised optimally, the probability of a successful implementation of a lean system is
very slim. Taking every argument into consideration, the following elements can be identified as forming part
of the JIT and lean systems:
• Batches should be small instead of the larger lot sizes as found in the traditional system.
• Each employee should know what is expected and must be able to work in a team.
• Eliminate all the activities that are non-value adding.
• Preference must be given to cellular manufacturing or manufacturing by product type rather than a
functional layout.
• A high-quality forecast of expected demand should be prepared with the assistance of the sales
department – no changes at short notice must be allowed to the forecast.
• Where at all possible, expensive robots must be shunned and low-cost flexible machines must be used
instead.
• JIT must be the preferred mode of operation for the organisation.
• Without compromising the safety of employees, work spaces should be minimised.
• The organisation must practise continuous improvement of quality that will ensure the production of
perfect quality.
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•
•
The customer must be seen as part of the organisation – the belief must be embedded with the supplier
and throughout the supply chain using value streams.
Before any decisions are made regarding the manufacturing and assembling of products, the supplier as a
valued member of the team must be included in the decision-making process.
The following five steps will assist in accomplishing lean status:
1 Value must be determined, as the customer will experience such value purchasing the product or using
the service
2 The value stream must be identified to guarantee that all the steps are included in the lean production
system
3 The customer must be the ultimate beneficiary of any value that is created by implementing a lean
production system
4 The customer must be allowed to pull the product or service, and the organisation should not push or
force the product or service onto the customer
5 Zero defects or perfection must be pursued by the organisation.
The transformation of an organisation from the traditional manufacturing system to a lean production system
is no easy task. To achieve lean status where a culture of continuous improvement and employee learning
must be the rule rather than the exception is the challenge that faces all levels of management. The goal can
only be achieved by adopting methodologies of minimising waste, motivated to be perfect through
continuous learning, being creative and, last but not least, teamwork. The following characteristics are shared
by all lean manufacturers:
• Eliminate inventory by applying the JIT methodology.
• To produce perfect products continuously, systems and processes must be in position to support
employees in achieving the goal.
• Eliminate or minimise the distances products have to travel by reducing space requirements.
• Suppliers must be made aware of the needs and the customers of the organisation: it can be achieved
through the development of close relationships with suppliers.
• Through education, suppliers must be obliged to take responsibility for meeting the needs of customers.
• All the activities that do not add value must be eliminated – therefore, activities such as material handling,
inspection, inventory and rework must be high on the list of priorities to eliminate.
• Improving job design, employee empowerment, commitment, teamwork and training of the workforce is
a prerequisite for an organisation that seeks to become a lean manufacturer.
• The devolution of responsibilities to lower levels of the workforce will make the jobs more challenging
for employees.
• Employee flexibility will be achieved by a reduction in the number of job classes.
During the implementation of a JIT system, a number of waste reduction methodologies are in existence that
will assist organisations in achieving lean status. In the recent past the methodologies were not utilised
exclusively for the practice of lean production. Currently the majority of the methodologies are utilised
independently. The waste reduction methodologies being utilised are for the sole purpose of eliminating
non-value adding steps in processes. The methodologies will also include quality improvement
methodologies. The above-mentioned methodologies are not the only ones that are available to achieve lean
status.
An important fact to realise is that a certain methodology will be more appropriate for application in one
organisation than in another. One cannot utilise the methodologies independently and be successful, as most
organisations are attempting to do. The majority of the methodologies are interrelated. Therefore the
possibility cannot be ruled out that one methodology can be a prerequisite for the utilisation of another
methodology. Mehta & Shah, 2005 (http://www.highbeam.com/doc/1P3-863998531.html) identified
simplification of work procedures as an important factor in lean production.
Simplification can be achieved through the formalisation of workflow, standardisation and integration. A
reduction in the variability of the production system can be achieved through detailed work standardisation. It
will contribute to enhanced process visibility. Achieving standardisation will increase the probability that the
lean system will be successful. The integration of workflows is another very important characteristic of a lean
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system. The reduction of WIP to the lowest possible level will be an achievement of a lean system. The ideal
situation will be where no WIP can be found in the production system.
As a result, a spirit of cooperation will be cultivated between all the departments in the manufacturing
process. To achieve lean status, the following characteristics of work design must be taken into account:
• The variety of skills that will be required in the workplace.
• All tasks to be carried out must be clearly identified.
• The importance and significance of each task must be investigated and communicated to every one of the
employees.
• The total extent of employee autonomy must be clearly defined and communicated to employees.
• Timely and regular feedback of tasks completed must be communicated to the employees.
11.8
Lean techniques
In order to reduce or eliminate the above wastes and costs, lean techniques can be used to implement a lean
programme. Although most of these techniques may be implemented as stand-alone programmes, few have
significant impact when used alone. The more common techniques are discussed below. Note that some are
used only in manufacturing organisations, but most apply equally to service industries.
11.8.1
Standard times
Labour requires known standard times to produce effectively and efficiently. The standard that will be
computed answers the question of how much time is required to complete a task. The following rationale is
applicable for measuring work:
• Ascertain an acceptable workload for an employee.
• Compare possible solutions.
• Achieve equilibrium of the work within a work centre.
• Exclude time wasting to achieve possible improvements.
Standard times are utilised to establish the capacity of a process and ultimately the production facility.
Standard times are further utilised to establish labour requirements, cost of labour, scheduling of jobs and
budgeting. Planning cannot be undertaken if the standard times are inaccurate. The computation of scientific
standard times is the time that labour will be allowed to complete a specific task under conventional settings.
All possible delays must then be taken into account when the standard time is computed.
Work measurement is a technique that can be utilised to set standards for tasks. Four very important
underlying principles can be identified for the utilisation of standard times:
1 The efficient and effective allotment and arrangement of capacity and work. The techniques require set
times to guarantee that an organisation will function as close to full capacity as humanly possible.
2 Standards can be utilised to encourage employees as well as to measure the accomplishments of
employees. For organisations that utilise incentive schemes, standards are of the highest importance to
motivate their employees.
3 Standard times are important during the tendering process for new contracts or when an organisation
wants to appraise the profitability of existing contracts. The measures assume some form of standard to
measure performance against.
4 The benchmarking process for improvement. Work measurement will be utilised when an organisation
measures its work methods against the organisation or organisations seen as the best in that industry. One
set of standards will be measured against another set.
When standard time is set too loosely, it allows more time to complete the task than is necessary. Labour may
then add elements out of fear that new standards will be computed, as they may fear that they will be unable
to measure up to the new time standards. For this reason it is very important that the observer and
management discuss the underlying principles of work measurement with the employees to be measured.
The operation to be measured will have various elements which can be stable, erratic or sporadic in
nature. Whenever a stable element is performed, that element must have matching specifications, and the
length of time for each of the elements must be exactly the same, irrespective of the number of times that
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element is measured. The performance of tasks by a machine is an example of a stable element. Any
variation during the performance of a stable element is an indication that there is an inherent problem in the
element.
The following universal rules regarding the observation of elements have been developed:
• Identified elements have to be measured on an individual and continual basis. Achieving the goal requires
that elements must have an unambiguous starting and termination point.
• Element measurements are made easier the shorter such element duration is. The element duration must
be such that it can be measured expediently.
• Successful measurement relies on the elements being amalgamated. Therefore the element must have
steps that follow each other in a rational order and the order must be maintained.
• There must be a clear separation of elements that are performed by machines and by employees.
• Elements occurring on a recurrent basis must be split from elements that occur on an irregular basis.
• Elements that cause fatigue, involve working with heavy equipment or machinery, as well as heavy
materials must be measured separately from other elements.
The steps listed below would assist an experienced and professional person in determining accurate time
standards:
1 The operation where a standard has to be determined must be clearly defined. The goal can be realised by
utilising the technique of method analysis. The reason is that the observer must understand the
character of the operation. The observer must ensure that the correct method for a particular type of
observation is utilised.
2 The operation has to be separated into measurable units or elements. The observer must be able to
manage the measurements without difficulty.
3 At the start the observer must establish the number of observations that must be carried out. The higher
the number of observations, the more accurate the time standard will be. Therefore the accuracy will be
guaranteed.
4 The time to carry out a task must be measured and recorded diligently. Thereafter the performance of the
operator must be rated. The higher the rating of an operator, the more experienced that employee is in
performing that specific task. It will result in a differentiation between different types of tasks performed
by labour.
5 Accurate time standards will enhance the development and implementation of standard operating
procedures.
6 Carrying out regular time studies will enable an organisation to validate current time standards and
modify the time standards if found to be outdated.
7 Time standards will allow the comparison of common operations that are present in divergent processes.
8 Adherence to steps 1 to 7 will allow an organisation to compute observed time (OT). Utilising OT, the
average or actual observed time could be computed. It is also known as the arithmetic mean per element
that was measured. Provision must be made for any unforeseen occurrence that can influence the
measured time for each element.
11.8.2
Kaizen
Kaizen is a systematic approach that includes all operations within the organisation and aims to improve the
quality of products and components that are delivered to customers. The improved quality is achieved
through the elimination of errors or waste. Continuous improvement is a never-ending process that
necessitates continuous measurements and should not be a once-off occurrence that will be implemented and
never looked at again.
Kaizen is the ability of an organisation to make scientific, continuous change in a culture of striving to
improve daily. This is the interface between system development and process improvement, where process
change contributes directly to the system that has been designed to fulfil the value proposition, building
operational competitiveness on a daily basis.
This ability is not acquired easily and does not become a habit of the organisation without first creating
the right team environment, providing opportunities to develop and sharpening the skills of individuals. It
also requires the organisation to build confidence in its ability to deliver a win-win proposition for the
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stakeholders.
In order to achieve Kaizen capability through the completion of Kaizen events that deliver immediate
savings, it is necessary to train staff on how to solve problems. This helps generate confidence in the
organisation by demonstrating what can be achieved when problems are addressed at source.
The Kaizen event defines the specific problems to be solved, the specific team to apply the
problem-solving techniques, and the time frame in which to achieve specific requirements. This environment
is conducive to dealing with critical problems, training team leaders and problem-solvers on lean tools and
using these tools to address real day-to-day issues. By witnessing the results from applying such tools,
organisations gain an enhanced understanding of what they are and how to apply them, and will be
predisposed to applying them in the future.
The duration of a Kaizen event should be a minimum of three days and a maximum of five days. The
following is a typical Kaizen schedule:
Day one:
1 Set up an orientation session for all the team members
2 Review the targets that have been set for the Kaizen event
3 What is the expectation once the Kaizen event has been completed?
4 Accentuate and discuss lean techniques to be utilised
5 The team will review the process that must be improved.
Day two:
1 Compile detailed documentation of the existing process to be improved
2 Complete process mapping and authenticate the process map
3 Introduce the lean techniques that will be utilised
4 The team must develop the metrics for the event.
Day three:
1 Brainstorm ideas for change – all employees must be afforded an equal opportunity to speak
2 Gather all the important ideas that have been identified and annotate them on flip charts for reference
throughout the event
3 Implement short-term plans for improvement: short-term plans are those improvements that can be
implemented immediately or within a week after completion of the event
4 Define long-term plans: long-term plans are those improvements that will require a longer period of time
to implement
5 Authenticate the plans with current data. This step will measure whether the improvements that were
implemented are working.
Day four:
1 The new process must be well documented
2 The Kaizen team must be fully committed to the new process
3 Authenticate results on a continual basis
4 Review the results to verify whether the original expectation was satisfied.
Day five:
1 The facilitator of the Kaizen event must prepare a management review briefing
2 The follow-up action plans must be prepared to ensure the continuous success of the Kaizen event
3 The Kaizen team must present the findings and recommendations to senior management.
The success of the Kaizen event is greatly dependent on the commitment of all employees in the process. The
major cause for failure is the fear of change that inevitably accompanies the outcome of a Kaizen event.
Therefore, if the employees are unwilling to commit to change, any new process will be doomed to failure.
The majority of employees are reluctant to change, because the new process represents a new challenge.
Employees will rather remain with something they know and understand. The Kaizen team leader must
ensure that all employees adhere to the new process for 21 days. After that period, the new process will be
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engrained and employees will not regress to the old familiar system. If the new process is neglected,
employees will regress and the new process will fail. Communication about the changes must be open and
unambiguous.
11.8.3
Matching demand and production
When a lean production system is implemented, there is no build-up of WIP inventory. The reason for the
phenomenon is that products are allowed to flow freely through the process. Furthermore, lean production
augments quality and fewer stoppages occur due to inferior quality. In turn it leads to less inventory build-up
to undo the damage done to the production process due to stoppages.
The variability of the process is reduced as a result of the low WIP inventory. Once the goal is achieved,
the need to maintain inventory is eliminated and this leads to the elimination of waste. It is one of the major
methodologies to be utilised in minimising inventory levels. In the majority of organisations the minimising
of inventory is a long-term goal. Another goal of the system is matching the demand tempo and production
tempo. The demand and production tempos cannot be seen as matched, because at the end of the year the
exact demand requirements have been achieved. To be a truly lean organisation, demand and production
tempos must match over a short time horizon.
Customer demand is utilised to pace work through the process in order to achieve a smooth production
rate. This can be seen as a pull system. The methodology of takt time, which is the cycle time needed to
match customer demand for the final product, can be utilised to fulfil the requirements of the pull system.
Utilising takt time pulls components through the system to satisfy customer demand and describes the exact
match of the demand tempo and the production tempo. All workers have to adhere to the calculated takt time
as it sets the pace at which the employees should complete the tasks in the process.
Takt time is also described as the heartbeat or pulse of the process. Keeping to the pace guarantees that
employees meet the required workflow demand. Takt time determines how often a product must be produced
to meet customer demand and is utilised when standardising work and load balancing is undertaken. Takt
time is in many instances the driving force behind a Kaizen event.
Takt time can be calculated using the following formula:
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WORKED EXAMPLE
The following is a simple example of a takt time calculation. To perform the calculation, two pieces of
information are needed:
1 What is your planned production time? Typically this is the shift length less planned downtime.
2 What is the customer demand that needs to be met during the planned production time?
Information and solutions
TABLE 11.1 Information and solutions for takt time calculations
ITEM
DATA AND CALCULATIONS
Shift length (A)
8 hours (480 minutes)
Breaks (B)
2 short x 15 minutes plus one meal × 30 minutes = 60 minutes
Planned production time (C)
A – B = 480 minutes – 60 minutes = 420 minutes
Customer demand (D)
400 pieces
Takt time
C/D = 420 minutes/400 pieces = 1.05 minutes/piece
Calculations
With this example, we know that if we produce one piece every 1.05 minutes (or 63 seconds), our
production will be aligned with customer demand.
11.8.4
Kanban
Lean production uses a pull system to move materials and components between operations. Kanban
techniques can be utilised in the implementation of such a pull system. Kanban means visible record or
signal and is a communication system used to enable customers to indicate when and in what quantities they
require their materials to be replenished. Due to the critical timing and sequence of a Kanban system,
improvements are made continually.
Every Kanban card must contain basic information such as the part number, brief description, type of
container, quantity in the container, origin of the container, and the destination of the container. The
information will not change during the production period. The Kanban system is linked to the production
tempo to ensure that only products that are required will be produced at the time that such a product is
required. In the pull system this is known as the next step demand.
In a Kanban system very small buffer inventory exists between operations. The uniqueness of the system
is the fact that management determines the size of the buffer inventory. There are three basic Kanban cards
used in the system. The first Kanban card used is the conveyance (C Kanban) card (also known as the move
[M Kanban] card) which authorises the process to withdraw components from the preceding process.
The second card used is the production (P Kanban) card which authorises a process to initiate the
production of a new batch of components. The third card used is the supplier (S Kanban) card which
authorises external suppliers to deliver a new batch of materials or components. As soon as the buffer stock
quantities have been achieved, the production process is halted. Once the buffer inventory reaches a point
below the optimum inventory level, a signal is forwarded to the preceding operation to commence
production. A successful signal must be simple and visible.
The following broad-spectrum policies can be drafted for a proficient Kanban system:
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•
•
•
•
•
•
There must be a card for every container in the system.
The user department will always obtain their material from the supplier department.
No material can be removed from the supplying department without the required Kanban card being
presented by the user department.
The Kanban container will contain the same number of parts every time. As a result, an organisation must
not allow any non-standard Kanban containers in the system. If it is allowed, the result will be a disrupted
process.
The parts in the Kanban must be of good quality. It will guarantee that labour and material use will be
maximised.
The production quantity cannot be more than the quantity specified on the Kanban card.
11.8.5
Standardisation
Organisations must make an attempt towards standardisation of components if lean status is to be achieved.
Standardisation disseminates the belief that an organisation should settle for fewer rather than many sizes,
models or formats of products to produce. In doing so, the organisation will prevent obsolescence, which is
not the most important purpose of standardisation. Organisations should not concentrate on end items only
when standardisation is implemented.
The most optimal use of standardisation is to manufacture a wide range of end items from a small number
of standard components and materials. Where organisations have a large variety of products, the
methodology can be utilised in an effort to reduce costs. Customers will be persuaded to support an
organisation that offers a choice of products. Therefore, whether an organisation is a high-volume, mass
producer or a job shop organisation, it must have a variety in product ranges.
A typical example of a high-volume, mass production organisation is the motor industry, where
customers are offered a variety of models to choose from. The manufacturers keep the cost down by
designing the vehicles to use standardised components. The majority of vehicles in a certain model range will
use the same steering wheel, instrument panel, seats, rims, etc. Utilising standardised parts ensures that
employees deal with fewer components. The result is a reduction in training times and costs. Standardisation
results in an increase in demand for that component.
It leads to repeatability that guarantees that the process operates at maximum output.
It is possible because an employee performs a standardised operation on a daily basis. Due to the learning
curve methodology, employees become more skilful the more often they perform a task. The productivity of
employees increases. Inventory holding is reduced as a result, which is a principle of a lean system. Delayed
differentiation results if standardisation is used. Using the methodology, components are kept back in a lower
state as long as possible. The result is that generic components are not transformed to the differentiated state
until as late as possible in the manufacturing process.
Standardisation further reduces the need for an extensive range of production equipment and tooling.
Standardisation improves continuous and JIT production. The intermittent production process becomes
something of the past and changeover costs are reduced. A number of benefits can be derived from using
standardised components. The first benefit is that the number of components to be inventoried is reduced.
The second benefit is that the number of inventory records necessary is reduced. The third benefit is that the
number of orders and receipts of materials and components is reduced.
The fourth benefit is that the number of vendors is reduced. A fifth benefit is that standardised
components are manufactured using standardised processes. A sixth benefit is cost reduction and therefore
substantial savings. The benefits are achieved through continuous improvements in the purchasing processes,
handling processes and quality inspection processes. The benefits listed contribute significantly to the
endeavour in minimising cost. Any organisation with a large range of products can derive real cost benefits in
the area of inventory reduction using standardisation.
The reduction of inventory costs can be as high as 50 per cent when an organisation uses standardised
components. As a result, the associated costs of inventory are reduced by the same percentage. Therefore the
productivity of the inventory that is on hand increases. A direct outcome of standardised components is
modular design. In modular design the modules are components that are treated as a single unit. The outcome
is similar to that of standardised parts. The BOM structures are also simplified. Mehta & Shah, 2005 express
the opinion that standardisation is much more than only components and parts.
