Operations Management Operations

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					                                                Operations Management IBA

                                   PART 1           INTRODUCTION

                                    1.   OPERATIONS MANAGEMENT

The activity of managing the resources which produce and deliver products and services.
     Important because today’s business environment requires new thinking from operations

The operation function is responsible for this activity. It is one of the 3 core functions: marketing,
product/service development and operations.                                         Table 1.1, page 5
Support functions: accounting/finance and human resources.

Operations management in smaller organizations
Informal structure because of the lack of resources. Therefore individuals’ roles can overlap.

Operations management in not-for-profit organizations
Operations decisions are the same in commercial and not-for-profit organizations. However, the
strategic objectives of not-for profit organizations may be more complex and involve a mixture of
PESTEL objectives.

Modern business pressures have changed the operations agenda.                      Table 1.2, page 11


Transformed resources: physical properties, location, possession, store (materials), psychological state

Transforming resources:
Facilities – the buildings, equipment, plant and process technology of the operation
Staff – the people who operate, maintain, plan and manage the operation

Facilitating products: products that are produced by an operation to support its services.
Facilitating services: services that are produced by an operation to support its products.
     All operations are service providers.
                                               Operations Management IBA

All operations are part of a larger supply network which, through the individual contributions of
each operation, satisfies end-customer requirements. All operations are made up of processes that
form a network of internal customer-supplier relationships within the operation.

Hierarchy of operations: operations can be analyzed at three levels, the process, the operation and
the supply network.

Operations as a function:        produces the products and services for external customers.
Operations as an activity:       management of processes within any of the organization’s functions.

End-to-end business processes that satisfy customer needs often cut across functionally based

OPERATIONS PROCESSES HAVE DIFFERENT CHARACTERISTICS                              table 1.7, page 22

The volume dimension
    Repeatability
    Systematization

The variety dimension
    Taxi and busses provide the same basic service (transportation), but the tax has a high variety
        of routes and times to offer its customers.

The variation dimension
    Off-season demand. Summer time: high utilization of resources and unit costs.

The visibility dimension
Refers to how much of the operation’s activities its customers experience, or how much the
operation is exposed to its customers.
      High received variety
      Customer contact skills

Front office – high visibility    Information desk at an airport
Back office – low visibility      Baggage handlers at an airport

Low cost = high volume, low variety, low variation and low customer visibility

Responsibilities include understanding relevant performance objectives, setting an operations
strategy, the design of the operation (product, services and processes), planning and controlling the
operation, and the improvement of the operation over time.

Operations managers also have a set of broad societal responsibilities: ‘Corporate social
responsibility’ or CSR objectives.
                                               Operations Management IBA

                                   2. OPERATIONS PERFORMANCE

  Operations management is a make or break activity
  It is large and is most businesses represents the bulk of its assets
  It gives the ability to compete by providing the ability to respond to customers and by
    developing the capabilities that will keep it ahead of its competitors in the future.

Operations management can affect profitability.
Example 1.    Organize sales campaign by extra spending, result: rise in sales
Example 2.    Reduce operating expense through forming improvement teams
Example 3.    Invest in flexible machinery, result: faster response to customer order

At a strategic level, performance objectives relate to the interest of the operation’s stakeholders.

What does top management expect from the operations function?
  1. Reducing costs                               4. Reducing the amount of investment
  2. Achieving customer satisfaction              5. Providing the basis for future innovation
  3. Reducing the risk of operational failure

Performance objective              Internal benefits                   External benefits
Quality – doing things right           Reduces costs                  Major influence on customer
                                       Increases dependability        satisfaction or dissatisfaction.
Speed – doing things fast              Reduces inventories            Speed increases value for some
                                       Reduces risks                  customers.
Dependability – doing things           Saves time                     Important aspect of customer
on time                                Saves money                    service.
                                       Gives stability/reliability
Flexibility – changing what            Speeds up response                Product/service flexibility
they do                                Saves time wasted in              Mix flexibility
                                          changeovers                     Volume flexibility
                                       Maintains dependability           Delivery flexibility
                                                                         - Mass customization
                                                                         - Agility
Cost – doing thins cheaply           Cost performance is helped by     low costs  reduce price 
                                     good performance in the other     higher volumes / increase profit
                                     performance objectives.
* Agility: a combination of all the five performance objectives, in particular flexibility and speed. It
means responding to market requirements by producing new and existing products and services fast
and flexibly.

Improving productivity
   - Reducing costs of inputs, while
       maintaining the level of its outputs.
                                                Operations Management IBA

Trade-offs are the extent to which improvements in one performance objective can be achieved by
sacrificing performance in others. The ‘efficient frontier’ concept is a useful approach to articulating
trade-offs and distinguishes between repositioning performance on the efficient frontier and
improving performance by overcoming trade-offs.

                                       3. OPERATIONS STRATEGY

Strategy: the total pattern of decisions and actions that position the organization in its environment
and that are intended to achieve its long-term goals.

Operations strategy concerns the pattern of strategic decisions and actions which set the role,
objectives and activities of the operation.
     Content: concerns specific decisions which are taken to achieve specific objectives.
     Process: the procedure which is used within a business to formulate its strategy.

Operations are the resources that create products and services.
    Implementing business strategy
    Supporting business strategy
    Developing capabilities which allow the organization to improve and refine its strategic goals.
    Driving business strategy
Operational is the opposite of strategic, meaning day-to-day and detailed.

The four-stage model of operations contribution

                                                                                  Figure 3.2, page 64

4 views of operations strategy: top-down, bottom-up, market requirement and operations resource.

  (1) Top-down
What the business wants operations to do.
   A. Corporate strategy            B. Business strategy                   C. Functional strategy

   (2) Bottom-up
What day-to-day experience suggests operations should do.
Emergent strategy: gradually shaped over time and based on experience rather than theoretical

    (3) Market requirement
The main role is satisfying markets. Operations performance objectives and operations decisions
should be primarily influenced by a combination of customers’ needs and competitors’ actions. Both
of these may be summarized in terms of the product/service life cycle.

