THE DEFINITIVE GUIDE
TO MANUFACTURING
AND SERVICE OPERATIONS
This page intentionally left blank
THE DEFINITIVE GUIDE
TO MANUFACTURING
AND SERVICE OPERATIONS
MASTER THE STRATEGIES AND
TACTICS FOR PLANNING,
ORGANIZING, AND MANAGING
HOW PRODUCTS AND SERVICES
ARE PRODUCED
Council of Supply Chain
Management Professionals
and
Nada Sanders, Ph.D.,
Lehigh University
Vice President, Publisher: Tim Moore
Associate Publisher and Director of Marketing: Amy Neidlinger
Executive Editor: Jeanne Glasser Levine
Consulting Editor: Chad Autry
Operations Specialist: Jodi Kemper
Cover Designer: Chuti Prasertsith
Managing Editor: Kristy Hart
Senior Project Editor: Betsy Gratner
Copy Editor: Geneil Breeze
Proofreader: Debbie Williams
Indexer: Lisa Stumpf
Senior Compositor: Gloria Schurick
Manufacturing Buyer: Dan Uhrig
© 2014 by Council of Supply Chain Management Professionals
Published by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
For information about buying this title in bulk quantities, or for special sales opportunities
(which may include electronic versions; custom cover designs; and content particular to your business,
training goals, marketing focus, or branding interests), please contact our corporate sales department
at corpsales@pearsoned.com or (800) 382-3419.
For government sales inquiries, please contact governmentsales@pearsoned.com.
For questions about sales outside the U.S., please contact international@pearsoned.com.
Company and product names mentioned herein are the trademarks or registered trademarks of their
respective owners.
All rights reserved. No part of this book may be reproduced, in any form or by any means, without
permission in writing from the publisher.
Printed in the United States of America
First Printing December 2013
ISBN-10: 0-13-343864-3
ISBN-13: 978-0-13-343864-2
Pearson Education LTD.
Pearson Education Australia PTY, Limited
Pearson Education Singapore, Pte. Ltd.
Pearson Education Asia, Ltd.
Pearson Education Canada, Ltd.
Pearson Educación de Mexico, S.A. de C.V.
Pearson Education—Japan
Pearson Education Malaysia, Pte. Ltd.
Library of Congress Control Number: 2013951242
Dedicated to all students who want to learn how the
“engine of business” works.
This page intentionally left blank
CONTENTS
Preface........................................................................................ xiv
1
Operations Management Defined............................................... 1
Defining Operations Management ...........................................................1
The Transformation Role of Operations Management ....................2
Differences in Manufacturing Versus Service Operations ...............3
The Role of Manufacturing and Service Operations in the
Organization and Supply Chain ...........................................................4
Organizational Decision Levels.................................................................5
Key Terminology.........................................................................................6
Critical Processes.........................................................................................8
Production Planning Processes ............................................................8
Master Production Schedule (MPS) ................................................. 10
Material Requirements Planning (MRP) ......................................... 10
Rough Cut Capacity Planning (RCCP) ............................................ 10
Measuring Productivity Levels ............................................................... 11
Inventory Determination ........................................................................ 13
Reasons for Carrying Inventory ........................................................ 13
Types of Inventory .............................................................................. 15
Inventory Policy Choices ........................................................................ 16
Fixed-Order Quantity System ........................................................... 16
Fixed-Time Period System ................................................................. 17
Inventory Policy in a Fixed-Order Quantity System .......................... 19
How Much to Order? .......................................................................... 19
When to Order? ................................................................................... 21
Independent Versus Dependent Demand ............................................ 22
ABC Inventory Classification ................................................................. 23
Vendor Managed Inventory (VMI)....................................................... 25
Challenges Facing the Modern Operations Manager ......................... 25
Discussion Questions .............................................................................. 26
Endnote ..................................................................................................... 27
vii
2
Key Elements and Processes ...................................................... 29
Levels of Planning Decisions .................................................................. 29
Strategic Versus Tactical Operations Decisions .................................. 31
Production Planning................................................................................ 31
Different Types of Production Plans ................................................ 33
Facility Requirements Planning ........................................................ 34
Resource Planning ................................................................................... 35
Master Production Scheduling (MPS) ............................................. 35
Material Requirements Planning (MRP) ......................................... 35
Rough Cut Capacity Planning (RCCP) ............................................ 37
Scheduling Work...................................................................................... 37
High-Volume Operations .................................................................. 38
Low-Volume Operations.................................................................... 38
Sequencing Jobs ................................................................................... 39
Total Quality Management (TQM) ....................................................... 41
Statistical Process Control (SPC): Process Capability and Control
Charts ......................................................................................................... 44
Variation ............................................................................................... 45
Process Capability ............................................................................... 45
Process Control Charts ....................................................................... 48
Six Sigma ................................................................................................... 49
Six Sigma Methodology........................................................................... 50
ISO Standards ........................................................................................... 51
Theory of Constraints (TOC)................................................................. 52
The 5S ........................................................................................................ 54
Discussion Questions .............................................................................. 55
3
Understanding Operations Strategies ...................................... 57
What Operations Strategy Is and Why It Is Important ...................... 57
Strategic Alignment ................................................................................. 58
Competitive Priorities ............................................................................. 59
Cost........................................................................................................ 61
Quality .................................................................................................. 61
viii
THE DEFINITVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
Time ...................................................................................................... 62
Flexibility .............................................................................................. 63
Operations Structure and Infrastructure ......................................... 63
Order Winners and Order Qualifiers ............................................... 64
Process Strategy ........................................................................................ 65
Intermittent Processes ........................................................................ 65
Repetitive Processes ............................................................................ 66
The Product-Process Matrix .............................................................. 66
Types of Operations Processes ............................................................... 68
Facility Layout Strategies ........................................................................ 70
Fixed Position Layout ......................................................................... 70
Process Layout ..................................................................................... 70
Product Layout .................................................................................... 71
Cellular Layouts ................................................................................... 72
Line Balancing .......................................................................................... 73
Step 1: Identify Task Times and Precedence Relationships .......... 73
Step 2: Determine Cycle Time ........................................................... 74
Step 3: Assign Tasks to Workstation ................................................ 74
Step 4: Compute Efficiency ................................................................ 74
Inventory Positioning Strategy............................................................... 75
Make-to-Order .................................................................................... 76
Make-to-Stock ..................................................................................... 76
Assemble-to-Order ............................................................................. 77
Comparing Inventory Positioning Strategies ....................................... 77
Outsourcing Strategy ............................................................................... 79
Outsourcing Versus Vertical Integration ............................................. 80
Discussion Questions .............................................................................. 81
Endnote ..................................................................................................... 82
4
Role of Technology in Managing Operations .......................... 83
The Role of Technology .......................................................................... 83
Types of Operations Technologies ........................................................ 84
Contents
ix
Enterprise Resource Planning (ERP) .................................................... 85
Evolution of ERP ...................................................................................... 86
Pre-Enterprise Resource Planning Software ................................... 87
Real-Time Processing ......................................................................... 87
Focus of Systems.................................................................................. 88
Benefits of ERP ......................................................................................... 89
The Planning Capabilities of ERP.......................................................... 90
Step 1: Strategic Business Planning................................................... 91
Step 2: Production Planning .............................................................. 91
Step 3: Master Production Schedule (MPS) .................................... 91
Step 4: Materials Requirements Planning (MRP) ........................... 92
Step 5: Capacity Requirements Planning (CRP) ............................. 92
Step 6: Operations Execution and Control ...................................... 92
Two-Tier ERP ........................................................................................... 93
Shortcomings of ERP Software .............................................................. 94
Successful ERP Implementation ............................................................ 95
Step 1: Determine Technical Requirements .................................... 96
Step 2: Software Installation............................................................... 97
Step 3: Data Cleaning .......................................................................... 97
Step 4: Testing ...................................................................................... 97
Step 5: Employee Training ................................................................. 97
Step 6: Run Pilot .................................................................................. 98
Other Information Technologies ........................................................... 98
Global Positioning Systems (GPS) .................................................... 98
Radio Frequency Identification (RFID) ........................................... 99
Advantages and Disadvantages of Automation ................................. 100
Automated Material Handling ............................................................. 101
Flexible Manufacturing Systems (FMS) .............................................. 101
Robotics ................................................................................................... 102
E-Manufacturing .................................................................................... 103
Computer-Aided Design (CAD)..................................................... 103
Computer-Integrated Manufacturing (CIM) ................................ 104
x
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
Emerging Technologies ......................................................................... 104
3D Printing ......................................................................................... 104
Responsive Web Design ................................................................... 105
Small Data .......................................................................................... 106
Discussion Questions ............................................................................ 107
5
Understanding the Role of Global Operations in the
Modern Marketplace................................................................ 109
Benefits of Global Operations .............................................................. 111
Factors Impacting Global Operations ............................................ 112
Challenges to Global Operations ......................................................... 114
The Global Consumer ...................................................................... 115
Global Versus Local Marketing ....................................................... 115
Cultural Challenge ............................................................................ 116
Global Infrastructure Design ................................................................ 117
Labor ................................................................................................... 117
Transportation ................................................................................... 117
Suppliers ............................................................................................. 118
Importance of Technology ............................................................... 118
Cost Considerations............................................................................... 119
Hidden Costs...................................................................................... 119
Noncost Considerations ................................................................... 121
The Reshoring Trend ........................................................................ 122
Importance of Total Cost of Ownership (TCO) ................................ 123
Cost of Goods Sold or Landed Cost................................................ 124
Other “Hard” Costs ........................................................................... 124
Potential Risk-Related Costs ............................................................ 126
Strategic Costs .................................................................................... 127
Environmental Costs ........................................................................ 128
The Role of Political and Economic Factors ...................................... 128
Exchange Rate Fluctuations.................................................................. 130
Regional Trade Agreements ................................................................. 131
Contents
xi
Impact of Nontariff Barriers ................................................................. 132
Discussion Questions ............................................................................ 133
6
Metrics and Frameworks for Assessing Performance ........... 135
Importance of Metrics and Measurement .......................................... 135
Categories of Metrics ............................................................................. 140
Organizational Focused Metrics ..................................................... 142
Predictive and Outcome Metrics .................................................... 143
Managing Trade-Offs ....................................................................... 144
Productivity Measures ........................................................................... 145
Productivity ........................................................................................ 145
Efficiency ............................................................................................ 146
Cycle Time.......................................................................................... 147
Customer Service Measures .................................................................. 147
Elements of Customer Service ......................................................... 148
Critical Key Performance Indicators (KPIs) ................................. 151
Measurement Systems and Frameworks ............................................ 152
Monitoring Options .......................................................................... 152
Balanced Scorecard ........................................................................... 154
Discussion Questions ............................................................................ 158
Endnote ................................................................................................... 159
Index ......................................................................................... 161
xii
THE DEFINITVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
ABOUT THE AUTHORS
Nada Sanders is Iacocca Chair and Professor of Supply Chain Management at Lehigh
University. She is an internationally recognized expert in the area of business forecasting
and supply chain management. She received both her Ph.D. and MBA from the Ohio
State University and is author of more than 100 scholarly publications. She has worked
with numerous companies and is a frequently called-upon consultant, expert witness,
and keynote speaker.