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To guarantee the success of lean production, standardisation should form part of all the tasks of an
organisation. It can be interpreted that SOP must be in place for all tasks. Employees must be allowed to use
their experience and knowledge gained by the minimal or SOP. It will result in an employee being more
autonomous in completing a task. As a result, lean production cannot be successful without standardisation.
Furthermore, time and motion studies must be carried out to standardise the time required to complete a task.
Employees should not be allowed any freedom with these standards and must strictly adhere to them.
DISCUSSION
Why do you say ‘add value to the customer’ vs ‘add value to the product’?
These are two different things. For example, a custom-made shirt may be made more valuable by adding
extra stitching, using top of the line fabric and adding a monogram. All these things add value to the
product in terms of quality and the longevity of the product. However, if the customer just wants a basic
shirt that fits well and that will last about two years, then these things do not add value to him. He will not
be willing to pay a premium to have a more valuable product and the added extras are actually a form of
waste.
Answer the following question about adding value: What type of lean manufacturing methodology do you
think has been applied in this example?
(SOURCE: Epply, T. 2010. The lean manufacturing handbook, 4th ed. Anderson: Continental Inc., 3)
11.8.6
U-shaped production lines
The majority of JIT or lean manufacturers design the new layout in a u-shape. In the traditional
manufacturing environment production takes place in a straight line. The raw material enters at the one end
and the finished products exits at the other end. In the u-shape, layout differs significantly. In the u-shaped
layout the entrance and exit to the process are situated across from each other. Therefore both goods
receiving and goods delivered take place at the origin of production.
An incorrectly configured layout will not facilitate the u-shaped production line. A correctly configured
u-shaped production line eliminates the unnecessary movement of materials and manpower. It is not the only
advantage that can be derived from u-shaped production lines. Another advantage of the system is that all
unnecessary operations are eliminated from the manufacturing process. A last advantage is that due to the
transportation waste being eliminated, less damage is caused to materials and WIP as well as finished goods.
The layout discussed is ideally suited for the cellular layout.
11.8.7
Involvement of employees
Employees must participate in the process in its totality to guarantee that lean status is achieved. Not only
must all components produced by employees be of high quality, but they must be produced at the right time
and in the right quantities. The quality function can never be forced onto employees through management
actions, and that is why their commitment to the process is so important.
Employees’ commitment and participation guarantee that the next operation will be able to continue the
manufacturing process without interruption. When employees are unable to achieve the required production
rate, they must be able to stop the production process and ask for assistance, and they should also be made
responsible for improving the process on a continuous basis. By combining these two responsibilities, a lean
or JIT system will be successful in eliminating waste. The success of the system will be reflected by
improved profits and an increase in the ROI by reducing costs, reducing inventory and improving quality.
To ensure that teamwork is successful, a culture of openness and trust must be cultivated. In such an
environment, employees will collaborate by recognising, defining and solving problems. In many cases there
is a mistaken belief that teamwork is nothing more than another programme such as suggestion boxes or
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green area schemes. Suggestion boxes and green areas are part of the teamwork concept. Inclusion of
programmes such as ad hoc teams to improve targets can also be part of teamwork. JIT and lean systems are
much more than a couple of individual methodologies.
The two systems are a management methodology and an organisation-wide approach towards teamwork.
The teamwork concept ensures that every employee in the organisation works towards continuous
improvement and the strategic goals of the organisation. Lean systems should not only focus on the
elimination of waste from processes. The focus must include all the resources in the organisation. The waste
of human resources can impact in a manner similar to any other kind of waste. The cost of knowledge and
talent is very high and wasting of these resources should be eliminated.
The employees of an organisation must be involved at all levels of the organisation to eliminate waste.
Nothing must be overlooked. Therefore it is very important that employees understand the decisions that are
taken at various levels of the organisation. Top and middle management have a very broad view of what is
happening in the organisation. As a result, management at those levels is of the opinion that the decisions
they formulate are advantageous to the organisation. As a rule it is usually true. But the majority of managers
do not take into account the manner in which employees perceive the decisions.
Employees are closer to the locale where the decisions will impact. A further consideration is what the
impact of decisions will be on the customers of the organisation. Without input from the employees that
interact with the customers, decisions that negatively influence customers will be the result. Employees have
to accept that the roles of every employee will change in the following manner:
• Employees are allowed much broader day-to-day management of job content. Included is cross-training
of all employees in a particular cell. Indirect work such as improvement of quality forms part of
teamwork. The result is that when employees are not involved in active work (production), they will
perform control and evaluating tasks. In the JIT and lean system the tasks are not viewed as a time
wasting effort. In the traditional system the tasks are experienced as non-productive tasks. In the
traditional system, if production was halted, employees were idle. As a result, the traditional system
recorded this as excess labour hours.
• Employees accept full responsibility for quality produced in a work centre. Most importantly, it includes
complete authority to stop the assembly line if inferior quality is produced. Teamwork forces every
employee to utilise the knowledge and skills acquired by each individual more effectively.
A major component of teamwork is employee empowerment. The methodology becomes even more
important when an organisation attempts to be globally competitive. The importance of employee
empowerment cannot be overemphasised. The successful implementation and management of methodologies
such as TQM, JIT and lean systems are reliant on the evidence that employees must take responsibility for
the work they carry out. The methodology cannot function if employees are not empowered. The acceptance
of the responsibility will be hollow if management does not delegate the authority that has to accompany the
responsibility.
11.8.8
5S methodology
The 5S methodology is an authoritative technique that is a fundamental part of the six-sigma methodology.
The principal objective of the 5S methodology is to coordinate and regulate work practices in an
organisation. Good housekeeping is an important factor in maintaining and improving quality in an
organisation. The 5S methodology can be utilised on the shop floor as well as in an office environment.
Quality programmes cannot be successful if the work areas within the organisation are untidy, shambolic or
grubby. The work areas as described will contribute to a variety of waste.
The waste of motion occurs when employees have to detour around obstructions in walkways. Time
wasting will occur while employees look for mislaid tools, equipment or materials in a generally untidy
workplace and when inferior quality items are reworked. The performance of employees increases if work
areas are orderly and uncluttered. The success of the methodology is reliant on a mindset change in
employees in their approach to task completion. The degree of success further depends on the participation of
the entire workforce in the housekeeping programme.
In this regard, the 5S methodology is more successful in Japan than in western cultures. In Japan the
participation of the workforce includes a total commitment to the 5S methodology. It is not the case in
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western organisations. The myth that a manufacturing facility must be dirty and dingy has to be dispelled.
The 5S methodology involves the following stages:
1 Seiri – sorting out. Seiri calls for the elimination of unnecessary items that have collected around work
areas. As debris and unused objects build up, productivity often takes a turn for the worse. In
unproductive work spaces, frustrations mount when workers find that they are unable to satisfactorily
finish the task at hand. Therefore it is vital to implement a workplace sorting system.
It will allow management to decide which items must be retained and which items can be treated as
surplus to requirement and discarded. During this stage, the frequency of use must be catalogued. The
items that are stored within the work area must be kept to a minimum to prevent clutter. A team of
employees will achieve the best results. Each piece of material, equipment or tool must be touched and
discussed in detail before it is catalogued. This to ensure that all the items in the workplace are given
equal attention during the process.
Every item that remains in the workplace must be labelled with a brightly coloured label. On the label
the name of the item must be annotated. To prevent misunderstanding, the name that is best known to the
employees must be annotated on the label. Not every employee may know the technical name of the item.
The last date of use of that item must appear on the label. If the item was not used from the previous
inspection period, that item should be removed from the work area.
The inspections should be undertaken at regular intervals. The principle ‘one is best’ must be adopted.
It means that meetings last one hour, reports consist of one page, materials are located in one place, etc.
2 Seiton – set in order. Set in order focuses on effective storage and organisation methods, with the end
goal of developing an environment that resists clutter and aids long-term productivity.
In order to set your workplace in order, you must determine:
2.1 What items or areas you need in order to do your job
2.2 Where those items should be located – based on frequency of use.
The safety of employees must be the determinant of how items will be stored. Heavy materials,
equipment and tools must be stored in a manner that employees can access them with a minimum of
effort. Correct signage of storage areas is vitally important. Each storage area must be clearly signposted
as to what is housed in that area. For instance, the signage must indicate whether items are flammable,
etc. Notice boards play an important role in informing employees. Therefore the notice boards must
contain current information only.
A date by when the notices must be removed should appear on each notice. On expiry of the notice
date, the notice must be removed immediately. Doing so will guarantee that only current notices are
displayed. One technique that can be used during this stage is shadow boards for tools. Another technique
is painting footprints on the floor to indicate the material flow through the work area. As a result
everything in the work area will have a designated place. If the materials, equipment or tools are not in
the designated place, it is an indication that the process is underperforming. Therefore the problem area
must be addressed immediately. The use of personal toolboxes must be discouraged. Tools must be stored
in a centralised area.
3 Seiso – shine – spic and span. Once you have eliminated the clutter in your work area, it is important to
thoroughly clean that area and the equipment in it. Leaks, squeals and vibrations involving clean
equipment can often be easily detected, but a dirty workplace tends to be distracting and equipment faults
go unnoticed. Clean workplace conditions are also important to employee health, morale and safety.
These factors add up to impact a company’s bottom line.
Employees must conduct visual inspections on a regular basis throughout their shift to ensure nothing
is out of place. Each employee in the organisation should assume responsibility for the cleanliness of his
or her personal work area. Cleaning entails removing old data from the computer system, shredding
outdated paperwork and removing unwanted materials, equipment and tools from work areas. Clearing
unwanted clutter will identify the root causes of many problems. These causes can be identified in the
beginning stages if the seiso stage is carried out correctly.
For instance, an oil spill is found in a pool next to or under a machine. If the cleaning exercise is
carried out regularly, it will be easy to determine when the oil leak was seen for the first time. Therefore
immediate corrective action can be taken. Each employee must have a designated responsibility within
the 5S methodology. Clear and unambiguous standards must be established. Cleaning materials and
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equipment must be correctly positioned. Ideally, the cleaning materials and equipment must be stored
within the work area in a clearly designated area.
The cleaning equipment must be replaced on a regular basis. Proof of the cleaning exercise can be in
the form of a signed register. Employees can comment on the action undertaken during the cleaning
exercise in the register. The actions described are an integral part of the seiso stage.
4 Seiketsu – standardise. Cleaning and organisation systems implemented without established standards
tend to lose effectiveness with time. Employees should be allowed to participate in the development of
standards that improve workplace conditions. Ask for feedback to find the best way to balance employee
morale with production concerns.
Keep employees informed by making the standards visible. Use customised posters, signs and labels
where applicable. Standardisation guarantees the process will function even though a particular employee
is absent from work. The major tasks of the 5S methodology are carried out during this stage.
Consolidation of the result obtained through the 5S methodology must take place during the seiketsu
stage. Standards must be established for the seiri, seiton, seiso and seiketsu stages simultaneously.
5 Shitsuke – sustain. This is by far the most difficult S to implement and achieve. People tend to resist
change and even the most well-structured 5S plan will fail if not constantly reinforced. The paramount
objective of the stage is the creation of a workplace of good habits. To guarantee that a workplace of
good habits is established, regular appraisals of the workplace must be undertaken.
Recently a sixth and seventh S were added to the 5S methodology, namely:
6 Safety. If the 5S methodology is implemented correctly, safety must be an integral component of the
implementation process. Standards must be compiled that guarantee a safe working environment. The
standards must be sustained and assessed regularly. Unsafe working conditions contribute to the
production of inferior quality products.
7 Support. This stage in the methodology concerns areas that are not part of the operations function.
During this stage the support functions assist the operations function in improving quality standards. A
very important function in this regard is the maintenance department. Implementing a viable maintenance
function reduces the variability from the processes caused by the breakdown of machines and equipment.
As a result of preventive maintenance programmes, the frequency of breakdowns is reduced with a
resultant reduction in the cost associated with these types of breakdowns. Therefore the seiso (shine)
stage must be incorporated as part of the preventive maintenance programme.
Figure 11.3 provides an illustration of the 5S methodology, including the 2 additional stages.
FIGURE 11.3 The 5S methodology, including additional stages
11.9 Success factors for lean implementation
The following success factors for lean implementation have been identified:
• Employees must be encouraged to think lean. Every task must be seen as critical to the success of the
organisation. Waste must be eliminated through creative thinking.
• The first step in improvement is the implementation of the 5S methodology. This constructs the
foundation on which the rest of the lean production implementation is established.
• Implementation and application of SOP is the responsibility of each individual employed by the
organisation.
• All value-added activities must be identified as a priority. Maximise these activities, as this is what the
consumer will be willing to pay for in a product.
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•
•
•
•
•
•
•
•
•
Without the support of top management, the introduction of a lean production system is doomed to
failure. Through the empowerment of middle management, the ‘how’ of lean production implementation
can be developed. The programme must form part of the vision and mission of the entire organisation.
The involvement of employees at all levels of the organisation is crucial to the successful implementation
of a lean production system. This goal can be achieved through a common vision of what is required for a
particular organisation.
Identify processes that are dysfunctional. Fix these deficiencies first. Those processes that are performing
well must be standardised. An entire new process must be created only as a last resort.
Training is quintessential. Train the team leaders and supervisors first. As a result, these employees will
become the lean production experts.
Historical data should not be trusted. The facts that are conveyed by employees as normal or standard
practice cannot be trusted. This type of information is usually incorrect.
The only measurement of the success of the lean system is through total product cycle time. If this time
has decreased, the implementation has been successful.
Value stream mapping is an important technique to use in the implementation of a lean system. This
technique ascertains where improvement efforts are necessitated.
Cellular manufacturing augments the probability of a successful implementation of a lean system.
The utilisation of visual controls during the implementation phase of the lean system will assist in
measuring progress.
CLOSING EXAMPLE
Traditional vs lean manufacturing in hamburgers
A simple example of traditional manufacturing vs lean manufacturing is the production lines at a hamburger
shop where everything is pre-packed and one that makes an order when received. When you arrive at the
first shop, you will see stacks of sandwiches or hamburgers stacked in the chutes behind the front counter.
These have been made in batches and are ready to be delivered to the customer. This system works as long
as there are sufficient customers who demand the types of burgers that are prepared and waiting before the
burgers get cold or dried out. However, if you ask for your burger with no pickles or fries with no salt, you
may be in for a long wait.
This is a good example of traditional manufacturing.
Conversely, when you go to the second shop for a hamburger, you will not see stacks of product waiting
for customers. When you place your order, the cashier announces it to the food preparers, who then ‘build’
your burger to order. If you ask for no pickles and extra onions, you will receive it in the same amount of
time it takes for you to get a standard burger. This is a good example of lean manufacturing.
The majority of the larger takeaway hamburger shops in South Africa opted for the second and lean
manufacturing option. Smaller shops still use the traditional manufacturing option and they usually only
make a limited number of hamburgers and other sandwiches at a time so as not to waste any of their
products.
Summary
Lean production or systems is a vital part of the business culture of an organisation. Lean production has to
be part of the strategic plan of the organisation. In this chapter a number of lean methodologies were
discussed that are associated with lean production. The tools, techniques and methodologies discussed here
cannot be seen as exhaustive. They are the ones most often used by practitioners. Lean production must be
implemented through the practice of continuous improvements. It means that small incremental
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improvements are made to processes or activities. Every staff member must take control and responsibility
for the work they undertake within a process or activity. They are ultimately responsible for the
improvements to be undertaken. Organisations must strive to eliminate every form of waste that occurs
within their processes and activities. Seven foremost goals have been acknowledged to exist for lean
production or systems. These goals are similar to those for JIT. During the implementation phase of the
system, many tools and techniques are available to staff members to use. To be successful, an organisation
must make the transition from being a lean thinking organisation to one that has a lean culture instilled. The
lean culture would impact every functional area within the organisation as well as the supply chain.
Key terms
5S methodology: An authoritative technique that is a fundamental part of the six-sigma methodology. The
principal objective of the 5S methodology is to coordinate and regulate work practices in an
organisation.
Achieving lean status: During the implementation of a JIT system, a number of waste reduction
methodologies are in existence to assist organisations in achieving lean status.
Availability: The percentage of time that a machine is actually able to produce parts out of the total time
that it should be able to produce products. This number includes breakdowns, set-ups and adjustments.
Continuous improvement: Replacing ineffective practices with effective ones to attain ongoing,
measurable gains. Organisations must constantly measure the effectiveness of processes and strive to
meet more difficult objectives to satisfy customers.
Cost of waste: Cost that is incurred due to the waste linked to manufacturing.
Involvement of employees: Employees must participate in the process in its totality to guarantee that lean
status can be achieved. Not only must all components produced by employees be of high quality, but
they must be produced at the right time and in the right quantities.
Kaizen: A systematic approach that includes all operations within the organisation and aims to improve the
quality of products and components that are delivered to customers.
Kanban: A Japanese word meaning ‘card signal’. It represents any visual method used to show the need for
parts or products to be moved or produced in a lean system.
Labour costs: Expenses associated with employees, including wages, insurance, taxes and workers’
compensation.
Lean production: Lean production has three very important tenets, namely value definition, waste
elimination and employee support.
Lean techniques: Different tools or methodologies that can be used to reduce or eliminate wastes and costs
of production.
Lean thinking: A management system that focuses on continuous improvement of service provision by
eliminating waste and poor flow through work processes.
Matching demand and production: Customer demand will be utilised to pace work through the process to
achieve a smooth production rate, and it can be seen as a pull system.
Non-value added: Activities that do not contribute to the product or the process and should therefore be
eliminated. Non-value added steps are waste.
Pull system: A material management system in which parts are not delivered to machines until they are
needed. Pull systems are based on actual demand for products.
Quality rate: The percentage of good parts out of the total number of products produced. This number
includes time lost to defects and the time it takes from start-up to normal production.
Root cause: The origin of a problem rather than just its symptoms.
Seven wastes: Activities identified and categorised as non-value adding events or processes that limit
profitability in a company.
Six-sigma: A quality manufacturing method that uses data analysis to eliminate defects in manufacturing.
Standard times: The time that is required to complete a task.
Standardisation: The reduction of the variability of the production system.
Takt time: The rate at which the customer requires your company to manufacture products. Takt time is the
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number of work minutes per day divided by the number of orders per day.
Total time of operations: The total time that elapses from the moment raw materials are delivered to the
dock to the moment that the finished product is shipped to the customer.
Unit: The nature of the measurable, such as production hour, cell size or operator.
U-shaped production lines: In the u-shaped layout the entrance and exit to the process are situated across
from each other. Therefore both goods receiving and goods delivered take place at the origin of
production.
Value: The number or amount of the unit, such as eight production hours, six cells and 18 operators.
Value added: Any part of the production process that improves the product for the customer.