Order-winning factors are factors that directly and significantly contribute to winning business.
                                               Operations Management IBA

Qualifying factors are factors with a minimum level of performance below which customers are
unlikely to consider an operations performance satisfactory.

   (4) Operations resource
Based on resource-based view (RBV) of the firm and sees the operation’s core competences as being
the main influence on operations strategy and competitive advantage.
Operations capabilities are developed partly through the strategic decisions taken by the operation.
    - Structural decisions are those which define an operation’s shape and form.
    - Infrastructural decisions influence the systems and procedures that determine how the
        operation will work in practice.

Intangible resources: relationships with suppliers, reputation with customers.

Any operations strategy process should result in strategies that are comprehensive and coherent,
provide correspondence, and prioritize the most critical activities or decisions.

First, is the operations strategy comprehensive?
Second, is there internal coherence between the various actions it is proposing.
Third, do the actions being proposed as part of the operations strategy correspond to the
          appropriate priority for each performance objective.
Fourth, does the strategy prioritize the most critical activities or decisions.

The five P’s of operations strategy formulation.
    1. Purpose
    2. Point of entry
    3. Process
    4. Project management
    5. participation

                                       PART 2           DESIGN

                                          4. PROCESS DESIGN

Design is the activity which shapes the physical form and purpose of both products and service. The

Process design should reflect process objectives
Throughput rate        the number of units passing through the process per unit of time
Throughput time         the time for a unit to move through a process.
Work in process         the number of units within a process waiting to be processed further
Utilization             the ratio of the actual output from a process or facility to its design capacity

Environmentally sensitive design
The sources and suitability of materials, the sources and quantities energy consumed, the amounts
and type of waste materials, the life of the product itself and the end-of- life of the product.
                                                Operations Management IBA

     Smart cars are build of recycled plastic, the plant has environmentally friendly painting
      techniques which involves no solvent emission.

Life cycle analysis
This technique analyses all the production input, the life-cycle use of the product and its final
disposal, in terms of total energy used.


Process types: terms that are used to describe a particular general approach to managing processes;
in manufacturing these are generally held to be project, jobbing, batch, mass and continuous
processes; in services they are held to be professional services, service shops and mass services.
Project processes  Shipbuilding, movie production companies, construction companies
Jobbing processes  Precision engineers such as specialist toolmakers, furniture restorers
Batch processes  Machine tool manufacturing, production of special gourmet frozen foods
Mass processes  Automobile plant, television factory, most food processes,
Continuous processes  Petrochemicals or electricity


Professional service  lawyers, architects, doctors, OEE
     High-contact, customization, front office, people-based
Service shops  banks, schools, restaurants, hotels
     Customer contact, customization, volumes of customer and staff discretion
Mass service  supermarkets, NS, airport,

The product-process matrix                                                        Figure 4.4, page 96

Processes are designed initially by breaking them down into their individual activities. Often common
symbols are used to represent types of activity.

Process mapping: describing processes in terms of how the activities within the process relate to
each other. Techniques which can be used:
     Process mapping symbols                                                  Figure 4.5, page 97
High-level process mapping: an aggregated process map that shows broad activities rather than
detailed activities (sometimes called an 'outline process map').
     Using process maps to improve processes
                                               Operations Management IBA

                      Throughput (TH) = Work In Process (WIP) x Cycle Time (CT)
                                        Page 102-103-104 !!

             Percentage throughput efficiency = Work content / Throughput time x 100

Value-added throughput efficiency
Work content: the total amount of work required to produce a unit of output, usually measured in
standard times.

Process of design of information-based processes.
Analysis, modeling, definition of business processes, technology that supports the processes, the
procedural rules that move information through processes and defining the process in terms of the
sequence of work activities.

The effects of process variability
Variability has a significant effect on the performance of processes, particularly the relationship
between waiting time and utilization.
     Cause: late/early arrival of materials, temporary malfunction or breakdown etc.

Stimulation in design
The use of a model of a process, product or service to explore its characteristics before the process,
product or service is created.

    6.   X

                                         7. LAYOUT AND FLOW
What makes a good layout?
  - Inherent safety                                      -   Accessibility
  - Length of flow                                       -   Use of space
  - Clarity of flow                                      -   Long-term flexibility
  - Staff conditions

BASIC LAYOUT TYPES                                                                table 7.1, page 180

    1. Fixed-position layout
The materials or people being transformed do not move but the transforming resources move
around them. Techniques are rarely used in this type of layout, but some, such as resource location
analysis, bring a systematic approach to minimizing the costs and inconvenience of flow at a fixed-
position location.
     Open-heart surgery, shipbuilding, high-class service restaurant

     2. Functional layout
All similar transforming resources are grouped together in the operation. The detailed design task is
usually (although not always) to minimize the distance travelled by the transformed resources (for
example customers) through the operation. Either manual of computer-based methods can be used
to devise the detailed design.
                                                 Operations Management IBA

       Flow record chart: a diagram used in layout to record the flow of products or services
        between facilities.
     Hospital, supermarket
                                          Read page 190-194 !!
    3. Cell layout
The resources needed for a particular class of product are grouped together in some way. The
detailed design task is to group the products or customer types such that convenient cells can be
designed around their needs. Techniques such as production flow analysis can be used to allocate
product to cells.
     Maternity unit in a hospital, ‘lunch’ products in a supermarket, some laptop assembly

Production flow analysis (PFA): a technique that examines product requirements and process
grouping simultaneously to allocate tasks and machines to cells in cell layout.
     - Remainder cell: the cell that has to cope with all the products that do not conveniently fit
         into other cells.

If cell designers concentrate on processes, they could use cluster analysis to fine which processes
group naturally together.