Founded in 1963, the Council of Supply Chain Management Professionals (CSCMP)
is the preeminent worldwide professional association dedicated to the advancement and
dissemination of research and knowledge on supply chain management. With more than
8,500 members representing nearly all industry sectors, government, and academia from
67 countries, CSCMP members are the leading practitioners and authorities in the fields
of logistics and supply chain management. The organization is led by an elected group
of global officers and is headquartered in Lombard, Illinois, USA.
About the Authors
xiii
PREFACE
Operations management is the “engine of business.” It is the business function
responsible for creating the goods and services companies sell. Today’s fierce global
competition, rapid economic changes, and advancements in both information and
processing technologies have all helped place operations management in the limelight
of business. Operations management is the business function that can help companies
succeed in this highly competitive landscape because, without operations management,
there would be no products to sell.
Operations concepts are far reaching. Operations management decisions impact
every organization and are equally important to service organizations as they are to
manufacturing. Operations management is also equally important in informing strategic
as well as tactical decisions. This book explains the foundational concepts of operations
management for both manufacturing and service operations and is intended to serve as
an important resource.
xiv
THE DEFINITVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
1
OPERATIONS MANAGEMENT
DEFINED
Defining Operations Management
Every business is managed through multiple business functions each responsible for
managing certain aspects of the business. Figure 1-1 illustrates this by showing that
the vice president of each of these functions reports directly to the president or CEO
of the company. Marketing is responsible for sales, generating customer demand, and
understanding customer wants and needs. Finance is responsible for managing cash
flow, current assets, and capital investments. MIS is responsible for managing flows of
information. Most of us have some idea of what finance and marketing are about, but
what does operations management do?
PRESIDENT OR CEO
MARKETING
OPERATIONS
FINANCE
MIS
Manages
Customers
Manages Creation
of Goods and
Services
Manages
Money
Manages
Information
Figure 1-1 Organizational chart
1
Operations management (OM) is the business function responsible for managing the
process of creation of goods and services. It involves planning, organizing, coordinating, and controlling all the resources needed to produce a company’s goods and services. Because operations management is a management function, it involves managing
people, equipment, technology, information, and all the other resources needed in the
production of goods and services. Operations management is the central core function
of every company. This is true regardless of the size of the company, the industry it is in,
whether it is manufacturing or service, or is for-profit or not-for-profit.
Consider a pharmaceutical company such as Merck. The marketing function of Merck
is responsible for promoting new pharmaceuticals to target customers and bringing customer feedback to the organization. Marketing is essentially the window to customers.
The finance function of Merck makes sure that they have needed capital for different
processes including R&D. However, it is the operations function that plans and coordinates all the resources needed to design, produce, and deliver the various pharmaceuticals to hospitals, pharmacies, and other locations where needed. Without operations,
there would be no products to sell to customers.
The Transformation Role of Operations Management
We say that operations management performs a transformation role in the process of
converting inputs such as raw materials into finished goods and services. These inputs
include human resources, such as workers, staff, and managers; facilities and processes,
such as buildings and equipment; they also include materials, technology, and information. In the traditional transformation model outputs are the goods and services a company produces. This is shown in Figure 1-2.
At a manufacturing plant the transformation is the physical change of raw materials
into products, such as transforming steel into automobiles, cloth into jackets, or plastic
into toys. This is equally true of service organizations. At a university OM is involved in
organizing resources, such as faculty, curriculum, and facilities, to transform high school
students into college graduates. At an airline it involves transporting passengers and
their luggage from one location to another.
INPUTS:
Energy
Materials
People
Equipment
Information
Capital
OUTPUTS:
TRANSFORMATION
ROLE OF OM
Products
(Goods
and/or
Services)
Figure 1-2 The transformation role of operations management
2
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
The transformation role of OM makes this function the “engine room” of the organization. As a result it is directly responsible for many decisions and activities that give rise
to product design and delivery problems. The design and management of operations
strongly influence how much material resources are consumed to manufacture goods or
deliver a service, making sure that there is enough inventory to produce the quantities
that need to be delivered to the customer, and ensuring that what is made is in fact what
the customer wants. Many of these decisions can be costly. It is for this reason that OM
is a function companies go to in order to improve performance and the financial bottom
line.
Differences in Manufacturing Versus Service Operations
All organizations can be broadly divided into two categories: manufacturing organizations and service organizations. Although both categories have an OM function, these
differences pose unique challenges for the operations function as the nature of what is
being produced is different. There are two primary distinctions between these categories of organizations. First, manufacturing organizations produce a physical or tangible
product that can be stored in inventory before it is needed by the customer. Service
organizations, on the other hand, produce intangible products that cannot be produced
ahead of time. Second, in manufacturing organizations customers typically have no
direct contact with the process of production. Customer contact occurs through distributors or retailers. For example, a customer buying a computer never comes in contact
with the factory where the computer is produced. However, in service organizations the
customers are typically present during the creation of the service. Customers here usually come in contact with some aspect of the operation. Consider a restaurant or a barber
shop, where the customer is present during the creation of the service.
The differences between manufacturing organizations and service organizations are
typically not as clear-cut as they might appear in the preceding example. Usually there
is much overlap between them, and their distinctions are increasingly becoming murky.
Most manufacturers provide services as part of their business, and many service firms
manufacture physical goods they use during service delivery. For example, a manufacturer of jet engines, such as Rolls Royce, not only produces engines but services them. A
barber shop may sell its own line of hair care products.
We can further divide a service operation into high contact and low contact segments.
High contact segments are those parts of the operation where the customer is present,
such as the service area of the post office or the dining area of a restaurant. However,
these services also have a low contact segment. These can be thought of as “back room”
or “behind the scenes” segments. Examples would include the kitchen segment at a fastfood restaurant or the laboratory for specimen analysis at a hospital.
Chapter 1 Operations Management Defined
3
Finally, in addition to pure manufacturing and pure service, there are companies that
have some characteristics of each type of organization. It is difficult to tell whether these
companies are actually manufacturing or service organizations. An excellent example
is an automated warehouse or a mail-order catalog business. These businesses have low
customer contact and are capital intensive. They are most like manufacturing organizations yet they provide a service. We call these companies quasi-manufacturing organizations.
The operational requirements of these two types of organizations are different, from
labor to inventory issues. These differences are shown in Table 1-1. As a result, it is
important to understand how to manage both service and manufacturing operations.
Table 1-1
Comparing Manufacturing and Service Operations
Manufacturers
Services
Tangible product.
Intangible product.
Product can be inventoried.
Product cannot be inventoried.
Low customer contact.
High customer contact.
Longer response time.
Short response time.
Capital intensive.
Labor intensive.
The Role of Manufacturing and Service Operations in the Organization and
Supply Chain
Operations management plays a critical role in the organization and supply chain. Without OM there would be no products to sell. However, operations cannot work in isolation from other business functions. Recall that each business function manages unique
aspects of the business, and they all must work together. For example, operations must
work with marketing to understand the exact wants of a particular group of customers. It can then design the exact products customers want and create the production
processes to efficiently produce these products. Marketing, on the other hand, must
understand operations’ capabilities, including the types of products it can produce and
the limitations of the production process. Without communication between marketing
and operations, the company may find itself in a situation where it is producing products
the customers don’t want.
4
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
Operations must also work closely with purchasing to understand availability of materials, cost and quality issues, availability of sources of supply, and lead times. Operations
links marketing—with its ties to customers—to sourcing—with links to sources of supply. Operations must understand exactly what customers want and be able to ensure that
sourcing can get the materials needed at the right price and at the right time to support
product designs, or offer alternative material options.