Review questions and activities
1 What are the prerequisites for a lean system?
2 Explain the success factors for lean implementation.
3 Illustrate your understanding of the seven most common wastes by means of a diagram.
4 Discuss overproduction waste.
5 Discuss transportation waste.
6 Discuss inventory waste.
7 Discuss carrying cost as an impediment to achieving lean status.
8 List the elements of a lean system.
9 Discuss the steps required guaranteeing computation of accurate time standards.
10 Discuss a typical Kaizen schedule.
11 Discuss the manner in which a Kanban system can assist an organisation in achieving lean status.
12 Is the involvement of employees important during implementation of a lean system? If so, why?
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CASE STUDY: MISSION DIRECTED WORK TEAMS (MDW) AT
VOLKSWAGEN SOUTH AFRICA (VWSA): GENERATING FRONTLINE
INVOLVEMENT IN THE NEW PAINT SHOP
The medium term vision of VWSA revolves around the development of a high performance team culture
by 2010. For this, a number of broad initiatives have been put in place by all Divisions, such as the
introduction of a new Volkswagen Production System in the mould of lean manufacturing. More
specialised initiatives were also put into place by individual Divisions.
Mission Directed Work Teams (MDW) is one of these specialised initiatives. It was selected for
implementation at initially only the New Paint Shop (it has since also been rolled out to the Old Paint
Shop, but this article deals with only the New Paint Shop).
The New Paint Shop in Uitenhage South Africa is a new start-up, state of the art facility. The main aim
of MDW in the New Paint Shop is to generate frontline involvement; the secondary aim – to serve as a
vehicle for coaching efficient high performance teams to complement the drive for excellence in quality,
speed, cost, safety and people.
MDW in the New Paint Shop commenced in November 2007 with the implementation of Module 1.
Notable progress has been made so far in terms of the quality, speed, cost and other indicators that are
measured by the frontline teams.
In terms of quality, for example, the Prime Preparation Area (C Shift) showed a 59% improvement in
the total number of measured defects in the period February 08 – April 08, while the Sealer Line (B Shift)
improved by 48% over the same period, and the Underbody Sealer Area (A Shift) 73%. Fine Sealer (C
Shift) and Spray Booth (B Shift) improved 89% and 31% respectively.
It can be seen that improvements are representative, as they are spread over several areas, and across
shifts. The same is true for other measurements. The total cost saving (all 21 teams) for the same period,
for instance, showed a 25% benefit.
Several good innovations were put forward. Some examples are:
• Vacuum machines were located inside booths. This meant that trapped dust was kept inside booths,
which could still threaten good dirt in paint counts. The situation was made safer by stationing the
vacuum machines outside booths. This also increased work space inside booths.
• Broad tape was used on flanges. The team proposed narrower (less expensive, but equally effective)
tape, with a collective annual cost saving of R60 000 for three shifts.
• Boots got clogged up by hardening fluids, and became very slippery. A cheap solution involving a
second hand solvent tray, a rag, and some solvent at the booth entrance resulted in clean boots that
were not slippery at all.
As always, challenges remain. These fall into two categories: attendance related, and follow up related.
Attendance related challenges revolve mostly around representation at the coaching reviews,
something that is problematic in view of the fact that the New Paint Shop has a 24-hour, 3-shift cycle.
Consequently, coaching reviews cannot be scheduled during production time, and employees have to
change their transport arrangements in order to attend. This is problematic because many travel between
Port Elizabeth and Uitenhage with lift clubs. A partial solution has been reached in that overtime is paid
for coaching review attendance (and also for team leader when preparing their multilevel meeting
presentations). Another was that meetings were scheduled as follows:
• MDT3 level meeting area attended by the coaches occurred right on the shop floor.
• All the teams’ areas are a maximum of 30 m away from their area.
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Follow-up related challenges pertain mostly to the implementation of the multitude of innovation ideas that
are put forward by the frontline teams. The problem here was securing the authorisation and funding
required for speedy implementation so that momentum is not lost. This question has been resolved through
the Division Head responsible for paint shop operations personally accepting the task of giving feedback
on innovation suggestions within two working days.
(SOURCE: Competitive Dynamics International. n.d. MDW at Volkswagen South Africa (VWSA): Generating frontline
involvement in the New Paint Shop. http://www.cdi.biz/SA_news_Volkswagen.aspx)
Case study questions and activities
1 What are the different lean manufacturing strategies that VWSA implemented in the new paint
shop?
2 Identify the wastes that VWSA addressed in these strategies.
3 Advise VWSA on possible lean techniques they can implement to address the challenges that they
still have in the paint shop.
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14 Eroglu, C. & Hofer, C. 2011. ‘Lean, leaner, too lean? The inventory-performance link revisited’, Journal
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23 Gong, J., Tang, J. & Li, Q. 2010. ‘Performance of real-time distributed arrival time control in assembly
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25 Hameri, A.P. 2011. ‘Production flow analysis – Cases from manufacturing and service industry’,
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27 Hoverstadt, P. 2010, ‘The viable system model’, Systems Approaches to Managing Change: A Practical
Guide, 87–133.
28 Hüttmeir, A., De Treville, S., Van Ackere, A., Monnier, L. & Prenninger, J. 2009. ‘Trading off between
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29 Hwang, R.K. & Katayama, H. 2010. ‘Uniform workload assignments for assembly line by GA-based
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38 Miller, G., Pawloski, J. & Standridge, C.R. 2010. ‘A case study of lean, sustainable manufacturing’,
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49 Salman, M.R., Van der Krogt, R., Little, J. & Geraghty, J. 2009. ‘Applying lean principles to production
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50 Saurin, T.A., Marodin, G.A. & Ribeiro, J.L.D. 2011. ‘A framework for assessing the use of lean
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Websites
Visit the websites below.
http://www.highbeam.com/doc/1P3-863998531.html
www.kellogg.northwestern.edu/execed/Programs/LEAN.aspx
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www.mfgeng.com/
The websites below were last accessed in April 2013:
www.cdi.biz/SA_news_Volkswagen.aspx
www.justice.gov.za/docs/articles/2012-mnt-strategy.html
www.sanews.gov.za/south-africa/justice-dept-wins-award-lean-thinking
YouTube™
Visit the following clips:
www.youtube.com/channel/HCb9OFj0CvkMU
www.youtube.com/channel/HCdTT423hHjxA
www.youtube.com/channel/HCiR2vg7csMr0
www.youtube.com/user/sixsigmamoneybelt
www.youtube.com/watch?feature=player_embedded&v=aI7ornrCKnM#!
www.youtube.com/watch?feature=player_embedded&v=jk9vgv7cXjw
www.youtube.com/watch?feature=player_embedded&v=zUUVy59J_54
www.youtube.com/watch?v=E6rRHqb5MV0&list=PL1F2D8F55EDDCD0AE&index=53
www.youtube.com/watch?v=IRLVcmqfJeQ
www.youtube.com/watch?v=ZdHGTCXcJQU
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CHAPTER 12
Quality management
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
Understand and explain the need for quality in organisations
In your own words describe the different definitions of quality
Identify and describe quality spheres in your own words
Understand and explain the quality contributions from other disciplines
Understand and explain the costs involved in quality
Discuss some of the popular quality management systems and quality standards that are available to
organisations
Discuss SHEQ management, its benefits and challenges
Identify and discuss the eight principles of quality systems
Describe the roles of various South African organisations for quality.
CHAPTER outline
12.1
12.2
12.2.1
12.2.2
12.2.3
12.3
12.3.1
12.3.2
12.3.3
12.3.4
12.4
12.4.1
12.4.2
12.4.3
12.5
12.5.1
12.5.2
12.5.3
12.5.4
12.5.5
12.5.6
12.5.7
12.5.8
12.5.9
12.6
12.6.1
Introduction
Exploring definitions of quality
Quality dimensions for goods
Quality dimensions for services
Why has quality become a priority?
Gurus of quality
W. Edwards Deming
Joseph M. Juran
Philip Crosby
Kaoru Ishikawa
Quality spheres
Quality control
Quality assurance
Quality management
Quality contributions from other disciplines
Financial perspective
Human resources perspective
Engineering perspective
Supply chain perspective
The operations perspective
The strategic management perspective
The marketing perspective
The value-based perspective
The contingency perspective
Costs of quality
Internal costs
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CHAPTER 12
Quality management
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
Understand and explain the need for quality in organisations
In your own words describe the different definitions of quality
Identify and describe quality spheres in your own words
Understand and explain the quality contributions from other disciplines
Understand and explain the costs involved in quality
Discuss some of the popular quality management systems and quality standards that are available to
organisations
Discuss SHEQ management, its benefits and challenges
Identify and discuss the eight principles of quality systems
Describe the roles of various South African organisations for quality.
CHAPTER outline
12.1
12.2
12.2.1
12.2.2
12.2.3
12.3
12.3.1
12.3.2
12.3.3
12.3.4
12.4
12.4.1
12.4.2
12.4.3
12.5
12.5.1
12.5.2
12.5.3
12.5.4
12.5.5
12.5.6
12.5.7
12.5.8
12.5.9
12.6
12.6.1
Introduction
Exploring definitions of quality
Quality dimensions for goods
Quality dimensions for services
Why has quality become a priority?
Gurus of quality
W. Edwards Deming
Joseph M. Juran
Philip Crosby
Kaoru Ishikawa
Quality spheres
Quality control
Quality assurance
Quality management
Quality contributions from other disciplines
Financial perspective
Human resources perspective
Engineering perspective
Supply chain perspective
The operations perspective
The strategic management perspective
The marketing perspective
The value-based perspective
The contingency perspective
Costs of quality
Internal costs
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12.6.2
12.7
12.7.1
12.7.2
12.7.3
12.7.4
12.7.5
12.7.6
12.7.7
12.7.8
12.7.9
12.8
12.9
12.9.1
12.9.2
12.9.3
12.10
External costs
Quality management systems
What is ISO 9000?
ISO 9000 series:2000
ISO 14000: Environmental standards
OHSAS 18001: Occupational health and safety standards
ISO 22000: Food safety standards
ISO 31000: Risk management
ISO 19011: Guidelines for auditing management systems
ISO 26000: Social responsibility
ISO 50001: Energy management
SHEQ management
Quality awards
The Malcolm Baldrige National Quality Award (MBNQA)
The Deming prize for quality
The European Quality Award (EQA)
South African quality organisations
Summary
Key terms
Review questions and activities
Case study
References
Websites
YouTube™
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SETTING THE SCENE
Toyota recalls 7.43 million cars, including in South Africa
As Toyota’s sale goes up, its reputation goes down. On October 10, 2012, Toyota announced a global recall
of 7.43 million vehicles in South Africa, the US, Japan, Australia, Europe, China and elsewhere in Asia and
the Middle East, due to a faulty power window control switch that could lead to potential fire accidents.
Toyota described the switch as “notchy” and said the problem will be fixed by applying special grease.
Following the largest recall of 8 million cars over sticky gas pedals and floor mats in 2009 and 2010, this
massive recall is another heavy hit to the company. The company’s stock shares went down almost 2% on
that day, making its comeback even harder.
No crashes or injuries have been reported related to the problem, but more than 200 problems were
reported in US. Fewer problems were reported elsewhere, including 39 cases in Japan, Toyota spokesman
Joichi Tachikawa said.
A spokesman for Toyota SA said no incidents had been reported in South Africa but the local company
would be taking pre-emptive action. Cars involved are believed to be the RAV4, Corolla, Yaris, Camry and
Auris from the indicated date range.
The recent fault gives rise to safety and quality concerns about the car. Toyota executives
acknowledged that Toyota cut back on quality control in order to be the world’s largest auto seller. Before
that, Toyota had boasted a reputation for pristine quality, centred around its super-lean production methods
that empowered the worker to hone in on quality control. Toyota executives have acknowledged the
escalating recalls were partly caused by the company’s overly ambitious growth goals.
(SOURCE: compiled from: http://www.wheels24.co.za/News/Toyota-recalls-743-million-cars-20121010 and http://www
.abcactionnews.com/dpp/money/consumer/toyota-recalls-743-million-cars-worldwide-25-million-in-the-us and http:/
/newhouseprssa.org/2012/11/06/another-blemish-on-reputation-toyota-massive-recall/ all websites accessed on 8 August 2013)
12.1 Introduction
Think about the last time you complained about something and the reasons for your complaint. Basically, you
complained because you experienced something that did not meet your expectations. If all the things people
do and all the things they experience are to their expectations, then they will not complain; in other words,
the things they do and experience meet their quality standards.
Organisations exist to make a profit. In order to make a profit, they need to manufacture goods and
supply services that satisfy the needs and expectations of their customers and clients. Practices of quality
ensure that the needs and expectations of customers and clients are continually determined and recognised,
and that the subsequent goods and services produced satisfy these needs.
Practices of quality also ensure that the organisation complies with and conforms to regulations and
standards required by the government and industry, as well as demands from interest groups.
12.2 Exploring definitions of quality
Quality can be defined in many ways, with reference to, for example, superiority, excellence, freedom from
defect, a high degree of effectiveness, a high degree of durability and reliability, good value for money and a
high degree of satisfaction. Basically, quality means satisfying the expectations of customers and clients.
When people go out to a restaurant, they will be satisfied if the food is tasty, the waiter friendly and the price
within their budget. Such a restaurant would be considered to be of good quality.
People are delighted if quality exceeds their expectations, just satisfied if quality meets their expectations,
and unsatisfied if quality is below their expectations. Imagine that you visit a bank and have an expectation of
completing your financial transactions within 15 minutes. You would be delighted if you completed these
transactions in 5 minutes, satisfied if it took 15 minutes, and unsatisfied if you spent 30 minutes to complete
them.
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Quality can be seen as highly perceptual and is value driven. Suppose you want to purchase a new
Mercedes-Benz. You would not accept the quality of the motor vehicle if it had a few scratches. However, if
you were given a substantial discount, making the purchase a bargain, the quality of the vehicle might then
become acceptable and you might gladly make the purchase.
Quality is defined in many ways by many authors and researchers, as the following examples show:
• In terms of fitness for use. A product is fit for use when it performs to its expected usage. For example,
a vacuum cleaner is good quality if it cleans carpets effectively.
• In terms of conformance to requirements. A product or service is of good quality when its attributes
meet all desired standards and specifications.
• In terms of freedom from deficiencies. This means that a product or service is of good quality when free
of errors at delivery, during use and during servicing.
• Transcendentally. This means that quality is something intuitively understood but impossible to
communicate, such as the beauty of love, excellence, greatness and appeal.
• In terms of a system. This approach promotes the understanding that quality is a system or means to
produce products and services economically which satisfy customer requirements, for example, ISO
9001:2000 quality standards.
• Culturally. This approach is concerned with aspects that support the drive for quality to satisfy customer
requirements, for example, management style, work practices and work attitudes.
• Judgementally. In terms of this approach, quality is what the customer says it is.
• In terms of value. In terms of this approach, quality means that the customer gains more benefits from a
product or service than the personal sacrifices her or she has made to acquire or use it.
12.2.1 Quality dimensions for goods
The most common dimensions for the assessment of the quality of goods are explained by using the example
of a digital camera as the product.
• Performance. This describes the efficiency with which a product achieves its intended purpose. Better
product characteristics and performance are synonymous with better quality. In our example, a camera
with seven megapixels produces better pictures than a camera with three megapixels.
• Features. These are attributes of a product that supplement the product’s basic performance. These
include the ‘bells and whistles’ contained in products. For example, the camera has automatic focus
capabilities.
• Reliability. This refers to the propensity for a product to perform consistently over its useful design life;
the perception is the better the quality, the better the reliability. People will expect the camera to be
highly reliable and still capture pictures after 5 or 10 years.
• Conformance. This refers to the situation when the specifications of the product are within the prescribed
tolerances.
• Durability. This refers to the degree to which a product tolerates stress or trauma without failing. The
camera in our example should not be damaged if it is dropped.
• Serviceability. This refers to the ease of the maintenance and repair of a product or the provision of
back-up service. It should be possible to repair the camera in our example if it is damaged, and there
should be a help desk for advice in case the user experiences problems with the camera.
• Aesthetics. This term refers to the product’s subjective characteristics that appeal to the senses of taste,
touch, hearing, sight and smell. For example, a silver camera may appeal more than a black camera.
• Perceived quality. This is quality based on the user’s opinion. This is influenced by brand names,
advertising, image and price. For example, some photographers might rate the quality of a Canon camera
more highly than that of a Kodak camera, and some photographers might rate the Kodak’s quality more
highly than the Canon’s. The ratings in these cases are based on the perceptions of the different users.
• Safety. This refers to the degree to which the product protects users before, during and after use.
• Environmental friendliness. This reflects the degree to which the product could have a destructive effect
on natural resources.
12.2.2 Quality dimensions for services
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Quality measurements of services are more difficult to achieve than those of goods, as there is more of a
human element in them. There are, however, some widely used characteristics, and we shall explain these by
using a restaurant as an example:
• Tangibles. These include the physical appearance of the service facility, the equipment, and the
personnel and communications materials. In our example, a clean restaurant will be perceived to be of a
higher quality than a dirty restaurant.
• Reliability. This relates to the ability of the service provider to perform the promised service dependably
and accurately. For example, the restaurant will be perceived as high quality if it provides tasty pizzas
with the same ingredients every time an order is placed.
• Responsiveness. This is the willingness of the service provider to be helpful and prompt in providing the
requested service. For example, a restaurant that can provide a meal within 10 minutes is perceived as
better than one that takes 45 minutes to produce a meal.
• Assurance. This refers to the knowledge and courtesy of employees and their ability to inspire trust and
confidence. For example, you might rate a restaurant whose waiters discuss the menu and specials with
you more highly than a restaurant where the waiters simply provide you with a menu and give you no
assistance in selecting a meal.
• Empathy. This is the ability to satisfy customers’ desire for caring and attentive service.
12.2.3 Why has quality become a priority?
Quality has become a priority because of changes in the business world, which are due to a variety of factors.
Some of the more important factors are:
• Competition. Customers in the past believed that higher prices meant higher quality. Presently,
customers want higher quality at lower prices and have many choices in obtaining this. Also, it is
believed that quality is non-negotiable and is expected at all times. Globalisation has led to an increase in
the number of suppliers of products and services, and hence to increased competition.
• The customer-focused organisation. Companies now focus their business strategies on customers in
terms of building up their levels of loyalty rather than making products that simply conform to
specifications.
• Higher level of customer expectation. Customers have greater expectations regarding product and
service conformance. This is due to the availability of more information, wider knowledge on the part of
customers, and a broader choice of suppliers.
• Performance improvement. Quality, cycle time, cost and profitability have become independent; hence
organisations speak of ‘performance improvement’ or ‘business excellence’, rather than simply of
‘quality’.
• Change in the form of organisations. With unbundling and de-layering of management structures,
organisations nowadays talk more about outsourcing, partnering with suppliers, process management and
shared services, meaning that quality and the understanding thereof is critical.
• Changing workforce. The South African workforce represents the rainbow nation and there is a variety
of different work cultures, different levels of education, different languages, etc. within different parts of
the organisation. There are also changes in the workforce due to downsizing strategies.
• The information revolution. With modern technology – for example, the email system, the internet and
cellphones – information can be easily collected and disseminated. Hence quality and management of
information are very important. Organisations can employ these technologies for many activities, for
example, to provide customers with a wealth of information, enable customers to order products,
collect information on customer needs and purchasing behaviour, customise products based on
customers’ needs, link suppliers, and link deals.