    4. Product layout
The transforming resources are located in sequence specifically for the convenience of products or
product types. The detailed design of product layouts includes a number of decisions:
     What cycle time is needed?
     Number of stages
Number of stages = total work content / required cycle time
     Task-time variation
        All repetitive processes will vary in time,
     Balancing work-time allocation
The cycle time of each part of the design, together with the number of stages, is a function of where
the design lies on the ‘long thin’ to ‘short fat’ spectrum or arrangements.
           Advantages long thin arrangement                   Advantages short fat arrangement
  -       Controlled flow of materials or customers       -   Higher mix flexibility
  -       Simple materials handling                       -   Higher volume flexibility
  -       Lower capital requirements                      -   Higher robustness
  -       More efficient operation                        -   Less monotonous work

This position affects costs, flexibility, robustness and staff attitude to work. The allocation of tasks to
stages is called line balancing, which can be performed either manually or through computer-based

The effectiveness of the line-balancing activity is the balancing loss. This is the time wasted through
the unequal allocation of work as a percentage of the total time invested in processing the product
or service.
      - The precedence diagram is the most useful technique to help in the line-balancing task. This
        is a representation of the ordering of the elements which compose the total work content of
        the product or service.
       Automobile assembly, loan application processing, self-service cafeteria
                                                    Operations Management IBA

The volume and variety characteristics of an operation will influence its layout.

                              PART 3           PLANNING AND CONTROL

                          10. THE NATURE OF PLANNING AND CONTROL

Planning and control wants to make a connection between supply and demand that will ensure that the
operation’s processes run effectively and efficiently and produce required products/services.
  Planning concerns what should happen in the future
  Control copes with changes – makes adjustments which allow operations to achieve set objectives

Long term planning and control                                               Figure 10.2, page 271
    -   Uses aggregated demand forecasts
    -   Determines resources in aggregated form
    -   Objectives set in largely financial terms

Medium-term planning and control
   -  Uses partially disaggregated demand forecasts
   -  Determines resources and contingencies
   -  Objectives set in both financial and operations terms

Short-term planning and control
    -    Uses totally disaggregated forecasts or actual demand
    -    Makes interventions to resources to correct deviations from plans
    -    Ad hoc considerations of operations objectives.

The degree of uncertainty in demand affects the balance between planning and control. The greater the
uncertainty, the more difficult it is to plan, and greater emphasis must be placed on control.

Dependent demand is relatively predictable because it is dependent o some known factor.
Independent demand is less predictable because it depends on the chances of the market or customer

Responding to demand
Operations that buy-in resources and produce only when they are demanded by specific customers.
     House builder does not have the resources to start building before the order is received.

Operations that produce products only when they are demanded by specific customers.
     House builder with standard design might choose to build houses when orders are placed.

Operations that produce products prior to their being demanded by specific customers.
    Construct pre-designed standard houses ahead of any firm demand. = less expensive
                                                       Operations Management IBA

The different ways of responding to demand can be characterized by differences in the P:D ratio of the
operation. This contrasts the total length of time customers have to wait between asking for the
product/service and receiving it.  Total throughput time of goods and services : demand time.

    -    P and D times depend on the operation                                                Figure 10.4, page 277
    -    P:D ratios indicate the degree of speculation

Loading, which dictates the amount of work that is allocated to each part of the operation.
Value operating time is the amount of time at a piece of equipment or work centre that is available for
productive working after stoppages and inefficiencies have been accounted for.

Finite loading is an approach which only allocates work to a work centre up to a set limit (useful capacity) work
over and above this capacity is not accepted. It is relevant for operations where:
It is possible to limit the load, it is necessary to limit the load and cost of limiting the load is not prohibitive

Infinite loading is an approach to loading work which does not limit accepting work, but instead tries to cope
with it. Infinite loading is relevant for operations where it is not possible to limit the load, it is not necessary to
limit the load and the cost of limiting the load is not prohibitive.

Sequencing, which decides the order in which work is tackled within the operation.
    -   Physical constraints
    -    Customer priority sequencing
    Process one customer/item prior to others, irrespective of the order of arrival. Used when a customer base
    is skewed containing a mass of small customers and a few important customers.
    -    Due date (DD) sequencing
    The work is sequenced according to when it is ‘due’ for delivery, irrespective of the size and importance of
    the customer. Improves the delivery reliability of an operation and improves average delivery speed. Does
    not provide optimal productivity, but may reduce total costs.
    -    LIFO sequencing
    -    FIFO sequencing
    -   Longest operation time (LOT) sequencing
    Keeps utilization high, does not take into account: delivery speed, reliability or flexibility.
    -   Shortest operation time (SOT) sequencing
    Ease cash-flow problems, affect total productivity and can damage service to larger customers.
    -    Judging sequencing rules
         Due date: dependability                             Minimizing work-in progress inventory: cost
         Minimizing flow time: speed                         Minimizing idle time of work centre’s: cost

     -    Johnson’s rule
A method of scheduling a number of jobs on two successive work centers. The primary objective of Johnson's
Rule is to find an optimal sequence of jobs to reduce the total amount of time it takes to complete all job. It
also reduces the number of idle time between the two work centers.

    1.   List the jobs and their times at each work center.
    2.   Select the job with the shortest time. If the job is for the first work center, then schedule the job first.
         If that job is for the second work center then schedule the job last.
    3.   Eliminate the job selected from further consideration.
    4.   Repeat steps 2 and 3, working towards the center of the job schedule until all jobs have been
                                                    Operations Management IBA

Scheduling, which determines the detailed timetable of activities and their start and finish time.

Number of possible schedules = (n!)m                          n=number of jobs, m=number of machines

Forward scheduling: starting work as soon as it arrives.
    -   High labor utilization – workers always start work to keep busy
    -   Flexible – the time slack in the system allows unexpected work to be loaded.
Backward scheduling: starting jobs at the last possible moment to prevent them from being late.
    -   Lower material costs – materials are not used until they have to be
    -   Less exposed to risk in case of schedule change by customer.