Ensuring that OM fits in with the other organizational functions is necessary but not sufficient. The reason is that each company depends on other members of its supply chain
to be able to deliver the right products to its customers in a timely and cost-effective
manner. In the upstream part of a company’s supply chain, a company depends on its
suppliers for the delivery of raw materials and components in time to meet production needs. If deliveries of these materials are late, or are of poor quality, production
will be delayed, regardless of how efficient a company’s operations process is. On the
downstream side, a company depends on its distributors and retailers for the delivery
of the product to the final customer. If these are not delivered on time, are damaged in
the transportation process, or are poorly displayed at the retail location, sales will suffer.
Also, if the operations function of other members of the supply chain is not managed
properly, excess costs will result, which will be passed down to other members of the
supply chain in the form of higher prices.
The bottom line is that companies that comprise a supply chain need to coordinate
and link their operations functions so that the entire chain is operating in a seamless
and efficient manner. Just consider the fact that most of the components Dell uses are
warehoused within a 15-minute radius of its assembly plant, and Dell is in constant communications with its suppliers. Dell considers this to be essential to produce and deliver
components in a timely fashion.
Organizational Decision Levels
Generally there are two levels of decisions in an organization. The first are strategic decisions. These decisions are broad in scope and long-term in nature. As a result they set the
direction for the entire company. The second are tactical decisions, which are narrow in
scope and short-term in nature. These two sets of decisions are intertwined with strategic
decisions being made first and determining the direction of tactical decisions, which are
made more frequently and routinely. Therefore, we have to start with strategic decisions
and then move on to tactical decisions. This relationship is shown in Figure 1-3.
Strategic decisions set the tone for the other more specific decisions. They ask questions
such as: What market are we in (and not in)? What are our unique strengths? How do
we compete (and not compete)? These decisions are important as they define exactly
Chapter 1 Operations Management Defined
5
how a company competes in the marketplace and exactly in what markets using specific
strengths.
Tactical decisions focus on more specific day-to-day issues, such as the quantities and
timing of specific resources, and how specific resources are used. They are bound by
strategic decisions. Tactical decisions must be aligned with strategic decisions because
they are the key to the company’s effectiveness in the long run. Tactical decisions provide
feedback to strategic decisions, which can be modified accordingly. Without the direction provided by strategic decisions, companies may pursue competition in areas that do
not directly contribute to the business plan and waste resources. Consider for example
a company such as Southwest Airlines, which has always had a clear strategic direction
to compete on cost. This has directly impacted tactical decisions, such as pursuing cost
cutting efforts in operations in the form of no frills and one aircraft to minimize scheduling costs.
STRATEGIC DECISIONS:
Operations Strategy
TACTICAL DECISIONS:
Operations Design
Figure 1-3 Levels of operations decisions
Key Terminology
Operations management requires making many strategic and tactical decisions. Here
we look at some key operations management decisions and associated key terminology:
6
■
Capacity planning—The process of determining the production capacity needed
by an organization to meet changing demands for its products. Different types
of capacity exist. For example, design capacity is the maximum amount of work
that an organization is capable of completing in a given period; effective capacity
is the maximum amount of work that an organization is capable of completing in
a given period due to constraints such as quality problems, delays, and material
management.
■
Efficiency—Performing activities at the lowest possible cost.
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
■
Enterprise resource planning (ERP)—Large, sophisticated software systems
used for identifying and planning the enterprise-wide resources needed to coordinate all activities involved in producing and delivering products.
■
Forecasting—The process of predicting future events, including product demand.
■
Just-in-time—A philosophy designed to achieve high-volume production
through elimination of waste and continuous improvement.
■
Lean systems—Sometimes synonymous with just-in-time, it is a philosophy that
takes a total system approach to creating efficient operations through the elimination of waste.
■
Location analysis—Identifying the best location for facilities.
■
Mass customization—The ability of a firm to highly customize its goods and
services at high volumes through its operations management function.
■
Operations management (OM)—The business function that refers to the transformation process of converting raw materials into finished goods and services;
OM used to be called production and operations management (P&OM) or just
production. As the field evolved from being primarily tactical (e.g., making inventory and scheduling decisions on the manufacturing floor) to being strategic
(today there are many CEOs from the OM field), the term moved to focus on the
broad notion of operations rather than mere production.
■
Product design—The process of deciding on the unique and specific features of
a product.
■
Process selection—The process of identifying the unique features of the production process that will give the product its unique characteristics. Process selection
typically goes hand in hand with product design, as we need to create a process that gives rise to the particular product design desired. An excellent product
design is worthless if a process for its creation cannot be developed.
■
Productivity—A measure of how efficiently an organization converts inputs into
outputs. It is usually measured by a ratio of output divided by input. Productivity
is essentially a scorecard of how efficiently resources are used and a measure of
competitiveness. Productivity is measured on many organizational levels—from
measuring labor and machine productivity to measuring the productivity of an
entire organization or even a nation. As a result it is of interest to a wide range of
people.
■
Quality management—The process used to ensure the quality of a product,
including measuring quality and identifying quality problems.
Chapter 1 Operations Management Defined
7
■
Reengineering—The process of redesigning a company’s processes to increase
efficiency, improve quality, and reduce costs. In many companies things are done
in a certain way that has been passed down over the years. Operations management is a key player in a company’s reengineering efforts.
■
Scheduling—The process of deciding on the timing and use of resources within
an operation; it addresses questions such as who will work on what work schedule
and in what sequence jobs will be processed.
■
Total quality management (TQM)—A philosophy that seeks to improve quality
by eliminating causes of product defects and by making quality the responsibility
of everyone in the organization. With TQM everyone in the company is responsible for quality. Practiced by some companies in the 1980s, TQM became pervasive in the 1990s and is an area of operations management that no competitive
company has been able to ignore.
■
Value added—A term used to describe the net increase created during the transformation of inputs into outputs. The OM function seeks to create value added in
the transformation process.
Critical Processes
Several critical processes drive the success of business operations. This section explains
the most common ones.
Production Planning Processes
Production planning is an integral part of the business planning process. This process
begins when management of an organization gathers input from the various organizational functions—such as finance, marketing, operations, and engineering—to develop
a business plan. The business plan, with its long-term focus, provides the company’s
direction and objectives for the next two to ten years. The business plan is then typically
updated and reevaluated annually. The business plan, which states the company’s objectives for profitability, growth rate, and return on investment, is typically the starting
point for the organization’s production plan, often termed the aggregate plan. So what
is a production plan?
The aggregate or production plan is an organizational plan that identifies the resources
needed by operations management to support the business plan over the next 6 to 18
months. The aggregate plan details the aggregate production rate and the size of the
workforce, which enables planners to determine the amount of inventory to be held; the
amount of overtime or undertime authorized; any authorized subcontracting, hiring, or
8
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
firing of employees; and back-ordering of customer orders. The production plan is usually updated and reevaluated monthly by operations management.
A company typically develops the production plan based on a composite product that
represents the expected product mix. To minimize the level of details, individual products are not represented in the aggregate plan. Think about how many different products
most companies have, and you can see that it would become cumbersome to include
every product in the plan. Companies may group products into major product families
to facilitate production planning. For example, a paint company may produce many different products, such as different colors of paint, different finishes (e.g., gloss versus flat),
and container sizes (e.g., gallon or half gallon). Including all of these in a plan would be
cumbersome. The aggregate plan considers a composite product—such as “gallons of
paint” in this example—as a product measure.
The goal of the aggregate plan is to develop a plan for all the operations resources—
machines, labor, and inventory—to produce the amount of product needed over a certain period of time. The aggregate plan will then specify for a particular period, say, the
month of January, how many units of product are produced, how much labor is needed,
and how much inventory. The goal is to have a big picture; using a composite product,
or product families, reduces the level of detail but still provides the information needed
for decision making. Common terms of output used in the aggregate plans are units,
gallons, pounds, standard hours, and dollars. For example, a simplified production plan
is shown in Table 1-2.
Table 1-2
A Simplified Production Plan
QUARTER
1
2
3
4
Demand
8,000
11,000
14,000
15,000
(Demand is given in units, say gallons or dollars.)
Produce
12,000
12,000
12,000
12,000
(In this case we chose to produce average demand.)
Inventory
4,000
5,000
3,000
0
(Inventory is computed as Amount Produced + Inventory from previous period – Demand.)
Labor
6 workers
6 workers
6 workers
6 workers
(We assumed that each worker produces 2,000 units per quarter.)
To summarize, the purpose of the production or aggregate plan is to develop production rates and authorize resources that allow the company to meet the objectives of the
strategic business plan.
Chapter 1 Operations Management Defined
9
Master Production Schedule (MPS)
The plan below the production plan is a master production schedule (MPS). An MPS
is the anticipated production schedule for the company expressed in specific configurations, quantities, and dates. It is stated as specific finished goods. It details how operations will use available resources and which units or models will be built in each time
frame. This allows marketing to make informed commitments to customers. The MPS
and the detailed sales plan are reviewed weekly or even daily.
The MPS is used as an anticipated schedule for building specific finished products and
providing specific services. The key distinction here is that the MPS is a statement of production or services and is not a statement of demand—a plan to satisfy customer demand
while considering operational effectiveness and cost. Due to this, individual products
can be finished ahead of time and held in inventory rather than finished as needed. The
master scheduler or office manager balances customer service and capacity usage.
The aggregate plan shows how many products or services are planned for each time
period. The MPS identifies the specific products or services planned for a given period.
The relationship of these plans is shown in Figure 1-4.