• The role of the ‘quality department’. Quality is no longer the role of a quality department alone; it is
the responsibility of every individual in an organisation. Hence quality has become an integrated function
in business models.
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DISCUSSION
Production of a textbook
Use the production of this textbook as an example and divide it into the different elements that are
necessary to produce it. Then determine the quality dimensions for each aspect/element.
Answer and debate the following questions with fellow students:
1 Which of these elements could be identified as a service and which a product?
2 What are the differences between the quality dimensions of a product and a service?
12.3 Gurus of quality
It is impossible to list all of the people who have contributed towards quality, but in this section we briefly
present some of the so-called ‘gurus of quality’.
12.3.1 W. Edwards Deming
Although Deming is best known for his emphasis on the management of a system for improving quality, his
thinking was based on the use of statistics for continual improvement. Prior to his death in 1993, Deming was
widely accepted as the world’s pre-eminent authority on quality management. He gained a lot of credibility
due to his influence on Japanese and American industry.
In the 1920s, Deming worked in the Western Electric Hawthorn plant. He was trained in engineering and
mathematical physics and was introduced into the field of statistics by one of his friends, Walter Shewhart.
After working at the Hawthorn plant, Deming worked in government jobs with the US Department of
Agriculture and the Bureau of the Census, where he assisted in developing statistical sampling techniques.
During the Second World War he worked with the US Defence contractors to use statistics to identify
systematic quality problems occurring within defence-related products.
After the war, Deming was sent to Japan to assist with the population census. During his stay in Japan,
the Japanese Union of Scientists and Engineers requested him to provide lectures in statistical quality control,
and it was during this period that he became impressed with the Japanese culture and commitment to quality.
Deming’s mantra was ‘continual never-ending improvement’ and quality was referred to as a ‘journey
without a destination’.
Deming’s 14 points for management
Table 12.1 summarises Deming’s 14 points for management, which we discuss in more detail below.
TABLE 12.1 Deming’s 14 points for management
1
Create constancy of purpose
8
Drive out fear
2
Adopt a new philosophy
9
Break down barriers between departments
3
Cease mass inspection
10
Eliminate slogans
4
End awarding business on the basis of
price tags
11
Eliminate work standards
5
Constantly improve the system
12
Remove barriers to pride
6
Institute training on the job
13
Institute education and self-help
7
Improve leadership
14
Put everyone to work
(SOURCE: Deming, W.E. 1986/2000. Out of the crisis. Cambridge: MIT Press, 23–24)
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1 Create constancy of purpose toward improvement of product and service with the aim of becoming
competitive, staying in business and providing jobs. This means that organisations are in existence not
just to make money or generate profits; they are in existence to serve their customers and employees.
Management of these organisations needs to ensure that there are strategic plans with clear visions and
missions, and to invest in innovation, training and research. Constancy of purpose means that
management must commit resources over a long term to ensure the completion of quality initiatives. The
implication here is that quality improvement happens over a long term and must not be viewed as a
short-term solution. The Japanese industry took 25 years to achieve high standards of quality.
2 Adopt a new philosophy. The present is a new economic age. Traditional methods of management create
mistrust, fear and anxiety. The new philosophy is a customer-centred approach based on mutual
cooperation between management and the workforce, where everyone is engaged in continual
improvement. Management must initiate change by replacing the goal of a reduction of defects with that
of improving customer satisfaction. Similarly, specification measurements must be replaced with
customer service metrics of measures of quality.
3 Cease dependence on mass inspection. Routine inspection activities acknowledge defects but do not add
value to the product. Instead, they almost encourage defects as an inspector is viewed as the person who
will detect and filter out defects. This methodology leads to an increase in cost and a decrease in
productivity. The need for inspection on a mass basis can be eliminated by building quality in the first
place. Instilling quality at the source means that all workers are responsible for their own work and
perform needed inspections at each stage of the process to maintain process control, and quality is not
the responsibility of the quality department.
4 End the practice of awarding business on the basis of price tag alone. The purchasing department is
responsible for the procurement of raw materials and components for the manufacture of goods and
services. Traditionally, purchasing decisions were based on price and not on quality. This results in
defective products if the raw materials are inferior in quality. Deming suggests that costs can be
minimised by moving toward a single supplier for an item and building loyalty and trust in a long-term
relationship. There is a misconception that the approach of having many suppliers results in competition
that improves quality and decreases cost. In reality, having many suppliers causes an over-emphasis on
cost and an increase in variability.
5 Improve constantly and forever to improve quality and productivity, and thus constantly reduce cost.
Continual improvements should be encouraged in small increments. Continual improvement focuses on
the management of systems of quality. The system of production includes product design, process design,
training, tools, machines, process flows and a host of other variables that affect the output. In the final
analysis, management is responsible for most of the system design elements as it is management that has
the authority and the budget to implement systems. This means that workers can be held responsible only
for their inputs into the system. The poor performance of the system is often due to the poor performance
of management.
6 Institute training on the job. It is essential for people to have the necessary training and knowledge to
perform their work. Training improves the productivity and morale of the workforce by showing workers
that the company is interested in helping them to invest in their future. Deming stresses that training,
although a necessary condition for improvement, is not sufficient to guarantee successful implementation
of quality management.
7 Improve leadership. The aim of supervision should be to help people, machines and processes to do a
better job. All quality experts agree that leadership is the key to improving quality. For wide-ranging
quality improvements to occur, upper management must be involved. It is upper management that has the
money and authority to oversee the improvement of quality.
8 Drive out fear, so that everyone may work effectively. At times, employees who surface problems and
request changes are considered as troublemakers. Some employees fear making or suggesting
improvements, because they do not get acknowledged and end up being ignored. Employees also fear
asking for improvements for fear that these improvements might cause them to lose their jobs. Japanese
firms have overcome these fears by offering lifetime employment.
9 Break down barriers between departments. Deming suggests that people in research, design, sales and
production must work as a team to eradicate problems of production. The organisation works
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collectively to meet the needs of customers by improving processes, so that teamwork is an important
means of attaining the organisation’s goals and objectives.
10 Eliminate slogans, exhortations and targets for the workforce that ask for zero defects and new levels of
authority. Deming believed that such exhortations only create adversarial relationships, as most of the
causes of bad quality and low productivity belong to the system and lie beyond the power of the
workforce. His view was that exhortations such as ‘get it right the first time’ and ‘zero defects forever’
can have the opposite of the intended effect. By pressuring employees to higher levels of quality and
productivity, management places the onus for improvement on the employees, and if the structures and
resources are not in place to assist employees, they can become frustrated and discouraged, lowering their
performance even further.
11 Eliminate work standards on the factory floor. Deming did not like the promotion of work standards and
work measurements. His view was that management should instil better leadership instead of standards,
because once standards are achieved, continuous improvement stops. In other words, there is a focus on
results and not on processes and this does not promote long-term behaviour. Managers need to understand
the system and the variations within the system and seek to reduce these in the long term.
12 Remove barriers that rob workers of their right to pride in the quality of their work. The responsibility of
supervisors must be changed from managing numbers to ensuring quality. Many casual workers are hired
on an hour-to-hour basis just to perform physical tasks. These workers suffer from low morale and low
commitment to the organisation. Unskilled managers also add to this problem by reinforcing the fact that
employees cannot be trusted with decisions and self-determination. Deming was of the view that
performance appraisals were destructive to pride of workmanship. Rather than promoting teamwork,
performance appraisals promote competition between workers for the sharing of limited resources.
Objectives are driven by numbers, which normally focus on short-term results and not on the customers.
13 Institute a vigorous programme of education and self-improvement. Deming believed in a learning
organisation. Such an organisation requires a structure that reinforces and rewards learning. The
organisation must create the environment in which employees strive to achieve their best by attaining
better skills and better education. This in turn will motivate the worker.
14 Put everybody in the company to work to accomplish transformation. The transformation process is
everyone’s job. Hence a quality management system must include all the workers in an organisation.
12.3.2 Joseph M. Juran
Joseph M. Juran was responsible for increasing the focus on quality in the past half-century. Like Deming, he
taught quality principles to the Japanese. Juran promoted the view that organisational quality problems are
largely the result of insufficient and ineffective planning for quality. He argued that companies must revise
and master their strategic planning processes.
The Juran trilogy
Juran identified three basic processes essential for managing and improving quality: planning, control and
improvement. These processes are interrelated and referred to as ‘The Juran trilogy’.
Everything begins with quality planning. The purpose of quality is to provide the operating forces with
the means of producing products that can meet the customers’ needs. Quality planning begins with
identifying customers and their needs and designing products that will satisfy these needs. Once planning is
complete, the plan is turned over to the operating forces. Their job is to produce the product.
During operations, there must be quality control to ensure that the products are manufactured to
expectations. Quality control involves determining what to control; determining measurement standards with
the respective methods for measurement, collecting and analysing data; and ensuring corrective action where
required. Improvement requires the investigation of problems, identification of root causes, and ensuring
implementation of remedies to improve the performance.
12.3.3 Philip Crosby
Crosby’s primary mantra was that quality, as a managed process, can be a source of profit for the
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organisation. He emphasised the behavioural and motivational aspects of quality management, rather than
focusing on statistical approaches.
Crosby identified a period of enlightenment during which management becomes aware of the importance
of quality – by exposure to quality videos, workshops and seminars – and the urgent need to respond to the
challenges of competitiveness. A quality improvement team is then established. This team has members from
all departments, whose function is to set and review organisational quality measures. The next step is to
evaluate quality-related costs, to ensure profit table corrective actions. This is also required as a means of
motivating workers to improve quality. The final step includes actions to establish an ad hoc committee for
the zero defects programme and employee recognition programmes.
Crosby’s 14 steps
Crosby proposed a quality improvement programme consisting of 14 steps, as follows:
1 Make it obvious that management is clear about quality.
2 Form quality improvement teams with representatives from each department.
3 Determine how to measure where current and potential quality problems lie.
4 Evaluate the cost of quality and explain its use as a management tool.
5 Raise quality awareness and make it the personal concern of all employees.
6 Take formal actions to correct problems identified during the previous steps.
7 Establish a committee for the zero defects programme.
8 Train all employees to carry out actively their part of the quality improvement programme.
9 Hold a ‘zero defects day’ to let all employees know that there is a change in emphasis.
10 Encourage individuals to establish improvement goals for themselves and their groups.
11 Encourage employees to communicate to management the obstacles they face in attaining their
improvement goals.
12 Recognise and appreciate those who participate.
13 Establish quality councils to communicate on a regular basis.
14 Do it all over again.
12.3.4 Kaoru Ishikawa
Ishikawa was a leader in Japan’s quality movement. He believed in training and the use of statistics in quality
control, making everyone in an organisation responsible for statistical analyses and interpretation. His
philosophy was that everyone should be involved in improving quality, and he was responsible for coining
the term ‘companywide quality control’.
Ishikawa’s 11 points
The Ishikawa philosophy was based on the following 11 points:
1 Quality begins with education and ends with education.
2 The first step in quality is to know the requirements of the customer.
3 The ideal state of quality control is when inspection is no longer necessary.
4 Remove the root causes and not the symptoms.
5 Quality control is the responsibility of all workers in all divisions.
6 Do not confuse the means with the objectives.
7 Put quality first and set your sights on long-term objectives.
8 Marketing is the entrance and exit of quality.
9 Top management must not show anger when facts are presented by subordinates.
10 Ninety-five per cent of problems can be solved with the normal tools of quality control (refer to Section
13.2).
11 Data without dispersion information are false data.
Ishikawa was known for ‘democratising statistics’. In other words, he tried to make statistics as simple as
possible to the average worker. His technique was to use visual tools for the communication and
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understanding of statistical concepts.
As the above discussion of these quality gurus makes clear, even with all the differences, all the gurus
have in common the notion that quality is hugely important and that it is the responsibility of everyone in an
organisation.
DISCUSSION
Toyota’s huge 7.4m recall includes SA
Read the situation discussed in the setting-the-scene box at the beginning of the chapter.
Answer and debate the following question with fellow students: How could Toyota use Ishikawa’s
philosophy to ensure that the same situation does not occur in future?
12.4 Quality spheres
There are three spheres to quality, namely quality control, quality assurance and quality management.
They interact with each other as shown in Figure 12.1.
FIGURE 12.1 Quality spheres
12.4.1 Quality control
The first sphere is quality control, which is embedded within a process to meet standards consistently. The
control process involves observing or measuring actual performance, comparing it with some standard, and
then taking appropriate remedial action if there are deviations.
Let us use the example of a cake to illustrate the concept. Suppose you decide to bake a cake. Most
bakers mix the raw ingredients and check the mixture’s texture and taste before putting it into the oven. If the
texture or the taste is not to the required standard, they take the appropriate action, which could be reworking
the mixture or completely discarding it. This is quality control.
There are basically two methodologies to control: feedback and feed forward systems.
The feedback system
The feedback system is illustrated in Figure 12.2. When this approach is used, the outputs are measured by
means of a sensor, and compared with the standard. Corrective action, if required, is made upstream, either to
the inputs or to the conditions of the transformation process.
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FIGURE 12.2 Feedback system
Let us consider another example. Suppose you want to heat a syrup mixture to 60 °C. Sugar is mixed with
water and heated by means of an electric stove. A thermometer is used as a sensor. If the temperature is
found to be less than 60 °C, corrective action is needed. This would entail increasing the temperature of the
stove. Alternatively, if the temperature is found to be more than 60 °C, corrective action would entail
reducing the temperature of the stove.
The feed forward system
The feed forward system is illustrated in Figure 12.3. In a feed forward system, the corrective action is taken
downstream. Suppose Figure 12.3 represents a process of filling bags of cement that have to have a mass of
25 kg. The sensor is a mass meter. If the bag is found not to be the correct weight, a signal is sent
downstream to reject the bag.
FIGURE 12.3 Feed forward system
Basic activities of quality control
The basic activities of quality control can thus be described as follows:
• determining what to measure
• implementing a measurement system
• measuring the selected parameter, for example, temperature, weight, etc.
• comparing the measurement with a standard
• taking the necessary corrective action if there is a deviation from the standard.
12.4.2 Quality assurance
Quality assurance refers to activities associated with the guaranteeing of the quality of a good or service.
Often these activities are related to the provision of evidence to establish confidence in a product. The
evidence collected can be used for proving or facilitating the following:
• that products are fit for use and safe for the user
• that standards and regulations defined by government, industrial associations and professional
organisations are being implemented effectively
• that the product conforms to the standards required by the customer
• that procedures are adequate and are being practised and adhered to
• that all concerned parties are aware of quality requirements
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•
•
that corrective action is taken to eliminate defective products
that opportunities for improvement are identified, evaluated and implemented.
12.4.3 Quality management
The management processes that assist in integrating the control and assurance activities make up quality
management. Some of the tasks involved in this sphere are as follows:
• planning and implementing quality
• creating an organisational culture and organisational environment conducive for the promotion of quality
• planning and providing the resources for the implementation and maintenance of quality
• motivating and rewarding employees for the practice of quality
• ensuring suppliers are meeting the quality standards demanded.
12.5 Quality contributions from other disciplines
In support of the notion that quality is the responsibility of every employee in the organisation (mentioned
earlier in this chapter), this section summarises some of the contributions from and responsibilities of other
functional areas within an organisation.
12.5.1 Financial perspective
The financial perspective addresses costs associated with implementing quality, and considers any
subsequent financial benefit. If quality is implemented correctly, there will be a reduction of waste, and this
reduction could lead to improved profitability. However, these financial returns accrue over the long term
rather than the short term. Another problem is that it is difficult to determine a direct relationship between
quality improvement and financial success because there are many intervening and inter-correlated variables.
The law of diminishing returns suggests that investment in quality improvement will reach a point after
which it becomes uneconomical. The financial perspective has forced quality practitioners to be highly
objective, with quantifiable results, when requesting funding for quality improvements.
12.5.2 Human resources perspective
The human resources function is involved in the enabling of the workforce to develop and use its full
potential to meet the strategic objectives of the organisation. The success of the implementation of quality
initiatives within the organisation is dependent on the support and involvement of the workforce. The human
resources perspective is focused on the training, empowering, evaluation and motivation of employees to
achieve quality objectives.
12.5.3 Engineering perspective
Engineers are normally involved with product and process design. Product design engineering involves all
those activities associated with developing a product from the concept phase to final design phase. The
activities include the development of processes for the realisation of the product. The engineer also has to
design all the quality controls and quality components into the various products and processes. Engineers use
statistical methods to predict the rate of failure of a product or the components of the product over its life
span. This methodology is called reliability engineering. Reliability is defined as the ability of a product to
perform a required function under stated conditions for a stated period of time.
Another engineering-related contribution to quality is statistical process control (SPC). This is an
approach used to monitor process capability and process stability. (See Chapter 13, Section 13.2.3.)
12.5.4 Supply chain perspective
This perspective has grown out of the concept of value chain which includes inbound logistics, core
processes and outbound logistics.
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12.5.5 The operations perspective
The operations perspective focuses on the management of the activities of product and process design and
adopts the systems view of quality. This view involves the understanding that product quality is the result of
the interactions of several variables such as machinery, labour, procedures, planning and management. The
operations perspective also considers the needs of customers.
12.5.6 The strategic management perspective
Strategy refers to the planning processes an organisation uses to achieve long-term objectives, which include
setting a planned course of action which is cohesive and coherent in terms of goals, plans, policies and
sequencing. Quality strategies are rooted in the building blocks of the vision, mission and core values,
which lead to business-level and functional-level strategies. The aim of these strategies is to gain a
competitive advantage.
12.5.7 The marketing perspective
Traditionally, the term ‘marketing’ referred to those activities involved in directing the flow of products and
services from the producer to the consumer. More recently, marketing has focused attention on satisfying
customers and adding value through relationship management. The marketing perspective of quality is
based on the so-called ‘perceived quality’ of products and services, and the managing of quality perceptions
and the quality during the actual transaction and after-sales support. Marketing also plays a role in ensuring
that the voice of the customer is considered in the design process. This perception revolves around the
customer.
12.5.8 The value-based perspective
The customer-based perspective on quality revolves around the concept of value. A value-based perspective
involves a subjective assessment of the efficiency and economic value of every step of the process to the
customer.
12.5.9 The contingency perspective
Organisations differ in key areas such as mission, core functions, competence, customer attributes, target
markets, technology, employee skills, management style and a host of environmental variables. Contingency
theory presupposes that there is no theory or method for operating an organisation that can be applied in all
instances. A coherent quality strategy needs to address the key environmental variables. The contingency
approach to quality helps to settle the different perceptions on quality. The various definitions and
dimensions of quality vary in this approach. The definitions and dimensions of quality depend on the
environment in which the organisation operates.
12.6 Costs of quality
Quality, like any other commodity, comes at a cost. In the case of quality, these costs are associated with the
prevention of poor quality, the detection of poor quality, corrective action, and return. There are also two
broad categories of costs: internal costs and external costs.
12.6.1 Internal costs
Internal costs are quality costs incurred on goods and services before the customers receive them. These costs
are comprised of prevention costs, appraisal costs and internal failure costs.