Gantt charts
A scheduling device that represents time as a bar or channel on which activities can be marked.

Scheduling work patterns
Rostering: a term used in planning and control, usually to indicate staff scheduling, the allocation of working
times to individuals so as to adjust the capacity of an operation.
    -    Capacity matched demands, length of each shift is not too long/short, working at unsocial hours is
         minimized, days off match agreed staff conditions, vacation, sufficient flexibility

Monitoring and control, detecting what is happening, re-planning if necessary and intervening.
    Pull control is a system whereby demand is triggered by requests from a work centre’s internal
        customer.  lower inventory levels than push
    Push control is a centralized system whereby control decisions are issued to work centre’s which are
        then required to perform the task and supply the next workstation.

An approach to operations control that comes from the theory of constraints (TOC) and OPT and uses the
bottleneck stage in a process to control materials movement.                 Figure 10.16, page 291

                               11.    CAPACITY PLANNING AND CONTROL

Capacity constraints
    Gift wrapping service demand might increase far more than usual Christmas.

Planning and controlling capacity
    1. Long-term capacity strategy
A set of decisions that determine the level of physical capacity of an operation in whatever the operation
considers to be long-term; this will vary between industries.

     2. Medium term capacity
This usually involves an assessment of the demand forecast over a period of 2-19 months.

    3. Short term capacity
Enables them to flex output for a short period, either on a predicted basis or at short notice.

Aggregated planning and control:
A term used to indicate medium-term capacity planning that aggregates different products and services
together in order to get a broad view of demand and capacity.
                                                     Operations Management IBA

Objectives of capacity planning and control
Costs, revenues, working capital, quality of goods, speed, dependability and flexibility.

Forecasting is a key input to capacity planning and control. Demand forecast has 3 requirements.
    -    It is expressed I terms which are useful for capacity planning and control
    -    It is as accurate as possible
    -    It gives an indication of relative uncertainty

Almost all operations have some kind of fluctuation in demand (or seasonality) caused by some combination of
climatic, festive, behavioral, political, financial or social factors.

Output capacity measure, when the output from the operations does not vary in its nature.
Input capacity measure

Which of these measures is used partly depends on how stable is the mix of outputs. It is difficult to aggregate
the different types of output from an operation, input measures are usually preferred.

Design capacity
The capacity of a process or facility as it is designed to be, often greater than effective capacity.

Useful capacity after maintenance, changeover, other stoppages and loading has been accounted for.

The usage of capacity is measured by the factors
Utilization = actual output / design capacity
Efficiency = actual output / effective capacity

Overall operations effectiveness (OEE) is a method of judging the effectiveness of how operations equipment
is used. It is based on three aspects of performance.       Figure 11.5, page 307!
     -    Time that equipment is available to operate
     -    Quality of the product or service it produces
     -    Speed, or throughput rate, of the equipment

OEE = a x p x q
Availability rate          =a       = total operating time / loading time
Performance rate           =p       = net operating time / total operating time
Quality rate               =q       = valuable operating time / net operating time

There are three ‘pure’ options available for coping with demand fluctuations.
    1. Level capacity plan
        Ignore the fluctuations and keep activity levels constant.
    +    Stable employment pattern, high process utilization, high productivity with low unit costs
    -   Create inventory which has to be financed and stored.
     Not suitable for perishable, customized or unpredictable products

    2.   Chase demand plan
         Adjust capacity to reflect the fluctuations in demand.
         Methods of adjusting capacity
        Overtime and idle time
         Idle time: the costs of paying staff who are not engaged in direct productive work
                                                   Operations Management IBA

      Annual hours: a type of flextime working that controls the amount of time worked by individuals on an
      annual rather than a shorter basis.
     Varying the size of the workforce
      Done by hire and fire and sufficient flexibility into job design and job demarcation.
     Kitchen staff can escort customers from the reception to their rooms in peak times.
     Using part-time staff
     Subcontracting
      Buy capacity from other organizations which enables the operation to meet its own demand without
      the extra expense of investing in capacity which will not be needed after the peak.
    -    Can be expensive, subcontractor wants to make margin and might not be motivated to deliver on time
         or the desired levels of quality and the subcontractor might enter the same market.

    3.   Demand management
         Attempt to change demand to fit capacity available. Change demand through price. Less common for
         products than for services.

A radical approach to fill periods of low demand is developing alternative products.
     Universities fill their lecture halls with conferences during the vacation.

Yield management
A collection of methods that can be used to ensure that an operation (usually with a fixed capacity such as
airlines and hotels) maximizes its potential to generate profit. Especially useful where:
      -   Capacity is relatively fixed
      -   The market can be clearly segmented
      -   The service cannot be stored and are sold in advance
      -   The marginal costs of making a sale is relatively low
     Methods of airlines: over-booking capacity, price discounting and varying service types.

     Cumulative representation
Allows the feasibility of alternative capacity plans to be assessed.         Figure 11.12, page 318
Chase demand plans can also be illustrated on a cumulative representation. Are useful where the operation has
the ability to store its finished goods as inventory.

      Queuing theory
For operations which cannot store their output, such as most service operations, capacity planning and control
is best considered using waiting or queuing theory. Used to explore to capacity strategies.

Elements that define their queuing behavior

The source of customers/Calling population: customers could also be trucks arriving, order arriving to be
processed or machines waiting to be service. The source of customers can be finite/infinite.
The arrival rate: the rate at which customers needing to be served arrive at the server or servers.
The queue: customers waiting to be served form the queue or waiting line itself.
Rejecting: is the number of customers in a queue is already at the maximum number allowed..
     During periods of heavy demand some sites will not allow customers to access part of the site.