Material Requirements Planning (MRP)
The authorized MPS is a critical input into material requirements planning (MRP), the
next plan below the MPS. MRP is a plan that uses the MPS, bill of material data, and
inventory records to calculate specific requirements for materials. The MPS tells the
MRP system what the company plans to build and when. The MRP system then calculates the materials needed to build the products in the schedule and plan for the necessary materials. Notice that as we move from the business plan through the production
plan, MPS, and then MRP we progressively become more specific and detailed.
Rough Cut Capacity Planning (RCCP)
This is the process of converting the MPS into specific capacity requirements for key
resources such as direct labor and machine time. This process calculates a rough estimate of the workload placed on critical resources by the proposed MPS. This workload
is compared against demonstrated capacity for each critical resource. This comparison
enables the master scheduler to develop a feasible MPS.
10
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
BUSINESS PLAN
PRODUCTION PLAN
ROUGH CUT CAPACITY
PLANNING
MASTER PRODUCTION
SCHEDULE
MATERIAL
REQUIREMENT
PLANNING
Figure 1-4 The relationships of different planning processes
Measuring Productivity Levels
Recall that operations management is responsible for managing the transformation of
numerous inputs into a range of outputs, such as goods or services. But how do we know
whether this transformation process is efficient? A measure of how efficiently inputs are
converted into outputs is called productivity. Productivity measures how well resources
are used. It is computed as a ratio of outputs (goods and services) to inputs (labor and
materials). The more productive a company is, the better it uses its resources. The equation is as follows:
Productivity = output/input
Chapter 1 Operations Management Defined
11
This measure of productivity can be used to measure the productivity of one worker or
many, as well as the productivity of a machine, a department, the whole firm, or even a
nation. Total productivity is used when measuring productivity for all inputs combined,
such as labor, machines, and capital. For example, let’s say a company produces weekly
the equivalent of $10,000 in output in the form of finished goods. Let’s also say that the
weekly value of all the inputs combined—including labor, materials, and other costs—is
$5,000. Total productivity for the week for the company is
Total Productivity = output/input = $10,000/$5,000 = 2.0
Although total productivity is valuable to give a company a sense of how it is doing on
the whole, it is often much more useful to measure the productivity of one variable at a
time. This allows us to evaluate how efficiently various resources are being used. Partial
productivity or single-factor productivity is when we compute productivity as the ratio of
output relative to a single input. For example, we can compute machine productivity or
labor productivity. For machine productivity we can see how many units a machine is
processing over a certain period of time; similarly for labor productivity we can compute
how many units a worker can process over a certain period of time, such as a day, hour,
or month.
The interpretation of productivity is not as easy as you might think. Productivity is a
relative measure that should be tracked over time. This allows us to benchmark against
ourselves, our competitors, and our industry. Just looking at the number, such as the 2.0
in the previous computation of total productivity, does not reveal much. Consider, for
example, if one worker at a sub shop produced 20 subs in 2 hours, the productivity of that
worker is 10 subs per hour. This number by itself does not tell us much. However, if we
compare it to the productivity of two other workers, one who produces 8 per hour and
another 5 per hour, it is much more meaningful. Although this is a simplistic example,
it illustrates the point that performance expectations are relative, and they need to be
benchmarked and compared over time. By comparing our productivity over time and
against similar operations, we have a much better sense of how high our productivity
really is.
Another criterion for evaluating productivity and setting standards for performance is
considering the company’s strategy for competing in the marketplace. This is called a
competitive priority, and it defines how a company competes. A company that competes
based on speed would probably measure productivity in units produced over time. However, a company that competes based on cost might measure productivity in terms of
costs of inputs such as labor, materials, and overhead. On the other hand, a company that
competes on quality may measure productivity based on the number of errors made. The
important thing is that the productivity measure selected provides information on how
the company is doing relative to the competitive priority it defines as most important.
12
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
Inventory Determination
Inventory is quantities of goods in stock. This is true for any product, material, or good.
Consider the books or CDs on your bookshelf. They comprise an inventory of books.
They provide you with a certain value from enjoying them to the monetary value you
paid for them. They cost money to purchase—money that cannot be used for something else. The same is true for inventory companies hold in stock. When we talk about
inventory we are simply talking about quantities of materials a company has in storage.
This material serves many purposes, but it also ties up a great deal of funds. As a result,
managing inventory throughout the entire supply chain is important.
All organizations—both manufacturing and service organizations—carry inventory. A
great deal of inventory must be carried to support basic processes of the operation. In
manufacturing, inventory can take a variety of forms. This includes raw materials and
component parts, which are delivered from suppliers, work-in-process (WIP) inventory,
or finished goods. Inventory also includes supplies and equipment. Inventory can tie up
funds if it sits unutilized in stock; however, not having enough inventory when needed
can mean stockouts or production delays. As a result managing inventory is a critical
part of operations management.
The major decisions in inventory relate to when to replenish stock, and how large orders
should be. This is called an inventory policy. An inventory policy addresses the basic
questions of when and how much to order. To understand more about determining an
inventory policy we need to first look at some reasons for carrying inventory.
Reasons for Carrying Inventory
Organizations carry inventory for many reasons, and all companies—even those that
practice lean systems—carry inventory. In fact, organizations cannot run without a certain amount of inventory. Some reasons that organizations carry inventory are as follows:
1. Protect against stockouts—One reason for carrying inventory is that goods cannot arrive immediately when you run out of stock. A certain amount of lead time
is needed for goods to be produced and delivered. You have to make sure that
you have enough inventory in stock to cover demand during the period of lead
time. Lead time will have a certain amount of variation, which may result from
shipping delays, production problems at the supplier site, lost orders, defective
materials, and numerous other problems so you have to plan to be prepared. Also,
sources of supply are rarely at the same location as demand, and you cannot locate
a production facility everywhere there is demand. As a result, inventory has to be
transported from one location to another, and sometimes held in a distribution
center to be distributed when needed at the various locations. The result is the
need to carry inventory to protect against possible stockouts.
Chapter 1 Operations Management Defined
13
2. Maintain independence of operations—During the production process as well
as the supply chain, the product is moved through many different operations that
have different processing rates. The challenge is balancing different processing
capabilities, and it is not always possible. Therefore, you need a cushion between
operations, and inventory at different points in the system serves this purpose.
Extra inventory strategically placed evens out differences in processing capability. Extra stores of inventory can be placed at various points in the supply chain
network, or at work centers within a facility, to give it flexibility.
Just consider the high interdependence of work stations on an assembly line.
Inventory is typically placed between work stations to decrease their interdependence. Otherwise, work stoppage at one station may disrupt or otherwise shut
down the entire assembly line. Also consider that there is natural variation in
processing times between identical operations due to randomness. As a result it
is desirable to create a cushion of inventory so that output can occur at a constant
rate.
3. Balance supply and demand—Balancing supply on one side of the supply chain
with demand on the other is always a challenge. Demand is never known with
certainty and holding extra inventory enables an organization to meet unexpected
surges in demand. Also, consider that demand occurs intermittently, rather than
on a continuous basis. An example might be retail sales, which are slower on
weekday mornings but high over the weekends. Not having extra inventory might
mean missed sales. Carrying inventory helps to address these natural variations in
demand.
Seasonal demand patterns also contribute to high and low periods of demand,
such as ice cream sales in the summer or snow shovel sales in the winter. It would
be costly for production facilities to produce products in unison with the seasonality of demand. This might mean closed facilities and unemployed workers during low seasons, and overtime production during high seasons. A more common
strategy is for companies, and their supply chains, to produce at a more uniform
rate during the year. In this case extra products are stored in inventory and used
during peak seasons.
4. Protect against uncertainty—Many unexpected events occur that impact both
supply and demand. This is due to randomness and could be anything from a
batch of damaged goods being received, to an unexpected delay due to weather, or
a strike at a supplier’s plant. Companies carry extra inventory in stock to protect
themselves, or buffer, against these uncertainties. This is a “just in case” scenario.
However, companies know that they have to be prepared so that they don’t run
out of stock.
14
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
5. Economic purchase orders—You have heard about keeping inventories low, but
in this scenario inventory may be purchased in large quantities. There are a number of reasons why this might be advantageous. For example, suppliers sometimes
offer price discounts to encourage customers to purchase larger quantities at one
time. Similarly, buying in large quantities might result in savings associated with
transporting larger quantities at one time. Also, anticipating some type of price
increase, shortage, or disruption might lead companies to buy larger quantities.
Purchasing larger quantities in anticipation of shortages, for example, is a common supply chain strategy.
Types of Inventory
To better understand inventory we need to look at different types of inventories and their
purposes, as their quantities are computed differently. Together they collectively add up
to inventory costs for the organization. Let’s look at these here:
■
Cycle stock—This category of inventory is computed for immediate use and is
also called lot size inventory. It is computed based on expected demand over a
certain time period and assumes demand is known. This simply computes how
much stock is needed to cover demand over a set period of time. It also accounts
for the fact that products are typically produced in batches. This is the quantity,
or the size, of the batch that is produced during the production cycle. Therefore
it is called cycle stock.
■
Safety stock—This is inventory carried to serve as a cushion for uncertainties in
supply and demand. It can be in the form of finished goods to cover unexpected
demand, raw materials to guard against supply problems, or work-in-process
inventories to guard against production stoppages.
■
Seasonal inventory—These inventories are carried to compensate for differences
in the timing of supply and demand, and to smooth out the flow of products
throughout the supply chain. They are called seasonal inventories as they are
often used when demand fluctuations are significant, but predictable, such as with
seasonal variation. This is where companies carry extra inventory during a low
season in anticipation of higher demands during the high season. Finally, these
are inventories that are carried in anticipation of a price increase or a shortage or
products. For this reason they are sometimes called hedge inventory.