Prevention costs
Prevention costs are the costs of initiatives that have the potential to reduce the occurrence of defective goods
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or services. For example, the cost of training quality control staff and implementing a preventive maintenance
programme can be taken as a prevention cost. Other costs include quality planning costs, new product review
costs, process planning costs, process control costs, supplier evaluation costs and training costs.
Appraisal costs
Appraisal costs are costs incurred in examining processes during the production of a good or service. For
instance, the cost of examining raw materials can be taken as an appraisal cost. Other appraisal costs include
in-process inspection costs, final inspection costs, quality audit costs, test equipment calibration costs and
stock evaluation costs.
Internal failure costs
Internal failure costs are costs incurred to rectify defaulting processes and rework, or the scrapping of reject
products.
12.6.2 External costs
External costs are the costs that occur after the customer has received defective goods or defective services.
Examples are transport costs incurred in bringing defective products back to the organisation’s premises and
all the reprocessing or scrapping costs that accompany defective products. Examples of other external costs
are warranty charges, costs of resolving complaints, penalties for non-conformance, and possible loss of
revenues.
It is interesting to note that in many South African companies, external quality costs are greater than
internal quality costs. In order to reduce the total cost of quality, management systems are being
implemented by most organisations worldwide.
12.7 Quality management systems
A management system is a chain of interconnected components or processes that work together in synergy
to produce strategic results. Examples of quality related management systems are the ISO 9001, ISO 14001,
HOSAS 18001, ISO 17025 and ISO 22000 standards. A system has many components or processes, each of
which has a unique purpose within the system and without which the system cannot function. Processes are
normally designed to meet the objectives of the system.
Most organisations use quality management systems that enable the employees of the organisation to
identify, design, develop, produce and deliver various products and services to the customers’ needs and
expectations. The ISO 9000 series of standards is one of the most popular programmes used to develop a
quality management system.
12.7.1 What is ISO 9000?
As quality became a major focus of businesses throughout the world, various organisations developed
standards and guidelines. Terms such as ‘quality management’, ‘quality control’, ‘quality system’ and
‘quality assurance’ acquired different and sometimes conflicting meanings from country to country, within a
country, and sometimes within an industry. As the European Community moved towards the European free
trade agreement, which came into effect towards the end of 1992, quality management became a key strategic
objective. To standardise quality requirements for the European countries within the common market and
those wishing to do business with those countries, a specialised agency for standardisation, the International
Organisation for Standardization (ISO), was founded in 1946. It was composed of representatives from
throughout the world and adopted a set of quality standards in 1987. These were revised in 1994 and again in
2000; the most recent set is called the ISO 9000:2000 family of standards. Meeting these standards is deemed
to be meeting international quality standards.
The ISO 9000:2000 family of standards (often referred to simply as ISO 9000:2000) focuses on eight
principles of quality management, as follows:
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1 Customer-focused organisation. The principle is expressed as follows: ‘Organisations depend on their
customers and therefore should understand current and future customer needs, should meet customer
requirements and strive to exceed customer expectations.’ All organisations have customers.
Organisations exist to create and retain satisfied customers. Those that do not do so fail to survive. It is
essential, therefore, for the survival of an organisation that it determines and meets the requirements of
customers.
2 Leadership. This principle is expressed as follows: ‘Leaders establish unity of purpose and direction of
the organisation. They should create and maintain the internal environment in which people can become
fully involved in achieving the organisation’s objectives.’ In an organisation applying the leadership
principle, leaders draw up policies, set organisational quality objectives, and provide the environment
and resources to achieve these objectives.
3 Involvement of people. This principle is expressed as follows: ‘People at all levels are the essence of an
organisation and their full involvement enables their abilities to be used for the organisation’s benefit.’ In
an organisation applying the ‘involvement of people’ principle, people are motivated, understand their
jobs, and gladly assist the organisation in meeting the set quality objectives.
4 Process approach. The principle is expressed as follows: ‘A desired result is achieved more efficiently
when activities and related resources are managed as a process.’ In an organisation applying the process
approach principle, there is a culture of processes and a structure of supporting their relationships.
5 Systems approach to management. This principle is expressed as follows: ‘Identifying, understanding,
and managing interrelated processes as a system contributes to the organisation’s effectiveness and
efficiency in achieving its objectives.’ This means that people need to understand their performance in
terms of how it impacts on the organisation as a whole.
6 Continual improvement. This can be explained as follows: ‘Continual improvement of the
organisation’s overall performance should be a permanent objective of the organisation’. A company that
follows this principle has to have a culture of setting standards, evaluating performance against these
standards, and taking appropriate action when necessary.
7 Factual approach to decision-making, whereby effective decisions are based on the analysis of data
and information. In an organisation applying the factual approach, processes and outputs are
measured, people have clearly defined goals, and feedback is given regularly.
8 Mutually beneficial supplier relationships. This principle is expressed as follows: ‘An organisation and
its suppliers are interdependent and a mutually beneficial relationship enhances the ability of both to
create value.’ In such an organisation the suppliers are selected on a set of criteria and long-term
relationships are built with them.
The ISO standards were originally intended to be advisory and to be used only for two-party contractual
situations, for example, between a customer and supplier, and for internal auditing. However, they have
evolved into criteria for organisations that wish to ‘certify’ their quality management systems or achieve
‘registration’ through a third-party auditor or registrar. A supplier is thus not audited by each customer for
compliance with the standards; instead, the registrar certifies the supplier and this certification is accepted by
all the supplier’s customers.
The registration process includes the following:
• the registrar’s review of the quality system documents or quality manual
• pre-assessment, which identifies potential aspects of non-compliance in the system or in the
documentation
• assessment by a team of three auditors of the quality system and its documentation
• surveillance or periodic re-audits to verify conformity with the practices and systems registered.
ISO 9000 provides a set of good basic practices for the implementation of a quality system. Table 12.2 shows
the motivating and demotivating factors for the implementation of ISO 9000, and the advantages and
disadvantages of an ISO 9000 quality system.
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TABLE 12.2 ISO 9000: motivating and demotivating factors and the advantages and disadvantages
MOTIVATING FACTORS
DEMOTIVATING FACTORS
•
•
•
•
•
•
•
•
•
•
•
•
•
Customer pressure to comply or lose business
Required for tendering purposes
Need to improve business efficiency
Enhancement of company image
Improvement of customer satisfaction
Competitive advantage
Business survival
Export requirement
Legal requirement
Management has poor knowledge of ISO 9000
Perception of business size
Inability to predict financial benefits
Affordability
ADVANTAGES
DISADVANTAGES
•
•
•
•
•
•
•
•
•
•
•
•
•
Better cohesion and coordination of internal
processes
Reduction of customer complaints
Better management
Better relationship with suppliers and customers
Training facilitation
Improvement in productivity
Better products
More paperwork
Time consuming
Expensive
Disempowering
Bureaucratic
Poor flexibility
In a wider context, the ISO series comprises a set of different standards, which we discuss below.
12.7.2 ISO 9000 series:2000
This series is composed of three principle standards, which we shall discuss briefly:
1 ISO 9000:2005 Quality Management Systems: Fundamentals and vocabulary.
2 ISO 9001:2008 Quality Management Systems: Requirements.
3 ISO 9004:2009 Quality management Systems: Guidelines for performance improvement.
ISO 9000:2005 Quality Management Systems: Fundamentals and vocabulary
This explains the concepts to understand and interpret the ISO 9000:2005 requirements.
ISO 9001:2008 Quality Management Systems: Requirements
This outlines the requirements the organisation must meet in order to be certified. These requirements are
based on three parameters:
1 Document what you do
2 Do what you document
3 Do it all the time.
The requirements are based on four broad areas, which can be summarised as follows:
1 Management responsibility. This area focuses on how the analysis of data affects the performance of
the quality management system, and how management establishes quality policies and quality objectives,
and how it communicates customer requirements.
2 Resource management. This focuses on resource requirements and deployment. Resources include
information, facilities, communication, people and the work environment. The issues of the competency
of people are also part of this area.
3 Product and service realisation. This area focuses on how the product or service is produced to meet
customer requirements.
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4 Measurement, analysis and improvement. This area focuses on the practices used by the company to
measure the performance of systems, processes, products and services and take appropriate corrective and
preventative action to promote continual improvement.
ISO 9004:2009 Quality Management Systems: Guidelines for performance improvement
This is for organisations that want to go beyond ISO 9001:2008 and establish a quality management system
that focuses on improving organisational performance.
12.7.3 ISO 14000: Environmental standards
This International Standard specifies requirements for an environmental management system to enable an
organisation to develop and implement a policy and objectives which take into account legal and other
requirements to which the organisation subscribes, and information about significant environmental aspects.
It applies to environmental aspects that the organisation identifies as those which it can control and those
which it can influence. It does not itself state specific environmental performance criteria. This International
Standard is applicable to any organisation that wishes to ensure that it preserves the environment.
12.7.4 OHSAS 18001: Occupational health and safety standards
OHSAS 18000 is an international occupational health and safety management system specification. It
comprises of two parts, 18001 and 18002. OHSAS 18001:2007 is the ‘Occupational Health and Safety
Management Systems specification’. It was developed in response to an urgent demand for a recognised
standard against which occupational safety management systems can be assessed. It is compatible with ISO
9001 and ISO 14001. Recently (2011) the ISO versions and the SANS versions were released in South
Africa. OHSAS 18002:2008 provides guidelines on the implementation of OHSAS 18001. It explains the
requirements and how to work towards the implementation and/or registration of an Occupational Health and
Safety Management System.
The OHSAS system must incorporate South Africa’s statutory requirements of the amended Occupational
Health and Safety Amendment Act 181 of 1993. The purpose of the Act is:
• to provide for the health and safety of persons at work and for the health and safety of persons in
connection with the use of plant and machinery
• to provide for the protection of persons other than persons at work against hazards to health and safety
arising out of or in connection with the activities of persons at work
• to establish an advisory council for occupational health and safety
• to provide for matters connected therewith.
The Act spells out the duties of the organisation’s chief executive officer, the duties of all the employers,
duties of employees, and functions of health and safety committees.
12.7.5 ISO 22000: Food safety standards
This International Standard specifies requirements for a food safety management system where an
organisation in the food chain needs to demonstrate its ability to control food safety hazards in order to
ensure that food is safe at the time of human consumption. It is applicable to all organisations, regardless of
size, that are involved in any aspect of the food chain and want to implement systems that consistently
provide safe products.
There are many other standards pertaining to specific areas and industries. These standards can be
obtained on the internet or by contacting the South African Bureau of Standards.
12.7.6 ISO 31000: Risk management
Risk management is an increasingly important business driver and stakeholders have become much more
concerned about risk. Risk may be a driver of strategic decisions, it may be a cause of uncertainty in the
organisation, or it may simply be embedded in the activities of the organisation. ISO 31000 facilitates an
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enterprise-wide approach to risk management and enables an organisation to consider the potential impact of
all types of risks on all processes, activities, stakeholders, products and services. ISO 31000:2009 provides
generic guidelines for the design, implementation and maintenance of risk management processes throughout
an organisation.
12.7.7 ISO 19011: Guidelines for auditing management systems
Management system audits are conducted to evaluate if the organisation is practising its management
systems. Audits comprise of systematic, independent and documented processes for obtaining audit evidence
and evaluating it objectively against audit criteria. ISO 19011:2011 provides guidance on auditing
management systems, including the principles of auditing, managing an audit programme and conducting
management system audits, as well as guidance on the evaluation of the competence of the individuals
involved in the audit process, including the person managing the audit programme, auditors and audit teams.
12.7.8 ISO 26000: Social responsibility
Businesses and organisations operate in relation to the society and environment. It is therefore a crucial factor
in their ability to continue to operate effectively in an ethical and transparent way that contributes to the
health and welfare of society. It is also increasingly being used as a measure of their overall performance.
ISO 26000:2010 provides guidelines for clarifying what social responsibility is, and helps businesses and
organisations translate the social responsibility principles into effective actions. It is aimed at all types of
organisations regardless of their activity, size or location.
12.7.9 ISO 50001: Energy management
As we know, South Africa is challenged with rising electricity and fuel costs which make this standard
attractive to businesses. Using energy efficiently helps organisations to save money as well as to conserve
resources and tackle climate change. ISO 50001 supports organisations in all sectors to use energy more
efficiently through the development of an energy management system. ISO 50001 is based on the
management systems model of continual improvement, also used for other well-known standards such as ISO
9001 or ISO 14001. This makes it easier for organisations to integrate energy management into their overall
efforts to improve quality and environmental management.
ISO 50001:2011 provides a framework of requirements for organisations to:
• develop a policy for more efficient use of energy
• fix targets and objectives to meet the policy
• use data to better understand and make decisions about energy use
• measure the results
• review how well the policy works
• continually improve energy management.
12.8 SHEQ management
Some organisations maintain multiple management systems and keep them separate from each other. For
example, a company may have separately implemented and maintained management systems for ISO 9001
(quality), ISO 14001 (environment) and OHSAS 18001 (occupational health and safety). Some organisations
prefer to have a single management system to avoid confusion among employees and reduce system
management costs. This single system is referred to as ‘SHEQ’. SHEQ is a combination and integration of
ISO 9001, ISO 14001 and OHSAS 18001 standards.
The benefits of SHEQ management are:
• Employees only need to learn one management system.
• There are savings on registration and internal management costs.
• Operational efficiency can be increased and costs lowered.
• It is possible to make quality, environment and health and safety part of what every employee does every
day.
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•
•
•
•
•
It is possible to make quality, environment and health and safety part of the way in which the business is
operated.
A foundation is created for a sustainability management system (SMS).
There are fewer business risks.
Product or service innovation is encouraged.
It is possible to address pressure from stakeholder groups and activists.
However, SHEQ management also has the following challenges:
• In reality, practitioners combine systems and misinterpret them as integrated systems.
• There is no ISO or any other global integrated standard, hence there is no such thing as SHEQ
certification, and each standard has to be certified independently.
• It can make auditing difficult if the auditor is not trained in integrated systems.
• On paper, the system may appear to be integrated, but in practice it may run independently.
12.9 Quality awards
Quality awards are used for the improvement of national quality and, maybe even more importantly, for
organisations to benchmark themselves against other organisations. Quality awards promote management’s
thinking on strategic issues related to business rather than on day-to-day tactical issues.
12.9.1 The Malcolm Baldrige National Quality Award (MBNQA)
The Malcolm Baldrige National Quality Award (MBNQA), a model used in the United States of America,
consists of seven interrelated categories that form a basis for organisational performance. These categories
are leadership, strategic planning, customer and market knowledge, measurement analysis, human resource
focus, process management, and business results. Each category is broken down into several items. There is a
rigorous and stringent methodology for scoring the items and subsequently awarding points to each category.
The MBNQA is open to small (fewer than 500 employees) and large organisations (more than 500
employees) in the different business sectors. Non-profit and government organisations are excluded. The total
number of winners is maintained at a maximum of six per year, and awards are given by the state.
12.9.2 The Deming prize for quality
The Deming prize for quality was established in 1951 by the Japanese Union of Scientists and Engineers. The
prize is awarded to individuals and groups that make a significant contribution to the field of quality control.
The categories assessed are policy, operations, collection and analysis of data, future plans, education and
training, quality assurance, quality effects, standardisation, and control. The Deming prize is also open to
non-Japanese companies operating in Japan. This prize is more focused on processes and there is no limit to
the number of awards.
12.9.3 The European Quality Award (EQA)
The EQA was established in 1988 by 14 large European organisations. This award is administrated by The
European Foundation for Quality Management. The award has two levels. The higher-level EQA award is for
the most accomplished organisation in a given year, and the lower-level EQA is for those companies that
meet the award criteria. This model also addresses the issues of quality of life. The various categories of the
award are shown in Figure 12.4.
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FIGURE 12.4 The European Quality Award model
12.10 South African quality organisations
The following list gives some of the South African organisations concerned with quality, with descriptions of
their specific objectives and the areas that they address:
• South African Bureau of Standards (SABS): SABS has the mandate to determine and establish product
standards. It is also involved with establishing standards of practice, for example, SANS 16001:2007,
which is a standard for the management of HIV/Aids within the workplace. SABS also conducts
quality training and is involved with quality audits.
• South African National Accreditation System (SANAS): SANAS is recognised by the South African
government as the single national accreditation body that gives formal recognition that laboratories,
certification bodies, inspection bodies, proficiency testing scheme providers and good laboratory practice
(GLP) test facilities are competent to carry out specific tasks.
• South African Quality Institute (SAQI): SAQI has the mandate to promote quality within different
organisations. It also promotes quality training and drives quality programmes for national quality
improvement.
• Southern African Society for Quality (SASQ): SASQ is an organisation for the registration, growth and
development of quality, health and safety, environmental and SHEQ practitioners and professionals.
SASQ organises training, events and workshops for its members. A number of related articles and
presentations that assist quality learning can be found on their website.
• Southern African Auditors and Certification Training Association (SAACTA): SAATCA is an
organisation for the registration of auditors who audit quality and management systems. SAACTA sets
criteria for the practice of auditing and codes of conduct for auditors.
CLOSING EXAMPLE
What really caused the sinking of RMS Titanic?
We all know the answer don’t we? It struck an iceberg, which opened up a hole in the hull which let in
enough water to sink it. Simple! But it wasn’t that simple. The Titanic was unsinkable, or so it was claimed
at the time. With hindsight we know the claim was not true. So what really happened?
Iceberg collision just the mechanism
Sure the collision with the iceberg was the mechanism that breached the hull, letting in the sea and dragging
the mighty ship and many of its unfortunate passengers below the surface of the cold Atlantic Ocean. But
that’s it, the iceberg collision was just the mechanism, the iceberg was a hazard lying in the path of the
liner. It’s not the real reason the Titanic sank. For the real root causes of the sinking we have to go deeper.
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Risk assessment flawed?
These days, in our risk adverse society we would expect a risk assessment to be carried out. The assessment
would identify the hazards and risks that could be expected on such a journey. The assessment would also
identify the corresponding precautions that would need to be taken. Such an assessment may have gone a
long way to preventing the collision with better lookouts, or reducing the effect of the disaster with more
life-boats and better emergency training for the crew.
But would such a risk assessment have identified what really needed to be done to protect the ship and
its passengers? It is doubtful that just a consideration of physical hazards would have identified all the
causative factors that led to the sinking.
From investigations it has become apparent that it was a sequence of incorrect actions or lack of action
that ultimately led to the collision with the iceberg. However, what underpinned those decisions and
actions? Why were there so many poor decisions, why did all the events align to create that fateful sinking?
Incorrect beliefs and attitudes led to poor decisions
Attitude and beliefs drive the decision-making process. The situation of the Titanic demonstrates this very
clearly. Many decisions were significantly influenced by the fundamentally flawed belief that the Titanic
was unsinkable. This belief permeated the whole sequence of decisions and actions from the time the ship
was designed and built to its maiden voyage and its sinking on 15 April 1912.