Baulking: when a customer is human and refuses to join the queue and wait for service (too long).
Reneging: when a customer (human) has queued but now leaved the queue due to waiting time.
Queue discipline: the set of rules that determine the order in which customers waiting are served.
Servers: the facility that processes the customers in the queue.
                                                    Operations Management IBA

        Variability reduces effective capacity.
        The management of capacity is dynamic.

                                    Supplement to Chapter 11: page 334-339

                                  12.    ANALYTICAL QUEUING MODELS

Inventory occurs in operations because the timing of supply and the timing of demand do not always match.
Inventories are therefore needed to smooth the differences between supply and demand..

Main reasons for keeping inventory
To cope with random or unexpected interruptions in supply or demand.                 Buffer/Safety inventory
To cope with an operation’s inability to make all products simultaneously.           Cycle inventory
To allow different stages of processing to operate at different speed and with       De-coupling inventory
different schedules.
To cope with planned fluctuations in supply or demand.                               Anticipation inventory
To cope with transportation delays in the supply network.                            Pipeline inventory

 1. Major part of working capital, tying up money which could be used more productively elsewhere.
 2. Is inventory is not used quickly  risk of damage, loss, deterioration or obsolescence.
 3. Takes up space and has to be managed, stored in appropriate conditions, insured and physically handled
     when transactions occur.  overhead costs

The position of inventory
Three types of inventory: raw materials, components inventory(WIP) and finished goods inventory.
A development of this last system is the multi-echelon inventory system, which maps the relationship of
inventories between the various operations within a supply network. Figure 12.4, page 346

Day-to-day inventory decisions
How much to order, when to order and how to control the system.

    1. Cost of placing the order            (↓ when order size increases)
    2. Price discount costs                 (↓ when order size increases)
    3. Stock-out costs                      (↓ when order size increases)
    4. Working capital costs
Fund the costs of inventory because of the lag between paying our suppliers and receiving our payment.
    5. Storage costs
    6. Obsolescence costs
    7. Operating inefficiency costs

Consignment stock: deliver large quantities of inventory to their customers to story but will only charge for the
goods as and when they are used. In the meantime they remain the supplier’s property.

An inventory profile is a visual representation of the inventory level over time.

Average inventory = Q / 2
Frequency of deliveries = the reciprocal of the time interval = D/Q
D = units per month and an order of Q units
                                                   Operations Management IBA

The economic order quantity (EOQ) formula
The most common approach to decide how much of any particular item to order when stock needs
replenishing. It attempts to find the best balance between the advantages and disadvantages of holding stock.

Holding costs = holding cost/unit x average inventory = C h x Q/2
Ordering cost = ordering cost x number of orders per period = Co x D/Q
Total cost, Ct = ChQ /2 +           CoD/ Q
Afgeleide = 0 = minimum or maximum
dCt = Ch - CoD            so, the lowest cost will occur when 0 = Ch - CoD              MORE ON PAGE 351!!
dQ      2      Q2                                                 2     Q2

Criticism of the EOQ approach
     -   Assumptions included in the EOQ models are simplistic
     -   The real cost of stock in operations are not as assumed in EOQ models
     -   The models are really descriptive, and should not be used as prescriptive devices. > not Lean
     -   Cost minimization is not an appropriate objective for inventory management

Economic batch quantity (EBQ)
Maximum stock level = M
Slope of inventory build-up = M/ Q/P        = MP/Q                                      More on page 352!!

Re-order point (ROP): the point in time at which more items are ordered, usually calculated to ensure that
inventory does not run out before the next batch of inventory arrives.

Re-order level (ROL): The level of inventory at which more items are ordered, usually calculated to ensure that
inventory does not run out before the next batch of inventory arrives.

Lead-time usage is the amount of inventory that will be used between ordering replenishment and the
inventory arriving, usually described by a probability distribution to account for uncertainty in demand and lead

Continuous review is an approach to managing inventory that makes inventory-related decisions when
inventory reaches a particular level, as opposed to period review.

Periodic review is an approach to making inventory decisions that defines points in time for examining
inventory levels and then makes decisions accordingly, as opposed to continuous review.

Time interval
The interval between placing orders, t1, is usually calculated by EOQ.

Two-bin and three-bin system
Methods of indicating when the re-order point has been reached. When the first bin empties, that is the signal
to order the next re-order quantity.
Two bin system: Bin1: Items being used, Bin 2: Reorder level + safety inventory
Three bin system: Bin1: Items being used, Bin 2: Reorder level, Bin 3: safety inventory
                                                    Operations Management IBA


One common way of discriminating between different stock items is to rank them by the usage value. A
relative small proportion of the total range of items will account for a large proportion of the total usage value.
      Pareto law: 80/20 rule

ABC inventory control
An approach to inventory control that classes inventory by its usage value and varies the approach to managing
it accordingly. Class A items: 20% of total items with 80% of total value. Class B items: 30% of total items with
10% of total value. Class C items: low-usage items 50% of total items with 10% of total value.

Other criteria for classification of an item: consequence stock-out, uncertainty of supply, high obsolescence risk.

Measuring inventory
   1. Cover of stock: amount of time the inventory lasts (to normal demand), if it were not replenished.
   2. Stock turn: how often is the stock used up in a period.

Inventory information systems
        Updating stock records
        Generating orders
        Generating inventory reports
        Forecasting

Common problems with inventory systems

Most computer-based inventory management systems are based on what is called the perpetual
inventory principle. This is the simple idea that stock records are automatically updated every time
that items are recorded as having been received into an inventory or taken out of the inventory.

Opening stock level + receipts in – dispatches out = new stock level

Causes of errors:
Keying errors: entering the wrong product code, quantity errors, damaged inventory, wrong items
being taken out of stock, delays between transactions, items stolen from inventory.

