OMG 402 - Operations Management
Spring 1997
CLASS 1: INTRODUCTION
Harry Groenevelt
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Agenda
• What is Operations Management?
Why do we study it?
• Getting started: Process Analysis
– process diagrams
– first definitions and a fundamental relationship
• OMG 402 format and logistics
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What is Operations Management?
Definition 1: the study of processes which
convert inputs into outputs
INPUTS:
- Labor
- Management
- Equipment
- Materials
- Energy
- Information
- Customer
Participation
PRODUCTION
PROCESS
OUTPUTS:
- Physical
Products
- Services
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What is Operations Management?
Definition 2: A set of quantitative tools to
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purchase and manage materials
schedule resources
distribute goods
design production processes
locate facilities
monitor and control quality
and more...
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What is Operations Management?
Definition 3: A set of quantitative and
qualitative tools to
– understand the ‘physics’ of service and
manufacturing systems
– measure operational performance
– manage for competitiveness
(cost, quality, flexibility, time)
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Why Do We Need to Understand
Operations Management?
• Because the function of operations is to
implement firm strategy.
Example 1: The Custom Foot shoe store,
“custom footwear at off-the-rack prices”
(see NYT article, 3/20/96)
An example of mass customization.
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Why Do We Need to Understand
Operations Management?
Example: Custom Foot
in-store computer
scans customer foot
data transmitted to factories in Italy
shoe produced
to specifications
customer receives
shoe within a
guaranteed time.
shoes delivered directly to customer
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Operations at Custom Foot
• A burning question for investors, executives
and managers of Custom Foot:
What should be the promised lead time
from customer order to delivery?
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Operations at Custom Foot
Firm Strategy
Operations
• lead time is crucial to strategy.
• lead time interacts with:
– capacity
– inventory
– cost
Custom Foot promised a two week lead time.
Sounds good. But will they deliver?
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Why Do We Need to Understand
Operations Management?
Other examples in your packet:
• American Standard: streamlining
manufacturing operations and increasing
flexibility brings enormous growth.
• American Airlines: preserving service
quality in the face of massive system
disruptions.
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Why Do We Need to Understand
Operations Management?
A final example from Boeing:
“By early 1998 Boeing aims to double
monthly production … ”
(Business Week, 9/30/96)
We will discuss the consequences of this.
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Getting started: Process Analysis
1. defining a process - flow of materials and
information.
2. a few definitions and a fundamental relationship in
process flow.
we’ll use aircraft assembly as an example:
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Process Diagram:
Define Material Flow
task: value added
cockpit
install
flow: geographical or virtual movement
storage: time spent doing neither of the above
buffer
note: level of detail will depend on the purpose of the diagram!
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Process Diagram: Information Flow
information conveys who, what, where, when,
how..
Examples:
routing slip
order form
Information storage:
CAD
data
credit
history
database
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Process Analysis: A Few Definitions
throughput: the output of a production process per
unit time (in aircraft/month, patients/hour, $/year).
Sometimes also called flow or ‘l’.
stock: the inventory between the start and end of the
process (in aircraft, patients, dollars).
Sometimes also called number in system or work
in process (WIP) or ‘L’.
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Process Analysis: A Few Definitions
lead time: time from entry into the system until exit
from the system (in months, hours, years).
Sometimes also called time in system or flow time
or cycle time or ‘W’.
raw process time: time necessary to complete actual
work. Or, time for one unit of the product to
traverse an otherwise empty system.
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The Boeing Production Line
parts for one
aircraft
lead time
= months from entrance to exit
movement
processing
throughput
= aircraft/month
storage
stock = number of aircraft in process
question: will raw processing time = lead time?
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Process Analysis
A Fundamental Relationship
John D.C. Little at MIT gave
the first mathematical proof
of the ‘law’ in 1961.
Little’s Law:
(average stock) =
(average throughput)*(average lead time)
Warning: Little’s Law will apply to any process as
long as:
– consistent units are used.
– long-term averages are used (during the observation
period we take a large ‘sample’ and most of what has
come in has also gone out).
– consistent flows are measured (more on this later).
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Process Analysis:
Little’s Law Example
(average stock) =
(average throughput)*(average lead time)
At Boeing,
avg. throughput = 5 aircraft/month,
avg. lead time = 2 months
avg. stock = ______
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Little’s Law
and Boeing aircraft assembly
(average stock) =
(average throughput)*(average lead time)
This time, measure ‘stock’ as the value of materials
instead of aircraft.
Given: - $100 million/month cost of materials in
aircraft sold
- 2 months production/aircraft
Question: What should be the current value of
material WIP? Will it be exactly this?
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Little’s Law
and Boeing aircraft assembly
Boeing plans to double throughput.
• What happens to WIP if lead time stays
constant? What are the consequences?
• Can Boeing expect to hold lead time
constant?
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Little’s Law,
A loan processing example
loan applications
($/month)
credit
check
loan
approval
produce
contract
& sign
loans signed
($/month)
loans refused
($/month)
outstanding requests ($) = _________________________
x ________________________
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Other applications of Little’s Law
stock
Loan
processing
Outstanding.
=
Requests ($)
Bond trading
Correctional
facility
Supply chain
=
# inmates
throughput
*
lead time
*
=
Order-to* confirm time
(minutes)
=
*
Annual cost of
=
*
goods sold
($/yr)
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Final Words on Little’s Law
• Given two of the fundamental quantities
(stock, throughput, lead time), can always
find the third.
• Little’s Law is a valuable ‘back-of-theenvelope’ tool for estimating and factchecking.
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Final Words on Little’s Law
• Some questions:
– How do we predict system performance?
Given one fundamental quantity, how do we
find the other two?
– How do we improve system performance? Can
we increase throughput while decreasing WIP
and lead times?
• To answer, we’ll need to discuss capacity
and variability.
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Structure of OMG 402
• The ‘physics’ and measurement of
production and service systems
(weeks 1-3)
• Managing production (weeks 4-7)
• Logistics and supply chain management
(weeks 7-8)
• Developing and distributing new products
and services (weeks 8-9)
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Course Logistics
• Cases Packet
• Handouts – many on the Simon fileserver or
Course web site
• The Goal – used throughout the next few weeks
• “K&R” – suggested reading
• Labs – a time for careful problem-solving
• Teaching Assistants and Office Hours
• Feedback
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Course Logistics
• Class requirements
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Team exercises (20%)
Individual exercises (20%)*
Case discussion (ungraded, but…)
Midterm exam (25%)
Final exam (35%)
* for each individual exercise, a subset of the problems will
be selected randomly for grading.
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Course Logistics
• First Written Assignment is a Field Study
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Short description (1/2 page maximum)
process flow diagram
statistics gathered
questions answered
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Conclusion
The Goals of OMG402
• Understand relationships between
operations and firm success, operations and
other functional areas;
• Acquire the knowledge and skills that are
vital to the operations manager;
• Apply knowledge and skills to cutting-edge
problems in services and manufacturing.
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