■
Transportation or pipeline inventory—This is inventory that is in transit and
exists merely because the points of demand and supply are not same. At any one
time a global supply network has a large percentage of its inventory in transit—on
a barge, truck, or rail—being moved from one location to another, or waiting to
be loaded or unloaded.
Chapter 1 Operations Management Defined
15
■
Maintenance, repair, and operating (MRO) items—In addition to inventories
that directly support product creation, other inventories are used indirectly. These
are MRO items and include everything from office supplies and forms, to toilet
paper and cleaning supplies, to tools and parts needed to repair machines. Collectively, MRO items make up a significant amount of inventory and need to be
managed like all other inventories. Just think about the amount of paper, pencils,
and other supplies in an office. You expect them to be there, and without them
work can be significantly hampered.
Inventory Policy Choices
As discussed earlier an organization’s inventory policy must answer the two basic questions: when to order and how much to order. There are two basic categories or choices
in inventory policy that accomplish this: fixed-order quantity systems and fixed-time
period systems. They work in slightly different ways. Let’s look at these now.
Fixed-Order Quantity System
The first policy choice is through a system called a fixed-order quantity system. Therefore,
two variables define this system and answer the two basic questions of when to order
and how much. The first is an order quantity, Q, and the second is a reorder point, ROP.
As the name suggests, the quantity ordered with this system is constant or fixed and is
denoted by Q. An order is placed when the inventory position drops to some predetermined level. This predetermined level is called the reorder point and is usually noted as
ROP. Together these variables specify when to place an order: when inventory reaches
the ROP. They also specify how much to order: the quantity Q.
A graphical presentation of this model is shown in Figure 1-5. Notice that the system
assumes a constant demand rate of d by which the inventory position (IP) is reduced.
When the IP reaches the ROP, an order is placed for the quantity Q. When goods arrive,
the inventory is replenished, and all at once the inventory position is increased by Q.
However, inventory cannot arrive the moment an order is placed as there is a certain
amount of lead time, L, during which we have to wait for the order.
16
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
Demand Rate d
Inventory
Position
Q
ROP
Lead Time
L
L
Time
One Cycle
Figure 1-5 Fixed-order quantity system
Here inventory is monitored on a continual basis, and the assumption is that we always
know the current level of inventory. When inventory levels reach the ROP, an order of
quantity Q is placed. For example, let’s assume that a grocer uses a fixed-order quantity
system for its inventory of canned tomato soup. Its policy may be that it always orders
200 cans of soup, for which it gets a nice quantity discount, and the order is made when
the number of cans of soup drops to 25. Therefore, the ROP = 25, and the Q = 200.
In the classic version of this system Q is computed as the economic order quantity
(EOQ)—an economically optimal order quantity—which we will compute later. For this
reason this system is sometimes called the economic order quantity (EOQ) model. Other
terms used to describe it are the Q-model as the quantity Q is constant. Sometimes it is
called a continuous review system, as the inventory levels are continuously monitored.
The model has even been called a sawtooth model, as the graph of inventory looks like a
sawtooth. All these terms refer to the same type of inventory system, describing different
features of the system itself.
Fixed-Time Period System
The second inventory policy is determined by a system called a fixed-time period system
shown in Figure 1-6. This system checks inventory levels in fixed time intervals labeled
as T. The result is that the quantity ordered varies based upon the inventory position
when the system is checked. The system sets a target inventory level it wants to maintain,
say R. Inventory is checked every T intervals, say every week or every two weeks, and an
order is placed to restore the inventory level back to R. Based on the inventory level at
time period T, the amount of inventory that needs to be ordered will be some quantity
Q that varies from period to period. This quantity Q is the difference between the target
inventory R and how much inventory is in stock—the IP at time T:
Chapter 1 Operations Management Defined
17
Q = R – IP
where:
Q = order quantity
R = target inventory level
IP = inventory position
Two variables define this system and answer the two basic questions of when to order
and how much: T and Q. They specify when to place an order: at time interval T. They
also specify how much to order: quantity Q, computed as the difference between the target
inventory, R, and the inventory position, IP. Sometimes this system is called the periodic
review system to indicate that the inventory level is checked periodically, rather than
continuously.
Target Inventory Level R
R
Inventory
Position (IP)
Q2
Q1
T1
T2
T3
Time
Figure 1-6 Fixed-time period system
We can assume that an auto manufacturer uses a fixed-time period mode for its inventory of alternators. Also, let’s say its policy is to check inventory levels every two weeks,
and that it has a target inventory level R = 5,000 alternators. If after two weeks the company checks its inventory level and finds its inventory position IP = 2,800 alternators, it
would place an order for quantity Q = R – IP = 5,000 – 2,800 = 2,200 alternators. This is
essentially how this policy system works.
The biggest difference between the fixed-order quantity system and the fixed-time period
systems is in the timing and quantities of the orders placed. With the fixed-order quantity system inventory is checked on a continual basis and the system is prepared to place
orders multiple times per year on a random basis. This has an advantage of providing
greater system responsiveness, but it also requires administrative processes to be in place
18
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
on a continual basis. In addition, as different inventory items reach their reorder points
at different time periods, it might be difficult to obtain quantity discounts based on a
bundled order.
The fixed-period order system requires carrying more safety stock inventory. The reason
is that with this system we do not check the IP on a regular basis, and a sudden surge of
demand could lead to a stockout. This system, however, allows more organized purchasing as inventory levels are checked in set time intervals. Orders can be bundled and quantity discounts obtained more easily, which can provide an advantage. In a fixed-order
quantity system different items may reach reorder points at different times generating
many orders at random intervals. On the other hand, a fixed-period system could ensure
that inventory levels are checked on a regular basis for all items—say every two weeks.
Then the orders for all the items could be bundled.
Inventory Policy in a Fixed-Order Quantity System
A fixed-order quantity system is one of the most important in inventory management.
For that reason we need to look at how to compute the two variables that define it: the
order quantity Q and the reorder point ROP. Before we do that, however, we need to
look at the assumptions this system makes. Most importantly, the system assumes that
all the variables occur at a constant rate and their values are known with certainty. For
example, the system assumes that the demand, D, occurs at a constant rate and that there
is no variability in demand. Also, the lead time, L, is constant, the holding cost, H, is
known and fixed, as are stockout cost, S, and unit price, C. Although these assumptions
are not realistic the model is highly robust and provides excellent results despite these
assumptions.
How Much to Order?
The first decision in the fixed-order quantity model is to select the order quantity Q.
Recall that there are a number of inventory costs, most notably inventory holding cost
and ordering cost. We want to select the “best” order quantity that minimizes these
costs—the EOQ mentioned previously. This is computed by looking at the total annual
inventory cost and finding the order quantity that minimizes it. Consider that the total
annual cost is comprised of annual purchase cost, annual ordering cost, and annual holding cost, and looks as follows:
Chapter 1 Operations Management Defined
19
Total cost = Purchase cost + Ordering cost + Holding cost
TC = DC + (D/Q) S + (Q/2) H
where
TC = Total cost
D = Annual demand
C = Unit cost
Q = Order quantity
S = Ordering cost
H = Holding cost
The first term in the equation, DC, is the annual purchase cost for items. It is comprised
of annual demand (D) times the unit cost of each item (C). The second term (D/Q) S is
the annual ordering cost. It is computed as the number of orders placed per year (D/Q),
times the cost of each order, S. Finally, the third term is annual holding cost where (Q/2)
is the average inventory held. Remember that our maximum inventory is Q units when
the order is received. When inventory is depleted we have zero. Therefore on average we
have Q/2 units in inventory. H is the annual holding cost per unit of inventory.
The behavior of the two costs is shown in Figure 1-7. Notice that inventory holding cost
increases with the order quantity, Q. The reason is that higher order quantities mean
holding more inventory. However, this also means that we are ordering less frequently
so ordering cost decreases. The opposite is true as the order quantity Q is decreased. A
smaller order quantity results in a lower holding cost, but a higher ordering cost, as we
are ordering more frequently.
20
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
Costs
Ordering Costs
Holding Costs
Total Cost
Order Size
Economic
Ordering
Quantity
Figure 1-7 Ordering versus holding cost
The objective is to pick an order quantity that minimizes the sum of both the holding and
ordering costs, which is the minimum point on the total cost curve. To compute this we
use calculus and end up with the following classic computation of the “best” or optimal
order quantity, the EOQ:
EOQ =
2
2DS/H
When to Order?
The EOQ answers the question of how much to order, but we still need to determine
when to order. Assume that the demand rate (D) and lead time (L) are constant and
known with certainty. In that case the ROP would simply be enough inventory to ensure
that demand is covered during the length of the lead time. In this simple case, the ROP
would be computed as
ROP = demand during lead time
ROP = D L
Let’s assume that lead time L for a product is one week and the demand, d, is 250 units
per week. The ROP would be
Reorder Point = ROP = D x L = 1 week x 250 = 250 units
Chapter 1 Operations Management Defined
21
This means that every time inventory reaches 250 units an order is placed for the economic order quantity Q.
Unfortunately, D and L are rarely fixed, and demand is often higher than expected. As
a result we often have to carry a bit more inventory to address this uncertainty. This is
called safety stock or buffer stock and is inventory we carry in addition to the demand
during lead time. Safety stock is added to the ROP calculation and is computed as
follows:
ROP = demand during lead time + safety stock
ROP = D L + SS
Safety stock is computed based on the service level a company wants to maintain, which
is simply the chance that we will not run out of stock. This is set by the company based on
the level of service it wants to provide for a particular product and customer base. Higher
service levels mean higher levels of inventory. Another factor that is used to compute
safety stock is the variability of demand. The higher the variability and the higher the
service level the higher the safety stock, or the amount added to the final computation
of the ROP.