Because the ship was considered unsinkable, insufficient thought was given to the potential sinking by
an iceberg. It was not considered as a real possibility. Because the Titanic was considered unsinkable,
incorrect decisions and actions were taken. For example, the ship was driven at speed through an area where
icebergs had been previously sighted, allowing little time to avoid the collision. There were insufficient
lifeboats for all the passengers. Instead of stopping after the accident, the ship was still driven forward,
which accelerated its sinking. The crew were inadequately prepared or trained and the evacuation was
poorly executed.
Belief and mindset led to sinking
The belief that the ship could not be sunk underpinned all these decisions. It was this mindset that
ultimately led to the sinking of the Titanic. The owners and the management were justifiable very proud of
the mighty ship. It was an incredible achievement of ship-building design and construction so they had
reason to feel proud. However, their pride led to overconfidence in the ship and its capabilities and to
complacency when considering the risks.
What are the lessons for businesses today?
What are the lessons that can be learnt from the Titanic event that apply to today’s businesses? Most risk
assessments would not consider the beliefs, attitudes and decisions of management. Yet a significant
number of poor decisions and actions led to the circumstances where the Titanic struck an avoidable hazard
with sufficient force to create enough damage to sink her.
Risk assessments by themselves are not adequate to properly manage all the risks. They need to be
applied within a supporting framework.
(SOURCE: Activity Safety Associates. Meech, Richard, J.F. 2012. What really caused the sinking of the Titanic? www
.activesafetyassociates.co.uk/html/caused-sinking-of-titanic)
Summary
This chapter gave foundational knowledge on the basics of quality. We discussed some definitions of quality,
the dimensions of product service quality, the reasons for quality, and contributions from some of the gurus
of quality. We also referred to various quality standards and the specific areas they address. SHEQ
management and its advantages and challenges were also highlighted. Finally, we indicated that quality
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awards are presented at national level to raise the awareness of organisations and nations regarding the
importance of quality, and we showed the functions of some of the South African organisations related to
quality.
Key terms
Appraisal costs: Costs incurred in examining processes during the production of a good or service.
Assurance: The knowledge and courtesy of employees and their ability to inspire trust and confidence.
Conformance: The situation when the specifications of the product are within the prescribed tolerances.
Durability: The degree to which a product tolerates stress or trauma without failing.
Empathy: The ability to satisfy customers’ desire for caring and attentive service.
Environmental friendliness: Reflects the degree to which the product could have a destructive effect on
natural resources.
External quality costs: The costs that occur after the customer has received defective goods or defective
services.
Features: Attributes of a product that supplement the product’s basic performance.
Financial perspective of quality: Addresses costs associated with implementing quality, and considers any
subsequent financial benefit.
Human resources perspective of quality: Involved in the enabling of the workforce to develop and use its
full potential to meet the strategic objectives of the organisation.
Internal failure costs: Costs incurred to rectify defaulting processes and rework, or the scrapping of reject
products.
Internal quality costs: Quality costs incurred on goods and services before the customers receive them.
ISO 9000: Provides a set of good basic practices for the implementation of a quality system.
Marketing perspective of quality: Based on the so-called ‘perceived quality’ of products and services, and
the managing of quality perceptions and the quality during the actual transaction and after-sales support.
Operations perspective of quality: Focuses on the management of the activities of product and process
design and adopts the systems view of quality.
Perceived quality: Quality based on the user’s opinion.
Performance: Describes the efficiency with which a product achieves its intended purpose.
Prevention costs: The costs of initiatives that have the potential to reduce the occurrence of defective
goods or services.
Product design engineering: Involves all those activities associated with developing a product from the
conceptual phase to final design phase.
Quality: Satisfying the expectations of customers and clients.
Quality assurance: Activities associated with the guaranteeing of the quality of a good or service.
Quality control: Embedded within a process to meet standards consistently.
Quality management: Refers to the management processes that assist in integrating the control and
assurance activities.
Quality management systems: A chain of interconnected components or processes that work together in
synergy to produce strategic results.
Quality spheres: There are three spheres to quality, namely quality control, quality assurance and quality
management.
Quality strategies: Rooted in the building blocks of the vision, mission and core values, which lead to
business-level and functional-level strategies. The aim of these strategies is to gain a competitive
advantage.
Reliability: The propensity for a product to perform consistently over its useful design life. The perception
is that the better the quality, the better the reliability.
Responsiveness: The willingness of the service provider to be helpful and prompt in providing the
requested service.
Safety: The degree to which the product protects users before, during and after use.
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South African Bureau of Standards (SABS): SABS has the mandate to determine and establish product
standards.
South African National Accreditation System (SANAS): SANAS gives formal recognition that
laboratories, certification bodies, inspection bodies, proficiency testing scheme providers and good
laboratory practice (GLP) test facilities are competent to carry out specific tasks.
South African Quality Institute (SAQI): SAQI has the mandate to promote quality within different
organisations.
Southern African Auditors and Certification Training Association (SAACTA): SAATCA is an
organisation for the registration of auditors who audit quality and management systems.
Southern African Society for Quality (SASQ): SASQ is an organisation for the registration, growth and
development of quality, health and safety, environmental and SHEQ practitioners and professionals.
Supply chain perspective of quality: This has grown out of the concept of the value chain and includes
inbound logistics, core processes and outbound logistics.
Tangibles: Include the physical appearance of the service facility, the equipment, and the personnel and
communications materials.
Value-based perspective of quality: A subjective assessment of the efficiency and economic value of
every step of the process to the customer.
Review questions and activities
1 Explain the need for quality in organisations.
2 In your own words, describe the different definitions of quality.
3 Differentiate between the quality dimensions of goods and services.
4 Discuss the importance of quality for organisations.
5 Identify and describe quality spheres in your own words.
6 Understand and explain the quality contributions/perspectives from other disciplines.
7 Discuss the following quality standards that are available to organisations:
7.1 OHSAS 18001: Occupational health and safety standards
7.2 ISO 26000: Social responsibility
7.3 ISO 50001: Energy management.
8 Identify and discuss the eight principles of quality systems.
9 Describe SHEQ management and identify the advantages and challenges that it holds.
10 Describe the roles of various South African organisations for quality.
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CASE STUDY: BIG HYUNDAI RECALL A SIGN OF WHAT CAN HAPPEN
WHEN PARTS ARE SHARED
When Hyundai Motor Co. and its affiliate, Kia Motors Corp. announced on Wednesday that they were
conducting a massive recall of 1.7 million vehicles, it was a sign of what can go wrong when parts are
shared by many vehicle models.
Since the recession, according to automotive industry analysts, more and more manufacturers have
turned to the economies of scale involved in having fewer vehicle platforms and more interchangeable
parts and components.
“This is supposed to be the ideal for making cars now,” said Jesse Toprak, analyst for TrueCar.com.
“This is how you get scale, value creation.” Toprak added, “It’s not just about cost savings. It simplifies
production. If demand shifts from one car to another, shared parts make it much easier to shift the mix.
Overall it is great for the automakers.”
It’s a practice that has been growing among all automakers, which can reduce costs by sharing parts.
However, manufacturers can also wind up with a potentially dangerous and expensive situation and recall.
The Hyundai-Kia recall involves 13 models manufactured with the same brake light switches that may
malfunction.
The problem “may cause the brake lights to not illuminate when the brake pedal is depressed or may
cause an inability to deactivate the cruise control by depressing the brake pedal”. The faulty brake light
switch “may also result in intermittent operation of the push-button start feature, affecting the operation of
the brake-transmission shift interlock feature, preventing the shifter from being moved out of the park
position and causing the electronic stability control (ESC) malfunction light to illuminate”.
Other experts said that Hyundai’s response will be important in whether they receive any negative
comeback from consumers because of the recall. “From our perspective, it’s not about the recall, but about
how the automaker handles it,” said Eric Lyman, vice-president for editorial and partner development for
ALG.
Hyundai will notify owners, and dealers will replace the stop lamp switch, free of charge. The safety
recall will begin by June 2013.
(SOURCE: White, R.D. Copyright © 2013. ‘Big Hyandai recall a sign of what can happen when parts are shared’, Los Angeles
Times. http://www.latimes.com/business/autos/la-fi-hy-hyundai-kia-motors-recall-20130403,0,2508763.story). Reprinted with
permission.
Case study questions and activities
1 Discuss the different forms of quality control Hyundai could have implemented to avoid the recall.
2 What are the costs of quality for Hyundai as a result of this recall?
3 Describe the quality dimensions of Hyundai’s cars.
References
1 Aarts, F.M. &Vos, E.D. 2001. ‘The impact of ISO registration on New Zealand firm’s performance: A
financial perspective’, Total Quality Magazine, 13:3, 180–1812.
2 Deming, W.E. 1986/2000. Out of the crisis. Cambridge: MIT Press.
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3 Ghobadian, A. & Woo, H.S. 1996. ‘Characteristics, benefits and shortcomings of four major quality
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12 Samson, D. & Parker, R. 1994. ‘Service quality: The gap in the Australian consulting industry’,
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13 Sharma, B. & Gadenne, D. 2001. ‘An investigation of the perceived importance and effectiveness of
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Thesis: Rand Afrikaans University.
15 South African Bureau of Standards. ISO standards. [Online: see websites at the end of this chapter]
16 Stamatis, D.H. 1995. Understanding ISO 9000 and implementing the basics to quality. New York: Marcel
Dekker.
17 Stevenson, W.J. 2012. Operations management. UK: McGraw-Hill.
18 Summers, D.C.S. 2012. Quality management – Creating and sustaining organisational effectiveness.
New Jersey: Pearson Education.
19 White, R.D. 2013. ‘Big Hyandai recall a sign of what can happen when parts are shared’, Los Angeles
Times, 3 April. [Online: see websites at the end of this chapter]
20 Wolkins, D.O. 1993. Service quality principles. The service quality handbook. New York: AMACOM.
Websites
Visit the websites below.
http://en.wikipedia.org/wiki/Quality_control
http://office.microsoft.com/en-us/project-help/develop-practical-…
www.coin-or.org/management/forms/contribproc.pdf
www.iso9001.com/
www.iso.org/iso/home.html
www.isoqar.com/iso9001/qualintro.htm
www.praxiom.com/iso-9001.htm
www.projectmanagementdocs.com/
www.sabs.co.za/index.php?page=certiso90012000
The websites below were last accessed on the dates given:
http://healthandsafety1.wordpress.com/2012/06/29/sinking-of-the-titanic/ (March 2013)
http://www.latimes.com/business/autos/ (5 April 2013)
www.iol.co.za/motoring/industry-news/toyota-s-huge-7-4m-recall-includes-sa-1.1400096#.UVNCvBf22LU
(March 2013)
YouTube™
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Visit the following clips:
www.youtube.com/channel/HCtkXUWp2I6UM
www.youtube.com/watch?v=kao1K30LXEk
www.youtube.com/watch?v=L--Oyw6V8gI
www.youtube.com/watch?v=TiuaFwzJ4FU
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CHAPTER 13
Quality tools and techniques
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
Identify and describe the different tools of quality in your own words
Understand and explain the purpose and function of each quality tool
Understand and explain the use of each quality tool in quality improvement
Apply some of the tools and be able to interpret the data.
CHAPTER outline
13.1
13.2
13.2.1
13.2.2
13.2.3
13.2.4
13.2.5
13.2.6
13.2.7
13.2.8
13.2.9
13.3
13.3.1
13.3.2
13.3.3
13.3.4
13.3.5
13.3.6
Introduction
Tools of quality
Flow charts
Run charts
Control charts
Check sheets
Histograms
Pareto analysis
Cause-and-effect diagrams
Scatter diagrams
Failure mode, effects, and criticality analysis
Quality improvement techniques
Benchmarking
Six-sigma
Lean manufacturing
The Deming cycle
Pokayoke
The 5S model
Summary
Key terms
Review questions and activities
Case study
References
Websites
SETTING THE SCENE
Reducing fuel consumption has become a priority at ZZ2
ZZ2 is a multi-system farming conglomerate in the Limpopo Province of South Africa. The company
manages 60 000 hectares of land in Mooketsi, Politsi, Polokwane and Musina in the northern Limpopo
Province, Ceres and Riebeek-Wes in the Western Cape, and Langkloof in the Eastern Cape. ZZ2 grows
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CHAPTER 13
Quality tools and techniques
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
Identify and describe the different tools of quality in your own words
Understand and explain the purpose and function of each quality tool
Understand and explain the use of each quality tool in quality improvement
Apply some of the tools and be able to interpret the data.
CHAPTER outline
13.1
13.2
13.2.1
13.2.2
13.2.3
13.2.4
13.2.5
13.2.6
13.2.7
13.2.8
13.2.9
13.3
13.3.1
13.3.2
13.3.3
13.3.4
13.3.5
13.3.6
Introduction
Tools of quality
Flow charts
Run charts
Control charts
Check sheets
Histograms
Pareto analysis
Cause-and-effect diagrams
Scatter diagrams
Failure mode, effects, and criticality analysis
Quality improvement techniques
Benchmarking
Six-sigma
Lean manufacturing
The Deming cycle
Pokayoke
The 5S model
Summary
Key terms
Review questions and activities
Case study
References
Websites
SETTING THE SCENE
Reducing fuel consumption has become a priority at ZZ2
ZZ2 is a multi-system farming conglomerate in the Limpopo Province of South Africa. The company
manages 60 000 hectares of land in Mooketsi, Politsi, Polokwane and Musina in the northern Limpopo
Province, Ceres and Riebeek-Wes in the Western Cape, and Langkloof in the Eastern Cape. ZZ2 grows
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food on 10 000 hectares of land, including tomatoes, onions, avocados, mangoes, apples, pears and beef. As
Africa’s largest tomato producer ZZ2 sells 98 per cent of tomato production domestically and supplies the
export market with fruit and some vegetables throughout the year.
ZZ2’s distinctive yellow trucks with their red logos are a feature on South Africa’s roads. With this
farming enterprise’s long-distance fleet of trucks covering in the region of 300 000 km every month, it goes
without saying that ZZ2’s fuel bill is huge, with about 4.7 million litres of diesel consumed annually. It
makes economic and ecological sense to reduce fuel consumption as much as possible, and to this end
much ground has been covered over the past few years.
According to Japie Burger, transport manager at ZZ2, the average fuel consumption of a ZZ2 truck was
52 litre/100 km eight years ago, and this figure has now been reduced to 46 litres. At an average diesel
price of R10 per litre, this has contributed to a saving of R180 000 per month.
Burger says that this saving has been brought about by concerted efforts, and that several factors have
contributed. First of all, as old trucks have become redundant over the years, they have been replaced by
more fuel-efficient vehicles employing the latest technology. The new trucks have also been provided with
aero kits on their roofs to reduce drag. Furthermore, over the past three or four years an effort has been
made to use lighter trailers. These trailers carry heavier loads, which means that the payload efficiency per
litre of diesel has also increased.
In addition, driver training has made a vast difference to fuel consumption. Drivers are trained to keep
an eye on speed, revs, idling, etc. By giving incentives to drivers there has been considerable buy-in in the
fuel reduction programmes. Drivers are paid a monthly bonus if they keep fuel consumption below a certain
level, and if this is achieved for three months in a row, an additional bonus is paid. This can make a
difference of about 15% to their salaries over a period of three months.
There have been additional advantages to driver training and the fact that a maximum speed of 80km/h
is maintained on trucks. Over the past twenty years road collisions have been drastically reduced and this
has resulted in a low accident rate on write-offs and injuries or fatalities.
Road transport is at present the only option for ZZ2 to get its produce to market. Because of the
remoteness of farms and the fact that fresh produce must be delivered in time, rail transport is not an option,
Burger says.
(SOURCE: http://www.zz2.biz/index.php?option=com_content&view=article&id=74%3Areducing-fuel-consumption-has
-become-a-priority-at-zz2&catid=2%3Anews&Itemid=13&lang=af)
13.1 Introduction
Many organisations experience internal and external problems that eventually erode profits if not eradicated.
These problems cannot be ‘cured’ if, in the first place, the causes are not identified. A lot of effort can be
fruitless if symptoms are cured but the causes are not addressed. Tools of quality are used to identify the
problems and their root causes. Once the causes are identified, solutions can be planned and implemented by
means of various quality improvement techniques.
13.2 Tools of quality
These tools include flow charts, run charts, control charts, check sheets, histograms, Pareto analysis,
cause-and-effect diagrams, scatter diagrams, and failure mode, effects, and criticality analysis (FMECA). In
this section we discuss these tools.
13.2.1 Flow charts
A flow chart/process map is a picture of the separate steps of a process in sequential order (McMahon,
2008).
Their purpose is to identify problem areas and non-value adding processes to either eliminate them or try
to convert them into value-adding processes. The process described can be a manufacturing, administrative or
service process or even a project plan. Elements included are:
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•
•
•
•
•
•
sequence of actions
materials or services entering or leaving the room (inputs and outputs)
decisions that must be made
people who become involved
time involved in each step
process measurements (McMahon, 2008).
Flow charts are also useful in determining where to administer quality controls. Figure 13.1 shows some
generic and widely accepted symbols used to draw flow charts.
FIGURE 13.1 Flow chart symbols
(SOURCES: Compiled from Kruger, D. & Ramphal, R. 2009. Operations management, 2nd edition. Cape Town: Oxford
University Press, 138; McMahon, T. 2008. A lean journey. The quest for true north. Problem solving and basic quality tools, 27.
http://www.slideshare.net/ALeanJourney/the-seven-basic-tools-of-quality)
Figure 13.2 illustrates a flow chart showing the process for an application for a bank loan.
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FIGURE 13.2 Flow chart for an application for a bank loan
13.2.2 Run charts
Run charts are graphic representations of process performance. Figure 13.3 shows a run chart of temperature
recordings from a generator.
FIGURE 13.3 A run chart recording temperature
13.2.3 Control charts
Control charts are run charts with an indication of upper and lower tolerances. The control chart is a graph
used to study how a process changes over time and the data are plotted in time order. A control chart always
has a central line for the average (run chart), an upper line for the upper control limit (tolerance) and a lower
line for the lower control limit (tolerance) (McMahon, 2008).
Figure 13.4 shows a control chart of temperature recordings. Notice an upper tolerance of 15.0 and a
lower tolerance of 8.0. This shows that the process was out of tolerance from 13:30 to 14:00 and started
getting out of tolerance again from 14:45. There are many other types of control chart, for example, mean
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charts, range charts and capability charts. However, we shall not cover them here.
FIGURE 13.4 A control chart recording temperature
13.2.4 Check sheets
A check sheet is a structured, prepared form for collecting and analysing data (McMahon, 2008). Check
sheets have a dual purpose. Firstly, they can be used to ensure that certain activities and tasks are completed.
Secondly, they serve the purpose of data collection.
Table 13.1 shows an example of a check sheet. The check sheet shows students’ attendance on a weekly
basis. The control here is, firstly, that it forces the lecturer to take note of attendance and, secondly, the sheet
provides data on student attendance.
TABLE 13.1 Example of a check sheet
MON
TUES
WED
THURS
FRI
PRESENT ABSENT
1
M.D. Mkize
Y
Y
Y
Y
Y
5
0
2
T.P.Q. Smith
N
Y
N
N
Y
2
3
3
R.R. Naidoo
N
N
N
Y
N
1
4
4
T.S. Zulu
Y
N
N
Y
Y
3
2
5
S.D. Dlamini
Y
Y
Y
Y
N
4
1
13.2.5 Histograms
Histograms are simply graphic representations of data in a bar format. The histogram in Figure 13.5
represents the data of the class attendance discussed in Section 13.2.4.