                            14.    ENTERPRISE RESOURCE PLANNING (ERP)

ERP is an enterprise-wise information system that integrates all the information from many functions, that is
needed for planning and controlling operations activities. This integration around a common database allows
for transparency.

It often requires very considerable investment in the software itself, as well as its implementation. More
significantly, it often requires a company’s processes to be changed to bring them in line with the assumptions
build to the ERP software.

ERP can be seen as the latest development from the original planning and control approach known as materials
requirements planning (MRP). = A set of calculations embedded in a system that helps operations make
volume and timing of the end products to be made.
                                                    Operations Management IBA

Material requirements planning (MRP)
    -    Bill of material (BOM): is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-
         components, components, parts and the quantities of each needed to manufacture an end product.
    -    Master production schedule (MPS): schedule
         that forms the main input to MRP, it contains a
         statement of the volume and timing of the end
         products to be made.

Manufacturing resource planning (MRPII)
   -   LANs

Benefits of ERP
Absolute visibility, sense of control, sophisticated communication with customers, suppliers etc., capable of
integrating whole supply chains.

ERP is based on a client-server architecture and can include decision support facilities. It is often linked to
external extranet systems and ERP systems are able to operate on most common platforms (Windows, UNIX).

ERP changes the way companies do business
Companies invested in ERP because they felt the attraction of turning the company’s information
systems into a ‘smooth running and integrated machine’. But also because their competitors were
doing it.

Web-integrated ERP
Enterprise resource planning that is extended to include the ERP-type systems of other organizations
such as customers and suppliers.
    - Complex and need periodic maintenance (taken offline)

Because ERP systems are designed to address problems of information fragmentation implementation will be
complex and cross organizational boundaries.

Critical success factors (CSF) that the organization must ‘get right’ in order for the ERP system to work
effectively. Some of these are broad, organization-wide, or strategic, factors. Others are more project-specific,
or tactical, factors.                                                                       Table 14.2, page 416

Total cost, time and effort to implement is likely to be underestimated, there will never be enough
training, controlling the scope of the project is difficult.
                                                 Operations Management IBA

                                    15.   LEAN SYNCHRONIZATION

Lean: an approach to operations management that emphasizes the continual elimination of waste of
all types, often used interchangeably with just-in-time (JIT); it is more an overall philosophy whereas
JIT is usually used to indicate an approach to planning and control that adopts lean principles.

The concept of lean stresses the elimination of waste, while JIT emphasizes the idea of producing
items only when they are needed.

         Saves working capital through reducing inventory levels
         Has impact on the ability of an operation to improve its intrinsic efficiency

The lean synchronization philosophy:
     (a) Involvement of everyone
The lean approach to people management has also been called the respect-for-human system. It
encourages and requires team-based problem-solving, job enrichment, job rotation and multi-
skilling. The intention is to encourage a high degree of personal responsibility, engagement and
´ownership´ of the job.

Basic working practices are used to implement the involvement of everyone, they include:
    - Discipline                                      - Development of personnel
    - Flexibility                                     - Quality of working life (QWL)
    - Equality                                        - Creativity
    - Autonomy                                        - Total people involvement

    (b) Continuous improvement
Also known as Kaizen.

    (c) Eliminate waste
The most significant part of lean is its focus on the elimination of all forms of waste. Waste can be
defined as any activity that does not add value.

Seven types of waste
    1. Over-production
    2. Waiting time
Equipment efficiency and labor efficiency are two popular measures which are widely used to
measure equipment and labor waiting time.
    3. Transport
Moving items around the operation, together with the double and triple handling of work in process,
does not add value. Layout changes which bring processes closer together, improvements in
transport methods and workplace organization can all reduce waste.
    4. Process
    5. Inventory
    6. Motion
Simplification of work is a rich source of reduction in the waste of motion.
    7. Defectives

Barriers to achieving lean
                                               Operations Management IBA

Eliminate waste through streamlined flow
    - Examine all elements of throughput time
       Value stream mapping involves working on the ‘big picture’ and is a starting point to help
       recognize waste and identify its causes.                               Figure 15.5, page 437
    - Examine the shape of process flow
    - Ensure visibility
    - Use small-scale simple process technology

Eliminate waste through matching supply and demand exactly
    - Pull control
    - Kanbans / card or signal
        It is an instruction for preceding process to send more, tool for kaizen.
    - The single-card system

Eliminate waste through flexible processes
    - Reduce set-up times
        Pre-prepare equipment instead of having to do it while the process is stopped, make
        equipment capable of performing all required tasks so that changeovers become a simple
        adjustment and facilitate the change of equipment.

Eliminate waste through minimizing variability
    - Level schedules as much as possible
    - Level delivery schedules
    - Adopt mixed modeling where possible
    - Keep things simple – the 5 Ss
       Short, straighten, shine, standardize and sustain
    - Adopt total productive maintenance (TPM)

Most of the concepts and techniques of lean also apply to the whole supply network. The concept of
the lean supply chain has been likened to an air traffic control system, in that it attempts to provide
continuous, ‘real-time visibility and control’ to all elements in the chain.
Most of the ideas of lean are directly applicable to all the service operations in the supply network.

There are other approaches that attempt to perform the same function as lean management.
     - Theory of constraints (TOC)
The overall objective is to increase profit by increasing the throughput of a process operation.
Throughput, inventory and operating expenses are measures of effectiveness. The theory of
constraints wants to achieve improvement by focusing on the constraints which are the weakest links
in the process.

TOC is implemented through a five-step continuous process:
   1. Identifying the system constraint
   2. Decide how to exploit the constraint
   3. Subordinate everything to the constraint
   4. Elevate the constraint
   5. Start again from step 1.
                                                   Operations Management IBA

     - Material requirements planning (MRP)
Is a production planning and inventory control system used to manage manufacturing processes.
Most MRP systems are software-based, while it is possible to conduct MRP by hand as well.
An MRP system is intended to simultaneously meet three objectives:
     - Ensure materials are available for production and products are available for delivery.
     - Maintain the lowest possible level of inventory.
     - Plan manufacturing activities, delivery schedules and purchasing activities.