Independent Versus Dependent Demand
Another way to understand inventory is to separate it into two broad categories: dependent and independent demand. Understanding this difference is important as the entire
inventory policy for an item is based on this. Independent demand is demand for a
finished product, such as a computer, a bicycle, or a pizza. Dependent demand, on the
other hand, is demand for component parts or subassemblies. For example, this would be
the microchips in the computer, the wheels on the bicycle, or the cheese on the pizza.
The two inventory systems we discussed are used to determine order quantities for independent demand. But how do we compute quantities for dependent demand? Quantities
for dependent demand are derived from independent demand, which we call the “parent.” For example, we can forecast the amount of automobiles we expect to sell, then we
can derive the quantities needed of wheels, tires, braking systems, and other component
parts. For example, if a company plans to produce 200 cars in a day, it would need
800 wheels, 400 windshield wipers, and 200 braking systems. The number of wheels,
windshield wipers, braking systems, and other component parts is dependent upon the
quantity of the independent demand item from which it is derived.
22
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
The relationship between independent and dependent demand is depicted in a bill of
materials (BOM), a type of visual diagram that shows the relationship between quantities. An example is shown in Figure 1-8. Item A is the independent demand item. All the
other items are dependent demand. The quantities that go into the final item are shown
in parentheses. Notice that two units of C are combined with one unit of B to make the
final product. Similarly, two units of D and one unit of E are combined to make one unit
of B.
Independent Demand
A
C (2)
B (1)
Dependent Demand
D (2)
E (1)
D (1)
Figure 1-8 A bill of materials (BOM)
Dependent demand order quantities are computed using a system called material
requirements planning (MRP), which considers not only the quantities of each of the
component parts needed, but also the lead times needed to produce and receive the
items. For example, 20 units of A means that 20 units of B are needed, as are 40 units of
C; similarly, 40 units of D and 20 units of E are needed. However, the system must also
take into account differences in lead times, as receiving D may have a different lead time
than receiving E. This means that the orders should be placed at different times. This
system can also be tied to costs of goods and can link internal and external members of
the supply chain.
ABC Inventory Classification
An important aspect of managing inventory is to have a way to classify it based on its
importance. All items in the supply chain are not of equal importance. Some are very
important, such as specialized surgical equipment. Others are less important, such as
latex gloves in a hospital. The first step in managing inventory is to classify inventory
based on its degree of importance to manage it properly. The tool for this is ABC classification. Classifying inventory based on degree of importance allows us to give priority to
important inventory items and manage those with care. It also prevents us from wasting
precious resources on managing items that are of less importance.
Chapter 1 Operations Management Defined
23
ABC classification is based on Pareto’s Law, which states that a small percentage of items
accounts for a large percentage of value. This value can be sales, profits, or other measure of importance. Roughly 10 percent to 20 percent of inventory items account for 70
percent to 80 percent of inventory value. These highly valuable items are classified as A
inventory items. Moderate value items account for approximately 30 percent of inventory items and contribute to roughly 35 percent of the total. They are called B items.
Finally, approximately 50 percent of the items only contribute to roughly 10 percent of
total inventory value. These are called C items and are of least importance. Figure 1-9
provides an example of ABC analysis.
Percentage
of Dollar Value
C Inventory Items
B Items
A Items
20
40
60
80
100
Percentage of Items
Figure 1-9 ABC classification of inventory
The steps to conduct an ABC analysis are as follows:
1. Determine annual usage or sales for each item.
2. Determine the percentage of the total usage or sales by item.
3. Rank the items from highest to lowest percentage.
4. Classify the items into groups.
After ranking the items from highest to lowest percentage, do not force groups to fit the
preset percentages, as these are rough estimates. Rather, there are typically natural breaking points that will occur. The data will naturally group itself and these are groupings
that should be used.
ABC analysis is extremely important for determining order policies. The most sophisticated inventory systems should be used for A items. In fact, many managers personally
oversee these. By contrast, C items are typically left for automated ordering systems as
they do not warrant the cost of managerial involvement.
24
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
Vendor Managed Inventory (VMI)
A unique yet important aspect of managing inventory considers who owns it. Historically companies owned and managed all of their inventories. They were responsible
for the storing, controlling, replenishing, and overall management of the inventory.
With supply chain management (SCM), most of this has changed. Today, many firms
have implemented vendor management inventory (VMI) arrangements. Here, the
vendor is responsible for managing the inventory located at a customer’s facility. The
vendor stocks the inventory, places replenishment orders, and arranges its display.
The vendor typically owns the inventory until it is purchased by the customer.
VMI offers a number of important advantages to both the customer and the vendor.
The vendor has greater control over its product. The vendor is required to work much
more closely with the customer, giving the vendor a better understanding of how to
serve the market. The customer, in turn, has less responsibility and financial burden over
the inventory items. VMI requires both the vendor and the customer to work closely
together. It represents one of the many partnership arrangements that have evolved in
supply chain management.
Challenges Facing the Modern Operations Manager
Despite all the tools and systems at their disposal, operations managers face extensive
challenges when it comes to managing an organization’s resources. The global marketplace is characterized by its substantial size and dynamic makeup. The operations manager must grasp this reality to maintain optimal process performance in a shifting global
landscape. Successful operations managers stay abreast of these trends and implement
proactive systems to take advantage of them. Globalization, technology advancements,
and redefined marketplace priorities are among the many challenges at hand today.
Globalization has radically altered the way operations managers conduct their day-to-day
activities. Landforms, distances, and time zones no longer separate people from information. Because of this, modern corporations can—and, in some competitive instances,
must—base their operations in any number of countries to minimize costs and maximize
performance efficiency. Consider Toyota, an automobile company headquartered in
Tokyo, Japan. Toyota has made significant investments in American operations. Even
though companies such as Ford and GM pride themselves on domestic manufacturing,
Toyota’s popular Avalon model is actually considered one of the most “American-made”
cars. Assembled in Kentucky, the Avalon contains nearly 85 percent North American
parts.1 Globalization turned Toyota and other foreign automakers into giants in the
United States—and nearly put American automakers out of business.
Chapter 1 Operations Management Defined
25
The instantaneous availability of information is directly attributable to modern technological advancements. As you will see in subsequent chapters, technologies such as global
positioning systems (GPS) and radio-frequency identification (RFID) have revolutionized inventory management. Corporations can now account for inventory in real time,
no matter how dispersed it is. What’s more, these technological advancements have
made planning systems more precise, thereby narrowing operations managers’ margins
for error. Technology is moving at breakneck speed. Keeping up can be rewarding, but
failing to do so can be catastrophic.
The global marketplace has been, and is continuing to be, redefined by new priorities.
With a growing population depending on a fixed amount of resources, companies are
being forced to make sustainability a priority. There is no better example of corporate
sustainability than at search engine giant Google. Google is famous for making use of
renewable energy resources. Instead of lawn mowers, it invites goats to trim the grass of
its green areas. Customer priorities are changing, too, especially when it comes to health.
Because of social and political pressure, fast food companies such as McDonalds have
introduced fruit to their children’s menus. Burger King recently released a new version
of its French fries. Known as “Satisfries,” these French fries have 30% fewer calories than
Burger King’s traditional fries. Changes such as these are impacting the ways businesses
must conduct operations management and will continue to create operational challenges. The companies with the most savvy operations managers will be able to embrace
the adversity challenges present and change the marketplace in the process.
Discussion Questions
1. What are some characteristics of operations management that make it a core business function?
2. Explain the “transformation role” of operations management.
3. Differentiate between the two categories of organizations.
4. Cite examples of how operations management works in tandem with other business functions. How can poor operations management affect the entire supply
chain?
5. Define strategic decisions and tactical decisions. Which type of decision should an
organization make first? Why is it important to start with one before the other?
6. What is the difference between productivity and efficiency?
7. What is the purpose of the production—or aggregate—plan?
8. Detail the relationships among the critical planning processes.
26
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
9. How should productivity be measured? Should all organizations/industries measure productivity the same way? Why or why not?
10. How can carrying inventory protect against stockouts, balance supply/demand,
and protect against uncertainty? What are the consequences of not carrying
inventory?
11. Explain how each inventory management system determines its order timing and
its order quantity.
12. How does the Pareto Law assist in ABC classification?
13. VMI offers a vendor greater control over its products. How does VMI also help
the customer?
Endnote
1. http://editorial.autos.msn.com/what-are-the-most-american-madeautomobiles#2.