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FIGURE 13.5 A histogram based on class attendance
The purpose of histograms is to assist users in getting a picture of the data. From the histogram shown in
Figure 13.5, it is clear that the best attendance was on Thursday and the worst was on Wednesday, while
there were no days one which everyone was present.
13.2.6 Pareto analysis
Pareto analysis uses charts to identify and prioritise problems to be solved. They are histograms that are
aided by Juran’s 80/20 rule, which means that there are few vital causes that cause most of the quality
problems. Normally, 80 per cent of the problems result from 20 per cent of the causes.
Let us explore this by means of an example: ceramic tiles. Table 13.2 shows the defects in a set of
ceramic tiles.
TABLE 13.2 Ceramic tile defects
TYPE OF DEFECT
FREQUENCY
Scratches
83
Chips
76
Cracks
25
Uneven surface
9
Rough surface
6
Other
3
Total
202
The contribution of each type of defect to the quality problems experienced is shown in Figure 13.6.
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FIGURE 13.6 Pareto analysis of tile defects
From the Pareto chart analysis shown in Figure 13.6, it can be concluded that 80 per cent of the problems
stem from two areas: scratches and chips. Managers will be able to solve 80 per cent of the problems if they
eradicate the causes of these scratches and chips.
13.2.7 Cause-and-effect diagrams
The use of a cause-and-effect diagram (also known as a fishbone diagram) moves away from identification
of the symptoms of a problem towards identification of the real causes of the problem. It identifies as many
causes as possible for an effect or problem. This diagram resembles the skeleton of a fish, with the problem
represented by the head of the fish, the major causes shown by the ribs of the fish, and sub-causes represented
by the smaller bones of the ribs. Figure 13.7 shows an example in which a cause-and-effect diagram is used
to identify the causes of students’ failure in an examination.
FIGURE 13.7 Cause-and-effect diagram reflecting the causes of examination failures
A cause-and-effect diagram is normally drawn during a group session in which all the participants give
possible causes, which are grouped under the various headings of the main causes purely to give an
indication of where managers should look for solutions. The diagram itself does not say anything about the
importance or contribution of a specific cause to the problem. It does, however, give a clear indication of the
areas in which solutions will need to be found.
13.2.8 Scatter diagrams
The scatter diagram graphs pairs of numerical data, with one variable on each axis, to look for relationships
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between them. The data are plotted on the chart and form scattered patterns. If the variables are correlated,
the points will fall along a line or curve – the higher the correlation, the tighter the points will hug the line
(McMahon, 2008).
Consider the data in Table 13.3.
Table 13.3 Data used to construct a scatter diagram
DATA HOURS
%
DATA HOURS
%
DATA HOURS
%
DATA
SET
OVER-TIME EXTRA SET
OVER-TIME EXTRA SET
OVER-TIME EXTRA SET
TAX
TAX
TAX
1
1.0
1.2
11
0.8
0.6
21
10.0
10.5
31
2
2.0
2.3
12
1.5
2.0
22
9.5
9.0
32
3
3.0
2.5
13
3.0
2.0
23
9.8
9.2
33
4
4.0
3.0
14
2.5
3.0
24
8.5
8.0
34
5
5.0
4.5
15
3.5
3.0
25
8.7
8.5
35
6
6.0
5.5
16
3.5
2.0
26
7.5
7.2
36
7
7.0
6.8
17
2.0
1.3
27
7.0
7.5
37
8
8.0
7.8
18
4.5
3.5
28
8.0
7.8
38
9
9.0
9.5
19
5.5
5.3
29
6.5
6.5
39
10
10.0
9.8
20
5.0
5.0
30
10.0
9.8
40
A scatter diagram of the data given in Table 13.3 is shown below. Notice that there appears to be a direct
relationship between hours of overtime worked and percentage of extra tax paid. In fact, it appears that more
overtime worked results in having to pay more tax.
FIGURE 13.8 Scatter diagram of hours overtime versus percentage extra tax paid
13.2.9 Failure mode, effects and criticality analysis
By using the technique of FMECA, organisations can determine and identify potential causes of performance
failures during the design phase of goods and services. The primary objective of FMECA is to identify
critical failures and probable causes for these, with the aim of reducing them. There are basically three
elements of FMECA:
• Failure mode. The anticipated operational conditions are used as the background of the study of the good
or service.
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•
Failure effect. The potential failures are studied to determine their probable effects on the performance of
the good or service.
Failure criticality. The potential failures of the various components of the good or service are examined
to determine the severity of each failure.
•
The following methodology can be applied when using FMECA:
• Identify the good, service or components of them.
• List all probable failures.
• Identify the effect of each failure.
• Rate the probability (P) of the occurrence of each failure.
• Score the seriousness of the failure on a scale from 1 to 10 (S).
• Score the difficulty of detecting the error when used by the customer on a scale from 1 to 10 (D).
• Calculate the criticality index: C = P × S × D.
• Rank the criticality indices and briefly suggest the corrective mechanisms for the most serious failures.
Table 13.4 shows the FMECA for a glass bottle used to contain liquids.
TABLE 13.4 FMECA for a glass bottle containing liquids
FAILURE DESCRIPTION EFFECT
NUMBER
P
S
D
C
RANK
SOLUTION
Consider the
use of plastic
rather than
glass
1
Bottle falling
during use
Glass can
20
cause injury
to customer
10
10
2 000
1
2
Bottle leaks
around seal
Loss of
product
10
8
80
80
2
3
Bottle incorrect
volume
The
customer
may not
receive the
correct
quantity of
liquid
purchased
5
8
160
160
3
WORKED EXAMPLE
Vodacom South Africa did a study on the level of satisfaction of young people between the ages of 12 to 18
years with the customer services they render. Vodacom measured the following:
• Firstly, on a 7-point scale, respondents were requested to indicate the degree to which each statement is
important to them, reflecting their expectations (where 1 = not important and 7 = very important).
• Secondly, on a second 7-point scale, respondents were requested to state the degree to which the
statements are true reflections of their experience with their CNP (where 1 = strongly disagree and 7 =
strongly agree).
The gap between the two was then established and was seen as the expectation gap.
The information on the mean scores obtained for the expectations, experience and expectation gap is
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reflected in the table below.
TABLE 13.5 Mean scores for the expectations, experience and expectation gap
STATEMENTS
EXPECTATION
EXPERIENCE
EXPECTATION
GAP
Service quality – customer service
quality
6.01
5.65
0.36
Continuously able to fix a problem
5.97
5.63
0.34
Customer care service agents are friendly
when dealing with problems
6.13
5.8
0.33
Call-centre agents are able to help with
problems
6.04
5.76
0.28
Call-centre agents provide consistent
advice
6
5.64
0.36
Easy to get in contact with
6.05
5.46
0.59
Provides feedback on requests and
inquiries
5.97
5.64
0.34
Replies quickly to requests
6.01
5.64
0.38
Customer care service operating hours
convenient for all customers
6.05
5.73
0.32
Repairs and maintenance within
relatively acceptable time
5.88
5.55
0.33
Required
Draw histograms for the expectations, experience and expectation gaps for each of the statements.
Solution
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FIGURE 13.9 Histograms for the expectations, experience and expectation gaps
(SOURCE: Van Aardt, I., Shai, G., Basson, A. & Tustin, D.H. 2010. ‘Expectations and perceptions of service value and
satisfaction with cellphone service providers among South African youth’, Research Report, no. 400. Pretoria: Unisa Bureau of
Market Research)
13.3 Quality improvement techniques
In this section we discuss techniques and methodologies that can be used for the improvement of quality.
13.3.1 Benchmarking
Benchmarking is a process of comparing key performance measures to those of the best performers and
subsequently identifying areas for improvement. Think about your studies. If you want to be first in your
class, you should compare yourself with the best student in your class in the hope that you can identify your
shortcomings and take measures to improve until you can become the best. This is the process of
benchmarking. The benchmark itself serves as a reference point.
There are various reasons for benchmarking, including becoming more competitive, setting industry best
practices, defining customer requirements, establishing effective goals and objectives, and defining true
measures of productivity.
There are four categories of benchmarking. They are:
1 Internal. Here managers look for the best practices within the organisation to compare them, and to
compare current practices over time. For example, an organisation may benchmark with all internal
laboratories to identify the best laboratory practices.
2 Functional. This involves seeking the best functional practices outside the industry. For example, if a
company is within the sugar industry and has a problem of sugar dust control, it may benchmark with a
company in the cement industry that is known to have solved problems of cement dust control.
3 Generic. This involves a comparison of outstanding processes, irrespective of industry or function. For
example, a retailing benchmarking exercise for the best processes of customer service may use a
restaurant as a benchmarking partner.
4 Competitive. This requires comparisons between competitors, for example, Coca-Cola benchmarking
with Pepsi Cola for market share.
The benchmarking process involves five steps:
• Step 1. Decide on the aspect of the organisation on which the benchmarking exercise will focus.
• Step 2. Determine what to measure.
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•
•
•
Step 3. Select the benchmarking partner.
Step 4. Study and compare the measures and activities of performance of the benchmarking partner and
identify the opportunities for performance improvement.
Step 5. Improve and reinforce the performance.
The purpose of benchmarking includes the following:
• bringing about change within the organisation by changing the mindsets of senior executives
• comparing practices with the best
• challenging current practices and processes
• creating improvement within the organisation.
13.3.2 Six-sigma
The six-sigma methodology was developed and pioneered by Motorola in the 1980s with the aim of reducing
quality costs. Six-sigma is a business performance improvement strategy that aims to reduce the number of
mistakes or defects to as low as 3,4 occasions per million opportunities by eradicating variability within a
process. Basically, to improve the quality, variation within the process must be identified, measured, reduced
and prevented. Six-sigma is a top-down and highly disciplined approach that typically includes four stages:
measure, analyse, improve and control. It is also a data-orientated approach making rigorous use of statistical
decision tools.
Some of the benefits include:
• reduced time to market for new or revised products
• increased understanding of customer expectations
• reduced number of product design changes
• enhanced quality and reliability
• reduced warranty costs
• improved employee satisfaction
• reduced cycle time and variation
• improved process capability and yield
• improved measuring accuracy
• defeat of the competition.
The requirements for six-sigma projects are as follows:
• There have to be predetermined financial savings after the project is put into use.
• The project must articulate around a set of processes.
• These processes must incorporate outcomes that are important to the customer.
• These outcomes must be measurable and produce quantitative data.
• The quantitative data must be analysed with statistical tools and improvements suggested to reduce the
variations within the process.
The respective projects are managed by a team of process improvement experts who are graded as master
black belt, black belt or green belt, depending on their expertise and role in the project.
Normally, there are five phases to a six-sigma project, as described below and shown in more detail, with
each phase divided further into smaller steps, shown in Figure 13.10:
1 Define phase. The six-sigma methodology requires the proper identification and definition of a specific
problem during the define phase.
2 Measure phase. During the measure phase, the problem is expressed in terms of important characteristics
and specific metrics such as rand per tonne, days lost, and kilograms of waste. Acceptable targets and
specifications of the metrics are determined. The validation of the measuring system used to measure
the metric is also conducted during this phase.
3 Analyse phase. During the analyse phase, there is the collection of data representing the present problem
and the establishment of the problem in mathematical terms. At this stage the process is also studied in
statistical terms to establish if it can be improved or needs to be replaced with a new process. In addition,
the key process inputs that drive the key process outputs are determined.
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4 Improve phase. During this phase, potential causes are identified. The changes that need to be made to
the key input variables in order to affect the key output variables positively are established. This is also
followed by an implementation plan.
5 Control phase. The plan is put into action and verified, and controls are put in place to sustain the
change.
FIGURE 13.10 Phases of the six-sigma methodology
Because of its reliance on accurate data and proper statistical analysis, the success of six-sigma depends
heavily on the correct use and implementation of the methodology and the expertise and knowledge of the
improvement team experts. Some of the problems of this methodology are:
• inadequate information
• selection of the wrong projects
• creation of ‘solution-caused’ problems
• service of the wrong customer
• fixing of the wrong cause
• faulty implementation
• failure to consider the human side of the change.
13.3.3 Lean manufacturing
Lean manufacturing is a process of designing systems to reduce costs by getting rid of any waste in an
organisation. The emphasis is on eliminating any non-value activities, such as production of defective
products, excess inventory costs, excessive quality inspections and idle time. This methodology also
promotes the optimum use of all resources.
13.3.4 The Deming cycle
The Deming cycle is also called the PDSA (Plan, Do, Study, Act) cycle. This methodology is based on the
premise that improvement comes from applying knowledge which makes processes easier, more accurate,
faster, less costly, safer and more effective to customers.
The following four fundamental questions need to be answered when this methodology is used:
1 What are we trying to achieve?
2 What changes have to be implemented that will result in an improvement?
3 How will we know that a change has occurred after the implementation?
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4 How can the change be sustained?
There are four phases to the Deming cycle, as described below:
1 Plan phase. This phase consists of studying the current situation, gathering the data, and planning for
improvement.
2 Do phase. This phase consists of implementing the improvement plan on a small scale on a trial basis.
This can be in a laboratory or pilot plant or on a small segment of customers.
3 Study phase. This phase consists of determining whether the trial plan is working correctly and making
any further adjustments or changes to the improvement plan.
4 Act phase. This phase consists of ensuring that the improvements can be standardised and practised
continuously in the real, live situation or in the whole market sector. This then leads to the plan stage of
the next cycle.
This is illustrated below, where the incline illustrates the continuous process improvement.
FIGURE 13.11 The Deming cycle
13.3.5 Pokayoke
Pokayoke is an approach for error proofing a process. It is basically the use of devices to prevent human
error. An example is the key to a specific lock. You would need the exact key to open that lock. In other
words, there can be no human error through the use of the wrong key, as the door will not open. Hospitals use
specific trays that have indentations for each surgical instrument. After an operation, the nurse needs to
ensure that all instruments are in their correct trays, making sure that the doctor has not dropped any
instruments or, worse still, left any instruments inside the patient!
Pokayoke is focused on the following two functions:
1 Prevention, by providing a warning when an error is about to be made
2 Detection, when the defect has occurred and the taking of corrective action.
There are five error-proofing principles. They are:
1 Elimination. The objective is to eliminate all possibilities of error. The best method is to redesign the
operations to eliminate the process that can cause errors.
2 Replacement. The objective here is to substitute less-reliable processes with reliable processes, for
example, using computers rather than hand-held calculators for data calculations.
3 Facilitation. The objective here is to make work simpler and easier, for example, colour coding the
components of a machine so that no errors can be made during the assembly process.
4 Detection. The objective here is to detect the error before any further processing. An example is having a
bell ring when there are incorrect volumes of liquid in a liquid-filling process.
5 Mitigation. The objective here is to reduce the effect of the error, for example, the use of fuses in
overloaded circuits.
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DISCUSSION
Error warnings!
Consider the example of a motor vehicle and a generator. When you are driving a motor vehicle, a warning
light will shine if the petrol tank is almost empty, which warns you to top up with petrol. In many
generators, a warning light shines or an alarm sounds if the bearings of the generator overheat. In some
cases a device will also switch off the generator. This is necessary because generator bearings are very
expensive and overheating of bearings damages the whole generator.
Answer the following question about error principles: How can you apply the five error principles of
Pokayoke to prevent your car from breaking down when you see the warning light or hear the alarm?
13.3.6 The 5S model
The 5S model is used to improve the quality of housekeeping. The benefits of good housekeeping include
prevention of defects, prevention of accidents, and elimination of wasted time spent on looking for
documents and components. Five ‘S’ stands for the following:
1 Sort. Remove and clear out all unwanted items.
2 Set. Arrange items so that they are easy to find and retrieve.
3 Shine. Sweep, wash, polish and keep the work area clean at all times.
4 Standardise. Make all good practices of housekeeping a habit.
5 Sustain. Create the conditions, such as rewards and other means of recognition, for housekeeping efforts.
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CLOSING EXAMPLE
PPC Hercules waste-sorting project
PPC Cement conducted a survey in early 2009 to establish the quantities of various waste types generated
over a specified period. This information was used to engage with potential service providers ahead of
appointing a company to sort and recycle waste.
A dedicated area was fenced off for all recycling activities with two entrance gates to facilitate easy
access for trucks to remove full skips. A shelter was erected to enable the service provider to work in a
covered area under adverse weather conditions.
To facilitate separation at source, colour-coded 210-litre drums and wheeled bins were selected for use
throughout the site:
• Red – hazardous waste (oily rags, oil containers, grease containers, old personal protective equipment,
etc.)
• Blue – plastic, glass, cans and paper (soft drink cans and bottles, copier paper, etc.)
• Green – domestic waste (left-over food, wrappings, etc.)
• Cardboard boxes – photocopy paper in the offices
• Wheeled bins – domestic waste in the administration block.
Suitable locations for waste collection were identified throughout the plant in consultation with all staff.
Concrete slabs were cast to elevate drums to highlight their location. Each location is identified by a white
number painted in a green block. These numbers are plotted on a site map indicating the location of the
drums.
The waste drums around the plant are swapped for empty drums daily by the service provider to prevent
spillage of any waste material in the site. The drums and wheeled bins are taken to the waste-recycling area
for further sorting. Recyclables are removed and non-recyclables are placed in multi-waste skips for
disposal. Hazardous waste is placed in a dedicated skip for disposal at the Holfontein site. All safe disposal
certificates are filed on site. All recyclable waste removed from site is weighed and recorded by the service
provider to demonstrate the volumes recycled instead of going to a landfill site.
A large quantity of waste produced on site is recycled, namely scrap metal, wooden pallets, old printer
cartridges and old oil. Supported by a multi-level communications campaign, the project has already
produced positive results and improved housekeeping within the plant.
To promote sustainable information technology, the PPC IT department selected a project on recycling
of old and redundant equipment. In the past, the practice was merely to dispose of redundant equipment via
a disposal company. Following a feasibility study on waste-management options, recycling was highlighted
as a viable alternative.
Based on a number of selection criteria, including legal compliance, a service provider was appointed.
The contract involves removing redundant equipment from PPC’s Sandton premises thus providing
one-stop convenience for recycling e-waste, with the assurance of technology protection and
environment-conscious recycling methods. All electronic waste is manually stripped, disassembled and
sorted to avoid cross-contamination. Items for recycling are not shredded as whole units, thus avoiding a
mix of plastics, ferrous and non-ferrous metals.
Sophisticated dust extractors are used to recover precious and non-ferrous metals. Shredding and
pulverisation ensures that all metallics are separated and all plastics sent to plastic recyclers.
This project has been running smoothly for the past six months, with multiple benefits. PPC saves on
disposal costs and contributes to less solid waste disposal on landfill sites, while supporting small business
development.