Although both TOC and MRP may seem to be different approaches, they can be combined.
The way in which they can be combined depends on the complexity of product structures, the
complexity of product routine, the volume-variety characteristics of the operation and the level of
control required.

                                     17.     QUALITY MANAGEMENT

Higher quality has a beneficial effect on both revenues and costs.

Quality is the degree of fit between customers’ expectations and customer perception of the product/service.
A customer’s view of quality is shaped by the gap between perception and expectation.


       The gap between a customer’s expectation and the operation’s specification.
       The gap between the product/service concept and the way the organization has specified it.
       The gap between the way quality has been specified and the actual delivered quality.
       The gap between the actual delivered quality and the way the product/service has been described to
        the customer.

Conformance to specification means producing a product or providing a service to its design specification.

       Define quality characteristics
        The various elements within the concept of quality such as functionality, appearance, reliability,
        durability, recovery, contact etc.                                            Figure 17.5, page 503
       Decide how to measure each of the quality characteristics
        Taking an general quality characteristic and break it down into its constituent elements. The measures
        used are variables(length, time) and attributes(right/wrong, OK/Not OK).         Table 17.2, page 504
       Set quality standards for each characteristic
        the level of quality which defines the boundary between acceptable and unacceptable.
       Control quality against these standards
        1. Where in the operation should they check that it is confirming to standards?
        2. Should they check every product/service or take a sample?
            o Checking everything is time-consuming, costly and might destroy the product.

Most quality planning and control involves sampling the operations performance in some way. Sampling can
give rise to erroneous judgments which are classed as either type I or type II errors.
                                                     Operations Management IBA

Type I errors involve taking corrections where none are needed. Type II errors involve not making corrections
where they are in fact needed.

         3.   How should the checks be performed?
              Statistical process control (SPC) monitors processes as they produce products/services and
              attempts to distinguish between normal or natural variation in process performance and unusual
              or ‘assignable’ causes of variation.

              Acceptance sampling is used to decide whether to accept a whole batch of products/services on
              the basis of a sample; it is based on the operation’s willingness to risk rejecting a ‘good’ batch and
              accepting a ‘bad’ batch.

        Find and correct the causes of poor quality

        Continue to make improvements


TQM is an effective system for integrating the quality development, quality maintenance and quality
improvement efforts of the various groups in an organization so as to enable production and service at the
most economical levels which allow for full customer satisfaction.

TQM is an extension of previous practice such as Quality Control(QC) which detects and treats quality
problems and Quality assurance (QA) which widened the responsibility for quality to include functions other
than direct operations.
                                                                                      Figure 17.6, page 509

It is best thought of as a philosophy that stresses the ‘total’ of TQM and puts quality at the heart of everything
that is done by an operation.

‘Total” in TQM means the following:
     Meeting the needs and expectations of customers
        Covering all parts of the organization

Internal customer/supplier: everyone is a customer within the organization and consumes goods or services
provided by other internal suppliers.
     Service-level agreements (SLAs): definitions of the dimensions of service and the relationship between
         two parts of an organization. Issues covered are response time, range of service, dependability of
         service supply.
        Including every person in the organization
        Examining all costs which are related to quality, and getting things ‘right first time’
Prevention costs: incurred in trying to prevent problems, failures and errors from occurring.
     E.g. identifying, improving the design, training and development personnel, SPC process control
Appraisal costs: associated with controlling quality to check to see if problems or errors have occurred during
and after the creation of the product/service.
     E.g. setting up time, conducting customer surveys
Internal failure costs: associated with errors which are dealt with inside the operation.
     E.g. costs of scrapped parts, reworked parts, lost production time, lack of concentration
External failure costs: associated with errors going out of the operation to a customer.
     E.g. loss of customer goodwill affecting future business, guarantee and warranty costs
                                                     Operations Management IBA

TQM assumes that costs are known and measurable and it implies that failure and poor quality are acceptable.
TQM rejects the optimum-quality level concept and strives to reduce all known and unknown failure costs by
preventing errors and failure taking place.

Reactive (waiting for something to happen)  proactive (doing something before anything happens)
Inspect-in (appraisal-driven) approach  design-in (getting it right first time)

        Developing the systems and procedures which support quality and improvement

The ISO 9000 approach is a set of worldwide standards that established the requirements for companies’
quality management systems, last revised in 2000, there are several sets of standards.
    -    Quality management should be customer-focused
    -    Quality performance should be measured
    -    Quality management should be improvement-driven
    -    Top management must demonstrate their commitment to maintaining and improving systems.

        Developing a continuous process of improvement

Statistical process control is concerned with checking a product/service during its creation by monitoring the
quality over a period of time. It does this by using control charts to see if the process seems to be performing
as it should, or alternatively if it is ‘out of control’.
      -   Control charts can be used for either attributes or variables.

Process capability is a measure of the acceptability of the variation of the process.

                                                                               See page 522-523 for mathematics

The power of control charting lies in its ability to set control limits derived from the statistics of the natural
variation of processes. These control limits are often set at ± 3 standard deviations of the natural variation of
the process samples.

Assignable causes of variation
    -   Machinery may have worn or been set up badly
    -   Untrained person may not be following prescribed procedures

Process control charts allow operations managers to distinguish between the ‘normal’ variation inherent in any
process and the variations which could be caused by the process going out of control.