Chapter 1 Operations Management Defined
27
This page intentionally left blank
INDEX
NUMBERS
3D printing, 104-105
5S, 54-55
7-Eleven, 100
A
ABC analysis, 24
ABC inventory classification, 23-24
aggregate plans, 9, 30
AGV (automated guided vehicle), 101
AS/RS (automated storage and retrieval
systems), 101
assemble-to-order, 75, 77-79
assignable variation, 45
assigning tasks to workstations, 74
automated guided vehicle (AGV), 101
automated material handling, 101
automation, 100-101
average number of jobs in the
system, 41
B
balanced scorecards, 154
benefits of, 158
elements of, 155
newer versions, 156-157
original design, 154-156
balancing, supply and demand, 14
barriers, nontariff barriers, global
operations, 132-133
batch processes, 67
benefits of
balanced scorecards, 158
ERP (enterprise resource planning),
89-90
global operations, 111-112
BOM (bill of materials), 23, 32
MRP (material requirements planning), 36
brand image, 127
Burger King, 26
business plans, hierarchies, 29
C
CAD (computer-aided design), 84, 104
CAM (computer-aided manufacturing),
84, 103
capacity planning, 6
capacity requirements planning
(CRP), 92
categories, of metrics, 140-142
cause and effect diagrams, 43
cellular layouts, 72
challenges
to global operations, 114-115
culture, 116
global consumers, 115
marketing, 115-116
for operations managers, 25-26
161
charts
Gantt charts, 38
process control charts, 48-49
chase production plans, 33-34
checksheets, 43
China, 120
labor costs, 120
CIM (computer-integrated manufacturing), 104
Coca-Cola, marketing, 115
communication, metrics, 141
comparing
intermittent processes and repetitive
processes, 68
inventory positioning strategies, 77-79
competitive priorities, 59-60
cost, 61
flexibility, 63
operations structure and infrastructure, 63-64
order winners and order qualifiers,
64-65
quality, 61-62
time, 62
computer-aided design (CAD), 84, 104
computer-aided manufacturing (CAM),
84, 104
computing efficiency, 74-75
consistency of order cycle, customer
service measures, 150
constraints, TOC (theory of constraints), 53
consumers, global consumers, 115
continuous improvement, metrics, 139
continuous processes, 67
continuous review system, 17
control, metrics, 141
162
control charts, 43, 48-49
cost
competitive priorities, 61
end-of-life cost, 125
environmental costs, TCO (total cost
of ownership), 128
global operations, 113, 119
hidden costs, 119-121
noncost considerations, 121-122
reshoring, 122-123
of goods sold, TCO (total cost of ownership), 124
“hard” costs, 124-125
opportunity cost, 126
potential risk-related costs, 126-127
product liability, 126
quality, 126
rework, 126
strategic costs, TCO (total cost of
ownership), 127-128
TQM (total quality management), 42
travel costs, 125
CR (critical ratio), 40
critical processes
MPS (master production schedule), 10
MRP (material requirements
planning), 10
production planning processes, 8-9
critical processes RCCP (rough cut
capacity planning), 10
critical ratio (CR), 40
CRP (capacity requirements
planning), 92
culture
challenges to global operations, 116
global operations, 114
customer service, elements of, 148-151
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
customer service measures, 147-148
elements of customer service, 148-151
KPIs (key performance indicators),
151-152
CVS, 84
cycle stock, 15
cycle time
determining, 74
productivity measures, 147
D
Dairy Queen, 99
data, small data, 106
data cleaning, ERP (enterprise resource
planning), 97
decisions
organizational decision levels, 5
strategic decisions, 6
tactical decisions, 6
Dell, 5
dependent demand versus independent
demand, 22-23
Drucker, Peter, 140
E
earliest due date (EDD), 40
economic order quantity (EOQ), 17
economic purchase orders, 15
economic stability of suppliers, 127
economies, global operations, 114,
128-130
EDD (earliest due date), 40
efficiency, 6
computing, 74-75
productivity measures, 146
e-manufacturing
CAD (computer-aided design), 104
CIM (computer-integrated manufacturing), 104
emerging technologies, 104
3D printing, 104-105
responsive Web design, 105-106
small data, 106
employee training, ERP (enterprise
resource planning), 97-98
end-of-life cost, 125
enterprise resource planning. See ERP
(enterprise resource planning)
environmental costs, TCO (total cost of
ownership), 128
environmental factors,
globalization, 111
EOQ (economic order quantity), 17
ERP (enterprise resource planning), 7,
84-87
benefits of, 89-90
evolution of, 86-89
implementing, 95-96
data cleaning, 97
determining technical
requirements, 96
employee training, 97-98
running pilots, 98
software installation, 97
testing, 97
planning capabilities, 90
CRP (capacity requirements planning), 92
MPS (master production schedule),
91-92
MRP (material requirements planning), 92
operations execution and control,
92-93
Index
163
production plans, 91
strategic business plans, 91
software shortcomings, 94-95
two-tier ERP, 93-94
ERP II, 87
evolution of ERP (enterprise resource
planning), 86-89
exchange rate fluctuations, global operations, 130-131
expectations, metrics, 141
exposure to recession, 127
F
facilities requirements planning, 34-35
facility layout strategies, 70
cellular layouts, 72
fixed position layout, 70
process layout, 70-71
product layout, 71-72
FCFS (first come, first served), 40
FedEx, operations strategy, 57
financial plans, 30
first come, first served (FCFS), 40
fishbone diagrams, 43
fixed position layout, 70
fixed-order quantity system, 16-17, 19
how much to order, 19-21
when to order, 21-22
fixed-time period system, 17-19
flexibility, competitive priorities, 63
flexible manufacturing systems (FMS),
101-102
FMS (flexible manufacturing system),
101-102
follow-up, customer service
measures, 151
forecasting, 7
164
G
Gantt charts, 38
global consumers, 115
global environment factors, 111
global inventory pipelines, 121
global operations
benefits of, 111-112
challenges to, 114-115
culture, 116
global consumers, 115
marketing, 115-116
considerations for, 112
costs, 113, 119
hidden costs, 119-121
noncost considerations, 121-122
reshoring, 122-123
culture, 114
economic factors, 128-130
economies, 114
exchange rate fluctuations, 130-131
factors that impact, 112-114
infrastructure, 113-114, 117
labor, 117
suppliers, 118
technology, 118-119
transportation, 117-118
inventory pipelines, 121
markets, 113
nontariff barriers, 132-133
political factors, 128-130
politics, 114
regional trade agreements, 131-132
TCO (total cost of ownership). See
TCO (total cost of ownership)
technology, 114
global positioning systems (GPS), 98-99
global supply chains, 111
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
global trade, 110
globalization, 25, 109-111
Google, 26
GPS (global positioning systems), 98-99
graphs, 43
H
“hard” costs, 124-125
hidden costs, global operations, 119-121
hierarchies, business plans, 29
high performance design, 61
high-volume operations, scheduling
work, 38
histograms, 43
holding cost versus ordering, 20
Hull, Chuck, 105
hybrid aggregate plans, 34
I
identifying task times, 73
IMF (International Monetary
Fund), 110
implementing ERP (enterprise resource
planning), 95-96
data cleaning, 97
determining technical
requirements, 96
employee training, 97-98
running pilots, 98
software installation, 97
testing, 97
improvement, metrics, 141
independent demand versus dependent
demand, 22-23
information technology, 84-85
infrastructure
competitive priorities, 63-64
global operations, 113-114, 117
labor, 117
suppliers, 118
technology, 118-119
transportation, 117-118
intellectual property risk, 126
intermittent processes, 65-66, 69
comparing, to repetitive processes, 68
International Monetary Fund
(IMF), 110
Internet, 84
inventory, 13
ABC classification, 23-24
cycle stock, 15
MRO (maintenance, repair, and operating) items, 16
reasons for carrying, 13-15
safety stock, 15
seasonal inventory, 15
transportation/pipeline inventory, 15
VMI (vendor managed inventory), 25
inventory pipelines, global
operations, 121
inventory policies, 13
fixed-order quantity system, 16-17, 19
how much to order, 19-21
when to order, 21-22
fixed-time period system, 17-19
inventory position (IP), 16
inventory positioning strategies, 75
assemble-to-order, 77
comparing, 77-79
make-to-order, 76
make-to-stock, 76-77
IP (inventory position), 16
Index
165
ISO (International Organization for
Standards), 51-52
ISO 9000, 52
ISO 14000, 52
J-K
job flow time, 41
job lateness, 41
job priority, 39
job sequencing, 39-41
just-in-time, 7
Korea, 120
KPIs (key performance indicators),
151-152
L
labor, global operations
infrastructure, 117
labor costs, 120
landed costs, 124
last come, first served (LCFS), 40
lean systems, 7
level production plans, 33
levels of planning decisions, 29
line balancing, 73
assigning tasks to workstation, 74
computing efficiency, 74-75
determining cycle time, 74
identifying task times and precedence
relationships, 73
line processes, 67
location analysis, 7
longest processing time (LPT), 40
low-volume operations, scheduling
work, 38
LPT (longest processing time), 40
166
M
maintenance, repair, and operating
(MRO) items, 16
makespan, 41
make-to-order, 75-79
make-to-stock, 75-79
manufacturing
roles in organizations and supply
chains, 4-5
versus service operations, 3-4
marketing, global versus local, 115-116
markets, global operations, 113
mass customization, 7
master production schedule. See MPS
(master production schedule)
material requirements planning. See
MRP (material requirements planning)
McDonald’s, 26
suppliers, 118
measurements. See also performance
measurements
customer service measures, 147-148
elements of customer service,
148-151
monitoring options, 152-153
productivity measures, 145
cycle time, 147
efficiency, 146
productivity, 145-146
measuring productivity, 11-12
Merck, OM (operations management), 2
metrics, 135-136
categories, 140-142
defining, 138
ensuring continuous
improvement, 139
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
getting buy-in from senior management and employees, 138
good metrics, 136
measuring and sharing results, 139
organizational focused metrics, 142
predictive and outcome metrics,
143-144
trade-offs, 144-145
understanding what data is needed
and how to collect it, 139
MIS (management information systems), 88
monitoring options, 152-153
MPS (master production schedule), 10,
30, 32, 35
ERP (enterprise resource planning),
91-92
MRO (maintenance, repair, and operating) items, 16
MRP (material requirements planning),
10, 32, 35-36
BOM (bill of materials), 36
ERP (enterprise resource
planning), 92
N
NAFTA (North American Free Trade
Agreement), 132
nationalization of business, 129
NC (numerically controlled)
machines, 102
Nike, hidden costs, 120
Nokia, 100
nontariff barriers, global operations,
132-133
North American Free Trade Agreement
(NAFTA), 132
numerically controlled (NC)
machines, 102
O
OM (operations management), 1-2
defined, 7
manufacturing versus service operations, 3-4
transformation role of, 2-3
operation processes, types of, 68
operations execution, ERP (enterprise
resource planning), 92-93
operations management. See OM
operations managers, challenges for,
25-26
operations strategy, 57-58
competitive priorities, 59-60
cost, 61
flexibility, 63
operations structure and infrastructure, 63-64
order winners and order qualifiers,
64-65
quality, 61-62
time, 62
facility layout strategies, 70
cellular layouts, 72
fixed position layout, 70
process layout, 70-71
product layout, 71-72
inventory positioning strategies, 75
assemble-to-order, 77
comparing, 77-79
make-to-order, 76
make-to-stock, 76-77
Index
167
line balancing, 73
assigning tasks to workstation, 74
computing efficiency, 74-75
determining cycle time, 74
identifying task times and precedence relationships, 73
outsourcing strategies, 79-80
process strategy, 65
intermittent processes, 65-66
product-process matrix, 66-68
repetitive processes, 66
operations strategy strategic alignment,
58-59
opportunity cost, 126
order convenience, customer service
measures, 150
order information availability, customer
service measures, 149
order qualifiers, competitive priorities,
64-65
order winners, competitive priorities,
64-65
ordering, versus holding cost, 20
organizational decision levels, 5
organizational focused metrics, 142
outsourcing, 79-80, 120
versus vertical integration, 80-81
P
Pareto charts, 43
Pareto’s Law, 24
performance measurements, 137-138.