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(SOURCE: http://www.ppc.co.za/pages/environmental_complience.cfm)
Summary
In this chapter, we explained the various quality tools, such as flow charts, run charts, control charts, check
sheets, histograms, Pareto analysis, cause-and-effect diagrams, scatter diagrams and FMECA. All these tools
are used to try to identify possible causes of quality problems. We then discussed and illustrated some of the
quality improvement techniques, such as benchmarking, six-sigma, lean manufacturing, the Deming cycle,
use of Pokayoke, and the 5S model. Some of these tools are very easy to use, while others require substantial
input in the form of training and expert intervention.
Key terms
5S model: Used to improve the quality of housekeeping.
Benchmarking: A process of comparing key performance measures to those of the best performers and
subsequently identifying areas for improvement.
Cause-and-effect diagram: Also known as a fishbone diagram; moves away from identification of the
symptoms of a problem towards identification of the real causes of the problem. It identifies as many
causes as possible for an effect or problem.
Check sheet: A structured, prepared form for collecting and analysing data.
Control charts: A graph used to study how a process changes over time and the data are plotted in time
order.
Deming cycle: Also called the PDSA (Plan, Do, Study, Act) cycle; is based on the premise that
improvement comes from applying knowledge which makes processes easier, more accurate, faster, less
costly, safer and more effective to customers.
Failure criticality: The potential failures of the various components of the good or service are examined to
determine the severity of each failure.
Failure effect: The potential failures are studied to determine their probable effects on the performance of
the good or service.
Failure mode: The anticipated operational conditions are used as the background of the study of the good
or service.
Failure mode, effects, and critical analysis (FMECA): The primary objective of FMECA is to identify
critical failures and probable causes for these failures, with the aim of reducing them.
Flow chart: A picture of the separate steps of a process in sequential order.
Histograms: Graphic representations of data in a bar format.
Lean manufacturing: A process of designing systems to reduce costs by getting rid of any waste in an
organisation.
Pareto analysis: Uses charts to identify and prioritise problems to be solved.
Pokayoke: An approach for error proofing a process.
Run charts: Graphic representations of process performance.
Scatter diagram: Graphs pairs of numerical data, with one variable on each axis, to look for relationships
between them.
Six-sigma: A top-down and highly disciplined approach that typically includes four stages: measure,
analyse, improve and control. It is also a data-orientated approach making rigorous use of statistical
decision tools.
Tools of quality: The various tools that can be used to detect and analyse quality problems.
Review questions and activities
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1 Describe the various tools of quality.
2 Consider the case example of PPC cement at the end of the chapter. How would you apply the Deming
cycle to the waste-sorting project at PPC Hercules?
3 Imagine you are faced with a quality problem: you have to catch the train and must use your car to get to
the station. However, you are never on time to catch the early train. Identify the probable causes by using
the fishbone diagram.
4 Briefly describe the six-sigma methodology that can be used to solve a problem relating to your studies.
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CASE STUDY: ABC MANUFACTURING
ABC Manufacturing is manufacturing leather couches. They have been experiencing a downturn in their
throughput as well as some financial problems. Their management decided to do some investigation. Three
investigative teams were developed. The first was tasked to look at the manufacturing environment, the
second to investigate the administration processes, and the third to look at the financial aspects. Each team
member was trained on six-sigma. The first two teams decided to conduct research amongst the workers in
both manufacturing and administration.
This research included sending a survey to each department head as well as a number of supervisors
and workers. First a brief, written explanation of the research purpose was given to the department head as
well as a definition of six-sigma and how it works. The supervisors surveyed were the decision-makers
within their respective sections. The surveys involved questions about processes within their respective
areas of responsibility. They were asked to identify processes which were cumbersome and labour
intensive, and weaknesses in service delivery. The survey also involved questions regarding processes held
up due to waiting on other areas, waste and redundancy. Finally, they were asked if a management tool that
helped them analyse these processes on a continuous basis would be beneficial to their success and to a
higher level of customer service.
A number of processes were listed in each of the two surveys as very labour intensive, and the
respondents felt that they could benefit by being broken down and analysed for efficiency. Over half of the
respondents reported having processes within their sections that could either be combined with other
processes or eliminated altogether if they had the time to analyse them and could get approval from the
administration to streamline the process.
One subject on which all of the respondents agreed was in the area of ‘lead time issues’. All
supervisors reported processes being held up due to waiting on other departments to finish tasks. If lead
time is considered the time interval between the initiation and the completion of a production process, the
main complaint was that some tasks where held up as they had to obtain input from others in order to move
forward in their process. In the administration departments this was further exacerbated by an approval
process that was in place for certain actions. Most of the workers and supervisors identified tasks which
had become too complex and could be simplified, such as the budget process, the purchasing process, the
personnel evaluation process, physical inventory, record keeping and completion of time sheets. Saving
time by cutting waste, redundancy and useless complexity appealed to the supervisors who are faced with
daily shortages of personnel.
The task team on finances discovered some leakage in the payroll organisation in the form of
overpayments. After gathering more data, the largest opportunity for defect was with overpaying former
employees. Each team member was supplied with a recent overpayment case and asked to research the
case. Several tools were used, but the one that highlighted the issue was visual process mapping. This
process involves the team mapping the process steps using string, which helps highlight do-loops and other
suboptimal occurrences. It was soon established that the communication pattern was the issue, resulting in
the human resources department not receiving information about people who have resigned. The concept
of having an employee self-serve their departure from the company was born. As a result, overpayment
occurrences were dramatically reduced and, when one did occur, the average rand amount was less than
half.
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Case study questions and activities
1 Discuss how the investigations implemented by ABC Manufacturing fit in with the phases of a
six-sigma project.
2 Discuss how ABC Manufacturing can use the Pokayoke approach for error proofing the different
processes included in the investigations.
References
1 Aarts, F.M. & Vos, E.D. 2001.’The impact of ISO registration on New Zealand firm’s performance: A
financial perspective’, Total Assurance and Environmental Management Quality Magazine, 13:3,
180–185.
2 Aikens, C.H. 2006. Quality: A corporate force, managing for excellence. New Jersey: Prentice Hall.
3 Besterfield, D.H., Besterfield, C., Besterfield, G.H. & Besterfield, M. 2003. Total quality management.
New Jersey: Prentice Hall.
4 Evans, R. & Dean, J.W. 2002. Total quality. Stamford: Thomson.
5 Foster, S.T. 2007. Managing quality, integrating the supply chain, 3rd ed. New Jersey: Prentice Hall.
6 Ghobadian, A. & Woo, H.S. 1996. ‘Characteristics, benefits and shortcomings of four major quality
awards’, International Journal of Quality & Reliability Management, 13:2, 10–44.
7 Ghobadian, A., Speller, S. & Jones, M. 1993. ‘Service quality concepts and models’, International
Journal of Quality & Reliability Management, 11:9, 43–66.
8 Gitlow, H.S., Oppenheim, A.J., Oppenheim, R. & Levine, D.M. 2006. Quality management. Singapore:
McGraw-Hill.
9 Gryna, F.M. 2001. Quality planning and analysis. New York: McGraw-Hill.
10 Gryna, F.M., Chua, C.H. & DeFeo, J.A. 2006. Juran’s quality planning and analysis. Singapore:
McGraw-Hill.
11 Kruger, D. & Ramphal, R. 2009. Operations management, 2nd edition. Cape Town: Oxford University
Press.
12 Laszlo, G.P. 1991. ‘Quality awards – recognition or model?’, The TQM magazine, 8:5, 14–18.
13 McMahon, T. 2008. A lean journey. The quest for true north. Problem solving and basic quality tools.
[Online: see websites at the end of this chapter]
14 Mouatt, C.A.L. 1997. Implementing ISO 9000 and ISO 14000, quality assurance and environmental
management systems. Sydney: McGraw-Hill.
15 National Institute of Standards and Technology. 2003. National Baldrige quality program, technology
administration. US. Department of Commerce.
16 Oakland, J.S. 2003. TQM-text with cases. Oxford: Elsevier-Butterworth Heinemann.
17 Sharma, B. & Gadenne, D. 2001. ‘An investigation of the perceived importance and effectiveness of
quality management approaches’, The TQM magazine, 13:6, 433–443.
18 Smit, D.B.H. 2000. Total quality management: A strategic management approach. Unpublished DCOM
Thesis: Rand Afrikaans University.
19 Stamatis, D.H. 1995. Understanding ISO 9000 and implementing the basics to quality. New York: Marcel
Dekker.
20 Steenkamp, R. & Van Schoor, A. 2002. The quest for quality of life: A TQM approach. Cape Town: Juta.
21 Summers, D.C.S. 2005. Quality management – Creating and sustaining organisational effectiveness.
New Jersey: Pearson Education.
22 Van Aardt, I., Shai, G., Basson A. & Tustin, D.H. 2010. ‘Expectations and perceptions of service value
and satisfaction with cellphone service providers among South African youth’, Research Report no. 400.
Pretoria: Unisa Bureau of Market Research.
23 Wolkins, D.O. 1993. Service quality principles. The service quality handbook. New York: AMACOM.
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Websites
Visit the websites below.
http://asq.org/learn-about-quality/seven-basic-quality-tools/overview/overview.html
http://creately.com/blog/diagrams/flowchart-guide-flowchart-tutorial/
http://en.wikipedia.org/wiki/Flowchart
http://en.wikipedia.org/wiki/Seven_Basic_Tools_of_Quality
www.ajronline.org/content/160/5/995.full.pdf
www.bestflowchart.com/support.htm
www.breezetree.com/articles/what-is-a-flow-chart.htm
www.ppc.co.za/pages/environmental_complience.cfm
www.statit.com/services/CQIOverview.pdf
www.zz2.biz/index.php?option=com_content&view=article&id=74%3Areducing-fuel-consumption-has
-become-a-priority-at-zz2&catid=2%3Anews&Itemid=13&lang=af
The website below was last accessed in October 2012:
www.slideshare.net/ALeanJourney/the-seven-basic-tools-of-quality
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CHAPTER 14
Project management
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
•
Define a project
Define project management
Describe the difference between a portfolio, programme and project
Explain and discuss the triple constraint
Explain the project life cycle and its phases
Explain the project management framework and its knowledge areas
Describe the role of the project manager
Explain the role of a stakeholder
Explain how to structure a project team
Explain the various project management tools and techniques
Explain the role of the project management office
Describe the challenges facing project managers.
CHAPTER outline
14.1
14.2
14.2.1
14.2.2
14.2.3
14.3
14.3.1
14.3.2
14.3.3
14.3.4
14.3.5
14.4
14.4.1
14.4.2
14.4.3
14.5
14.5.1
14.5.2
14.5.3
14.6
14.7
14.7.1
14.7.2
14.7.3
Introduction
Portfolio and programme management
The triple constraint concept
Project principles
The project context
Project life cycle and project phases
Initiation/Definition
Planning
Execution
Monitoring and control
Closure
The project management framework
Core functions
Facilitating functions
Integration management
The role of the project manager
Leadership
Structuring the team
Stakeholder management
Project team structure
Project management tools and techniques
Work breakdown structure
Project network diagram
Critical path method (CPM)
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CHAPTER 14
Project management
LEARNING outcomes
After studying this chapter, you should be able to:
•
•
•
•
•
•
•
•
•
•
•
•
Define a project
Define project management
Describe the difference between a portfolio, programme and project
Explain and discuss the triple constraint
Explain the project life cycle and its phases
Explain the project management framework and its knowledge areas
Describe the role of the project manager
Explain the role of a stakeholder
Explain how to structure a project team
Explain the various project management tools and techniques
Explain the role of the project management office
Describe the challenges facing project managers.
CHAPTER outline
14.1
14.2
14.2.1
14.2.2
14.2.3
14.3
14.3.1
14.3.2
14.3.3
14.3.4
14.3.5
14.4
14.4.1
14.4.2
14.4.3
14.5
14.5.1
14.5.2
14.5.3
14.6
14.7
14.7.1
14.7.2
14.7.3
Introduction
Portfolio and programme management
The triple constraint concept
Project principles
The project context
Project life cycle and project phases
Initiation/Definition
Planning
Execution
Monitoring and control
Closure
The project management framework
Core functions
Facilitating functions
Integration management
The role of the project manager
Leadership
Structuring the team
Stakeholder management
Project team structure
Project management tools and techniques
Work breakdown structure
Project network diagram
Critical path method (CPM)
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14.7.4
14.8
14.9
14.10
Program evaluation review technique (PERT)
Gantt chart
The project management office
The challenges facing project managers
Summary
Key terms
Review questions and activities
Case studies
References
Websites
SETTING THE SCENE
Prepare before you start!
Preparation is a key part of project management. If the project is not started correctly, it will end up with
problems such as rework, scope creep, schedule delays, etc. While some might be tempted to jump in with
both feet and start writing code or tearing down walls, the project manager needs to help provide a solid
starting point for the project. It is this starting point that will help determine whether the project will
eventually be successful or not. This starting point is the jumping off point for the project and the team, and
it is worth the time and effort to make sure that there is a good foundation for the project in the long run
instead of jumping blindly into something that is not fully understood by the project team
(SOURCE: Darter, 2012).
14.1 Introduction
Project management is the management discipline of planning, organising, motivating and controlling people
and resources to achieve very specific outcomes and goals (PM Lead, 2013). All projects are temporary in
nature, with a defined beginning and end state, and are usually constrained by time. They are also often
constrained by budget and/or scope requirements (Chatfield & Johnson, 2013). They are undertaken to
achieve specific and even unique goals and objectives (Nokes, 2007), and normally to deliver beneficial
change or added value. The temporary nature of projects stands in contrast with business as usual (or
operations) (Dinsmore & Cooke-Davies, 2005), which are repetitive, permanent or semi-permanent
functional activities to produce products or services.
The Project Management Institute (PMI) clearly defines a project as: ‘A temporary endeavour undertaken
to accomplish a unique product or service’ (Project Management Institute, 2010: 4).
Key aspects of this definition are:
• Temporary: A project needs to have a clear end state, and this usually involves the delivery of a specific
set of outcomes, for example, a completed house construction project.
• Unique purpose: All projects are different in some way, and this means they need to be managed with the
identified differences in mind. These differences may be varying requirements or even different
equipment and labour being used.
• Requires resources: No project can complete itself without some resource. This may literally only be a
project manager being assigned to confirm project feasibility, even if the project isn’t taken any further.
• Primary sponsor or customer: All projects need to be completed for some customer (external to the
company), or sponsor who is internal, for example, the marketing director.
• Involves uncertainty: Uncertainty is a fact of life and no project can avoid uncertainty. The length and
complexity of a project also contributes to increasing the project uncertainty.
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14.2 Portfolio and programme management
Project portfolio management (PPM) is the collective management of a group of current or proposed
programmes and projects based on a number of key characteristics (Project Management Institute, 2010).
This management is normally centralised and involves the management of all the processes, methods and
technologies being used by project managers. It is normally focused under the auspices of a project
management office (PMO).
The objectives of PPM are to optimally plan and manage the resource mix for quality delivery of
objectives, and to schedule activities to best achieve an organisation’s operational and financial goals, while
also adhering to constraints imposed by customers, strategic organisational objectives or external real-world
factors (Cooper, Edgett & Kleinschmidt, 1998).
Programme management is the process of managing multiple ongoing interdependent projects, which
may be grouped in a specific business area or function, for example the IT department or marketing
department. Programmes do not only focus on one functional area, but may involve all the functions of the
organisation. An example could be the designing, manufacturing and providing support infrastructure for a
computer manufacturer. This would involve a number of projects, for example, factory construction or IT
network installation, but all collectively managed within a specific programme of work.
Project management is the application of knowledge, skills, tools and techniques to project activities to
meet specific project requirements (Project Management Institute, 2010), for example, the design of a
marketing brochure for a specific project. Projects may then be divided into work streams which group sets
of associated activities focused around a particular deliverable, for example, the identification, sourcing and
ordering of a specific component (spark plug or piston) for an automobile engine project. The actual task
would then be the installation of the spark plug in the engine during the assembly process, performed by a
specific individual at a specific time and place on the production line.
FIGURE 14.1 The hierarchy of a portfolio
14.2.1 The triple constraint concept
As in any endeavour, the project manager needs to manage every undertaking within certain conditions.
Projects need to be performed and delivered under certain constraints, and traditionally these constraints have
been listed as ‘scope’, ‘time’ and ‘cost’ (Chatfield & Johnson, 2013). These constraints can also be called the
‘project management triangle’, where each side represents a limiting factor or constraint. The key principle
that underpins the triangle is that one constraint, or point of the triangle, cannot be changed without having an
impact on one or both of the others.
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FIGURE 14.2 The triple constraint of project management
The three constraints are explained as follows:
• Time: The process of ensuring timely completion of the project against the customer’s requirements and
expectations.
• Cost: The process of ensuring that the project is completed within the agreed, signed off project budget.
Costs are the value of money that will be used to produce something and may be the cost of acquisition,
in which case they will need to be included in the budget.
• Scope (includes quality): The scope of a project is the list of all of its products and their requirements,
quality levels or features. The scope includes all the requirements that were agreed upon when the project
was initiated. The quality can mean the degree of excellence (‘a quality product’) that was outlined in
the sign-off criteria in the initiation stage of the project. The achievement of quality expectations is a key
criterion for successful project delivery and customer sign-off.
It is important to note that in the context of this chapter, the requirement for a specific ‘quality’ or
‘performance level’ is included within the scope constraint, and is not seen as a fourth constraint as in some
literature.
For example, a car manufacturer will produce a 4x4 vehicle with specific features and characteristics.
These are defined as part of the scope of the project. The difference between a VW Amarok and a GWM
Steed 5, for example, would not be in the characteristics or features, as they might be similar, but in the
quality which may differ significantly. This is largely reflected in the price of the vehicle. At no stage should
the GWM be seen in a negative light, as the vehicle is being targeted at a specific market segment and within
a specific price range. They may both have air conditioning and 4-wheel drive, but they do not compete on
price or quality. GWM has made a conscious decision to scope the vehicle’s quality levels for this price band
and market segment.
14.2.2 Project principles
While managing the triple constraint, there are a number of principles that will increase the chance of
success. These principles include:
• Projects need to support the organisation’s strategy and aim to add value to its goals and objectives.
• Projects need to be clearly broken down into work streams and their associated tasks to ensure that all
stakeholders are clear on the deliverables and their acceptance criteria. When in doubt, more detail is far
more beneficial than assumptions on deliverables.
• Risks associated with any project need to be managed, and if they come to pass, they become issues
which need to be resolved. An issue that is not resolved can almost certainly cause delays to the schedule
and in some cases a crisis, which affects the overall success of the project.
• The project manager and the project team need to deliver the project according to the agreed plan. Not
following or adhering to the plan can lead to errors and tasks being forgotten, which in turn can cause
quality to decrease.
• Project managers need to report the truth at all times. Trying to cover up issues and delays will not
resolve them and will lead to a loss of confidence, which could mean project failure.
• Project managers need to always keep the triple constraint in mind when planning and managing a
project.
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14.2.3 The project context
All organisational activities, including the projects they undertake, do not exist in isolation or in a vacuum.
The project context refers to the environment within which the project is undertaken, be this socio-economic
or environmental for example. This also means that a project is undertaken within the bounds of a
programme, which in turn could be part of a wider portfolio of work. All these are part of the project context.
The context will be different for every project and