The Taguchi loss function
Quality loss function (QLF) is a mathematical function which includes all the costs of poor quality. These
include wastage, repair, inspection, service, warranty and what is termed ‘loss to society’ costs.
     -   Answers the SPC problems: it assumes that any values of process performance which lie within the
         control limits are equally acceptable, while any values outside the limits are not. (1) A process always
         within its control limits may not be deteriorating, but is it improving. (2)
     -   Target-orientated philosophy

L = D2C
L = total loss to society costs     D = deviation from target performance         C = a constant

Assignable variation is a bad thing because it is a signal that something has changed in the process which therefore
must be investigated. Normal variation is itself a problem because it masks any changes in process behavior.
                                                   Operations Management IBA

                                                                                    Mathematics page 527-532

Acceptance sampling helps managers to understand the risks they are taking when they make decisions about
a whole batch of products on the basis of a sample taken from that batch. The risks of any particular sampling
plan are shown on its operating characteristics (OC) curve. However, some of its assumptions make acceptance
sampling controversial.

                                     PART 4            IMPROVEMENT

                                  18.     OPERATIONS IMPROVEMENT

The focus of most operations managers has shifted from planning and control to improvement (long term).
All four activities (strategy, design, planning and control and improvement) are really interrelated and

Red Queen effect
Companies in many industries are having to improve simply to retain their position relative to their competitors.


Radical or breakthrough improvement
Assumes that the main vehicle of improvement is major and dramatic change in the way the operation works.
     Sudden improvements, expensive, creative solutions, individualism
     New, more efficient machine in the factory, improved degree program at a university
Continuous improvement
Approach to improving performance which assumes many small incremental improvement steps.
     Kaizen
     Simplifying the question sequence when taking a hotel, reschedule due date to relax students
Improvement cycles
Never ending process of repeatedly questioning and re-questioning the detailed working of a process/activity.
                   DMAIC cycle                                              PDCA cycle

A process perspective
If improvement is described in terms of how processes can be made more effective, those messages will have
relevance for all the other functions of the business in addition to the operations function.

End-to-end processes
                                                   Operations Management IBA

Radical change
Evidence-based problem-solving
There is little point in improvement unless it meets the requirements of the customers.
Systems and procedures
Reduce process variation
A potentially useful method of identifying improvement opportunities is to try and identify the sources of
random variation in process performance. Statistical process control is one way of doing this.
Synchronized flow
Synchronized flow means that items in a process, operation or supply network flow smoothly and with even
velocity from start to finish. How inventory accumulates within the operation.
Emphasize education and training
Perfection is the goal
Waste identification
Include everybody
Develop internal customer-supplier relationships
Chapter 17, SALs

Key elements of lean when used as an improvement approach:
    -   Customer-centricity                                -         Reduce variation
    -   Internal customer-supplier relationships           -         Include all people
    -   Perfection is the goal                             -         Waste elimination
    -   Synchronized flow

Business process re-engineering (BPR)
Warning against establishing non-value-added work within an information technology system where it would
be even more difficult to identify and eliminate.
        Rethink business approaches in a cross-functional manner
        Strive for dramatic improvements in performance by radically rethinking and redesigning the process
        Have those who use the output from a process, perform the process
        Put decision points where the work is performed. Do no separate control work from manage work.

        Customer service operations: total responsibility for satisfying customers’ need

Six Sigma
An approach to improvement and quality management that originated in the Moterola Company but
which was widely popularized by its adoption in the GE Company in America. Although based on
traditional statistical process control, it is now a far broader philosophy if improvement that
recommends a particular approach to measuring, improving and managing quality and operations
performance generally.

Moterola . Their quality objective: total customer satisfaction can only be achieved when its products were
delivered when promised, with no defects, with no early-life failures and when the product did not fail
excessively in service.
      Eliminate these defects by making sure that design specifications were tight (i.e. narrow tolerance)
         and its processes very capable.
                                                    Operations Management IBA

Measuring performance (Six Sigma)
    A defect is a failure to meet customer-required performance
    A defect unit or item is any unit of output that contains a defect
    A defect opportunity is the number of different ways a unit of output can fail to meet customer
    Proportion defective is the percentage or fraction of units that have one or more defects
    Process yield is the percentage or fraction of total units produced by a process that are defect-free
    Defect per unit (DPU) is the average number of defects on a unit of output (defects / number items)
    Defect per opportunity is the proportion or percentage of defects divided by the total number of
       defects opportunities. (number defects / (number produced items x number opportunities per item)
    Defects per million opportunities (DPMO)
    The Sigma measurement is derived from the DPMO and is the number of standard deviations

Six Sigma elements
      Customer-driven objectives (process of comparing process outputs against customer requirements)
      Use of evidence
      Structured improvement cycle (DMAIC cycle)
      Process capability and control
      Process design
      Structured training and organization of improvement

Material arts analogy
Master Black Belts are experts in the use of Six Sigma tools and techniques as well as how such techniques can
be used and implemented. Expected to have the quantitative analytical skills. – teachers
Black Belts are dedicated full-time to improvement, some recommend one Black Belt for every 100 employees.
Green Belts work within improvement teams, possibly as team leaders.

BPR – what should happen rather than how it should happen


Scatter diagrams
A quick and simple method of identifying whether there is evidence of a connection between two sets of date.
     Time you set off to work and how long the journey takes
    -    Only identifies the existence of a relationship, not the existence of a cause-effect relationship.

Process maps (flow charts)
Give a detailed understanding prior to improvement. (chapter 4) They can also clarify improvement
opportunities and shed further light on the internal mechanics or workings of an operation. They highlight
problem areas where no procedures exists to cope with a particular set of circumstances.

Cause-effect diagrams
Method of helping to search for the roots causes of problems. The structure involves identifying possible
causes under the headings of: machinery, manpower, materials, methods and money.

Pareto diagrams
Straightforward techniques which involves arranging items of information on the types of problem or causes of
problem into their order of importance.
      Few causes explain the majority of effects

Why-why analysis
Stating the problem and asking why that problem has occurred. Why have those reasons occurred?
This procedure is continued until either a cause seems sufficiently self-contained to be addressed by itself or no
more answers to the question Why can be generated.

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