See also metrics
inappropriate measures, 137
pipeline inventory, 15
168
planning capabilities, ERP (enterprise
resource planning), 90
CRP (capacity requirements planning), 92
MPS (master production schedule),
91-92
MRP (material requirements planning), 92
operations execution and control,
92-93
production plans, 91
strategic business plans, 91
planning decisions
aggregate plans, 30
financial plans, 30
levels of, 29
production plans, 30
strategic business plans, 29
top-level plans, 29
political stability of the source
country, 127
politics, global operations, 114, 128-130
post-transaction, customer service measures, 151
potential risk-related costs, 126-127
predictive and outcome metrics,
143-144
pre-enterprise resource planning software, 87
pre-transaction elements of customer
service, 148
priorities, competitive priorities. See
competitive priorities
priority rules, 39-40
problems with ERP software, 94-95
process capability, 45-48, 62
process control charts, 48-49
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
process layout, 70-71
process quality, 62
process selection, 7
process strategy, 65
intermittent processes, 65-66
product-process matrix, 66-68
repetitive processes, 66
process technology, 84
product design, 7
product flexibility, 63
product layout, 71-72
product liability, 126
product substitution, customer service
measures, 150
product technology, 84
product tolerance range, 48
product variety, 68
product volume, 65
production planning, 31-32
production planning processes, 8-9
facilities requirements planning, 34-35
production plans, 9, 30
ERP (enterprise resource
planning), 91
types of, 33-34
chase production plans, 33-34
hybrid aggregate plans, 34
level production plans, 33
productivity, 7, 145-146
measuring, 11-12
productivity measures, 145
cycle time, 147
efficiency, 146
productivity, 145-146
product-process matrix, 66-68
project processes, 67
protecting
against stockouts, 13
against uncertainty, 14
protectionism, 129
prototype development costs, 125
Q
Q-model, 17
quality
competitive priorities, 61-62
cost, 126
TQM (total quality management),
41-43
quality control, TQM (total quality
management), 43
quality management, 7, 135
R
radio frequency identification (RFID),
99-100
random variation, 45
RCCP (rough cut capacity planning),
10, 32, 37
real-time processing, 87-88
reengineering, 8
regional trade agreements, global operations, 131-132
repetitive processes, 66, 68
comparing to intermittent
processes, 68
reporting, metrics, 141
reports, 153
reshoring, 122-123
resource planning, 35
MPS (master production schedule), 35
MRP (material requirements planning), 35-36
Index
169
resource planning RCCP (rough cut
capacity planning), 37
responsive Web design, 105-106
results, sharing, 139
rework, 126
RFID (radio frequency identification),
99-100
robotics, 102-103
roles
of manufacturing, in organizations
and supply chains, 4-5
of service operations, in organizations
and supply chains, 4-5
of technology, 83-84
rough cut capacity planning, 10, 32, 37
running pilots, ERP (enterprise resource planning), 98
RWD (responsive Web design), 105-106
S
S&OP (sales and operations
planning), 29
safety, 5S, 54
safety stock, 15
fixed-order quantity system, 22
sales and operations planning
(S&OP), 29
Samsung, hidden costs, 121
SAP (Systems, Applications, and Products in Data Processing), 86
real-time processing, 87-88
satisfaction, 5S, 55
scatter diagrams, 43
170
scheduling, 8
work, 37-38
high-volume operations, 38
low-volume operations, 38
sequencing jobs, 39-41
SCM (supply chain management), 25
scorecards, 153
balanced scorecards, 154
benefits of, 158
newer versions, 156-157
original design, 154-156
seasonal inventory, 15
security, 5S, 55
sequencing jobs, 39-41
service operations
versus manufacturing, 3-4
roles in organizations and supply
chains, 4-5
sharing results, 139
shortest processing time (SPT), 40
Singapore Airlines, operations
strategy, 58
Six Sigma, 49-50
Six Sigma methodology, 50-51
slack per remaining operations
(S/RO), 40
small data, 106
SMART, 152
software, ERP (enterprise resource planning), shortcomings of, 94-95
sorting, 5S, 54
Southwest Airlines, 31
operations strategy, 58
SPC (statistical process control), 44
process capability, 45-48
process control charts, 48-49
variation, 45
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS
special handling of shipments, customer
service measures, 150
SPT (shortest processing time), 40
SQC (statistical quality control), 44
SRM (supplier relationship management), 86
S/RO (slack per remaining
operations), 40
standardize, 5S, 54
standards, ISO (International Organization for Standards), 51-52
statistical process control (SPC), 44
statistical quality control (SQC), 44
stockout level, customer service measures, 149
stockouts, protecting against, 13
straightening, 5S, 54
strategic alignment, 58-59
strategic business plans, 29
ERP (enterprise resource
planning), 91
strategic costs, TCO (total cost of ownership), 127-128
strategic decisions, 6
versus tactical operations decisions, 31
strategy, operations strategy, 57-58
strategy maps, 157
structure, competitive priorities, 63-64
supplier relationship management
(SRM), 86
suppliers, global operations infrastructure, 118
supply and demand, balancing, 14
supply chain management (SCM), 25
supply chains, global, 111
sustain, 5S, 54
system accuracy, customer service measures, 149
systematic cleaning, 5S, 54
T
tactical decisions, 6
tactical operations decisions, versus
strategic decisions, 31
Taiwan, 120
tardiness, 41
task times, identifying, 73
tasks, assigning to workstations, 74
TCO (total cost of ownership), 122-124
costs of goods sold, 124
environmental costs, 128
“hard” costs, 124-125
potential risk-related costs, 126-127
strategic costs, 127-128
technology
automated material handling, 101
automation, 100-101
e-manufacturing
CAD (computer-aided design), 104
CIM (computer-integrated manufacturing), 104
emerging technologies, 104
3D printing, 104-105
responsive Web design, 105-106
small data, 106
ERP (enterprise resource planning),
85-87
evolution of, 86-89
FMS (flexible manufacturing system),
101-102
global operations, 114
Index
171
global operations infrastructure,
118-119
GPS (global positioning systems),
98-99
information technology, 84-85
Internet, 84
process technology, 84
product technology, 84
RFID (radio frequency identification),
99-100
robotics, 102-103
role of, 83-84
testing, ERP (enterprise resource planning), 97
Thailand, 120
theory of constraints, 52-53
time, competitive priorities, 62
TOC (theory of constraints), 52-53
tools of quality control, 43
top-level plans, 29
total cost of ownership (TCO). See TCO
(total cost of ownership)
total productivity, 12
total quality management. See TQM
(total quality management)
Toyota, 25, 131
TQM (total quality management), 8,
41-43
cost, 42
quality control, 43
trade, global trade, 110
trade agreements, global operations,
131-132
trade-offs, metrics, 144-145
transaction elements, customer service
measures, 149
transformation role of OM (operations
management), 2-3
172
transportation, global operations,
117-118
transportation inventory, 15
transshipments, 150
travel costs, 125
trigger price mechanisms, 133
two-tier ERP, 93-94
U-V
uncertainty, protecting against, 14
value added, 8
variation SPC (statistical process control), 45
vendor managed inventory (VMI), 25
vertical integration, versus outsourcing,
80-81
VMI (vendor managed inventory), 25
VOC (voice of the customer), 42
W-X-Y-Z
Walgreens, 84
Walmart
culture, 114
globalization, 109
RFID (radio frequency
identification), 100
work, scheduling, 37-38
high-volume operations, 38
low-volume operations, 38
sequencing jobs, 39-41
work centers, priority rules, 40
workstations, assigning tasks to, 74
THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS