Chapter

20

Operations Control

McGraw-Hill/Irwin

Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

20-2

Learning Objectives

After studying this chapter, you will be able to:

1. Understand the basic requirements for controlling

operating costs.

2. Define quality from the perspective of an

operations manager.

3. List the eight common dimensions of design

quality.

4. Explain the concept of quality assurance.

5. Explain the concept of total quality management

(TQM).

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Learning Objectives (cont’d)

After studying this chapter, you will be able to:

6. Define the following terms: continuous

improvement, kaizen, six sigma, lean manufacturing,

and quality at the source.

7. Describe the ISO 9000, ISO 14000, and the zero-

defects approaches to quality.

8. Identify and define the two major types of quality

control.

9. Recount the major reasons for carrying inventories.

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Learning Objectives (cont’d)

After studying this chapter, you will be able to:

10. Explain the concept of just-in-time (JIT) inventory.

11. Describe the ABC classification system for

managing inventories.

12. Summarize the economic order quantity (EOQ)

concept.

13. Describe the basic purposes of material

requirements planning (MRP).

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Effective Operating Systems

• Two aspects: design and control

• Efficient operation includes:• Monitoring the system processes

• Assurance of quality

• Management of inventories

• Management of inventories

• Good operations control can be a substitute for resources.

• Effective inventory control can reduce investment costs in inventories.

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Operating Costs

Figure 20.1

Source: N. Gaither, Production and Operations Management (Fort Worth: Dryden Press, 1980).

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Controlling Operations Cost

• Variable overhead expenses• Expenses that change in proportion to the

level of production or service.

• Fixed overhead • Expenses that do not change appreciably

with fluctuations in the level of production or service.

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Dimensions of Design Quality

Figure 20.2

Source: Richard B. Chase, F. Robert Jacobs, and Nicholas J. Aquilano, Operations Management for Competitive Advantage, 11th ed. (Burr Ridge, IL: McGraw-Hill/ Irwin, 2006), p. 322.

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Quality Management

• For the operations manager, quality is determined in relation to the specifications or standards set in the design stages—the degree or grade of excellence specified.

• The quality of an organization’s goods and services can affect the organization in many ways.• Loss of business• Liability• Costs• Productivity

• Productivity and quality are often closely related.

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Customer Response Programs

• Develop a new attitude toward customers. • Reduce management layers so that managers

are in contact with customers.• Link quality and information systems to

customer needs and problems.• Train employees in customer responsiveness.• Integrate customer responsiveness throughout

the entire distribution channel.• Use customer responsiveness as a marketing

tool.

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Deming’s 14 Quality Elements

Figure 20.3Source: From W. Edwards Deming, Out of the Crisis, 1986. Copyright © 1986 by The MIT Press. Reprinted with permission.

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Total Quality Management

Essential steps:

• Find out what customers want.

• Design a product or service that will meet (or exceed) what customers want.

• Design a production process that facilitates doing the job right the first time.

• Keep track of results, and use those results to guide improvement in the system.

• Extend these concepts to suppliers and to distribution.

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TQM vs. Traditional Approaches

Figure 20.4

Source: From William J. Stevenson, Production and Operations Management 4th edition. Copyright © 1993 The McGraw-Hill Companies, Inc. Reprinted with permission.

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Implementing TQM

• Demonstrate top-down commitment and involvement-push.

• Set tough improvement goals, not just stretch goals.

• Provide appropriate training, resources, and human resource backup.

• Determine critical measurement factors; benchmark and track progress.

• Spread success stories, especially those about favorable benchmarking; always share financial progress reports.

• Identify the costs of quality and routes to improvement; prove the case that quality costs decline with quality progress.

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Implementing TQM (cont’d)

• Rely on teamwork, involvement, and all-level leadership.

• Respect the “gurus,” but tailor every initiative for a good local fit.

• Allow time to see progress, analyze the system’s operation, reward contributions, and make needed adjustments.

• Finally, recognize that the key internal task is a culture change and the key external task is a new set of relationships with customers and suppliers.

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Barriers to Adopting TQM

• A lack of consistency of purpose on the part of management.

• An emphasis on short-term profits.• An inability to modify personnel

review systems.• Mobility of management (job

hopping).• Lack of commitment to training and

failure to instill leadership that is change oriented.

• Excessive costs.

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Quality Improvement Approaches

• Continuous improvement• Refers to an ongoing effort to make

improvements in every part of the organization relative to all of its products and services.

• Kaizen• “Good change”; continuous and relentless

improvement; views employees as most valuable asset.

• Quality at the source• Philosophy of making each employee

responsible for the quality of his or her own work.

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Quality Improvement Approaches (cont’d)

• Lean manufacturing• Focuses on identifying and eliminating

waste and non-value-added activities.

• Six sigma• Both a precise set of statistical tools and a

rallying cry for continuous improvement, driven by “what does the customer want in the way of quality?”

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Quality Improvement Approaches (cont’d)

• lean six sigma• A combination of lean methods and six

sigma; draws on the philosophies, principles, and tools of both approaches. Goal is growth and not just cost-cutting.

• Reengineering• Searching for and implementing radical

change in business processes to achieve breakthroughs in costs, speed, productivity, and service.

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Lean Six Sigma Incorporates the Key Methods, Tools, and Techniques of Its Predecessors

Figure 20.5

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Other Quality Standards

• ISO 9000• A set of quality standards for international

business.

• ISO 14000 • Addition to the ISO 9000 to control the impact of an

organization’s activities and outputs on the environment.

• This certification requires compliance in four organizational areas:

• Implementation of an environmental management system.

• Assurance that procedures are in place to maintain compliance with laws and regulations.

• Commitment to continual improvement.

• Commitment to waste minimization and prevention of pollution.

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Other Quality Standards (cont’d)

• Zero defects program

• Increasing quality by increasing everyone’s

impact on quality.

• Characteristics of successful zero-defects

programs:

• Extensive communication regarding the importance

of quality.

• Organization-wide recognition for high-quality

work.

• Quality problem identification by employees.

• Employee participation in goal setting.

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Malcolm Balridge National Quality Award

• Recognition of U.S. companies’ achievements in quality.

• Purpose of the award is to encourage efforts to improve quality and to recognize the quality achievements of U.S. companies.

• A maximum of two awards may be given annually in each of five categories: • Manufacturing.• Service.• Small business (500 or less employees).• Education.• Health care.

• Bush signed legislation that expands the Baldrige Award to include nonprofit and government organizations.

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Types of Quality Control

• Product quality control• Relates to inputs or outputs of the system.

• Used to evaluate quality of a batch of existing products or services.

• Process control• Relates to equipment and processes used during the

production process.

• Used to monitor quality while the product or service is being produced.

• Acceptance sampling• Statistical method of predicting quality through

inspection of a batch or large group of products.

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Acceptance Sampling

• Used for one of the following reasons:• The potential losses or costs of passing defective

items are not great relative to the cost of inspection; for example, it would not be appropriate to inspect every match produced by a match factory.

• Inspection of some items requires destruction of the product being tested, as is the case when testing flash bulbs.

• Sampling usually produces results more rapidly than does a census.

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Process Control Chart

• Time-based graphic display that shows whether a machine or a process is producing items that meet preestablished specifications.• Mean charts (also called X-charts ) monitor the

mean or average value of some characteristic (dimension, weight, etc.) of the items produced by a machine or process.

• Range charts (also called R-charts ) monitor the range of variability of some characteristic (dimension, weight, etc.) of the items produced by a machine or process.

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Process Control Chart

Figure 20.6

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Inventory Control

• Inventories are generally classified into one of three categories, depending on their location within the operating system: (1) raw material, (2) in process, or (3) finished goods.

• Inventories add flexibility and allow the organization to: • Purchase, produce, and ship in economic lot sizes rather

than in small jobs.

• Produce on a smooth, continuous basis even if the demand for the finished product or raw material fluctuates.

• Prevent major problems when forecasts of demand are in error or when unforeseen slowdowns or stoppages in supply or production occur.

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Just-in-Time Inventory Control

Figure 20.7

Source: N. Gaither, Production and Operations Management (Fort Worth: Dryden Press, 1992).

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Tracking Inventory

• Bar-code technology• A computer program recognizes the

information contained in the bar code and automatically adds or subtracts the item from inventory.

• Physical Inventory• Counting the number of units of inventory a

company holds in stock.

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Independent versus Dependent Demand Items

• Independent demand items• Finished goods ready to be shipped out or

sold.

• Dependent demand items• Subassembly or component parts used to

make a finished product; their demand is based on the number of finished products being produced.

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ABC Classification System

• Method of managing inventories based on their total value.

• ABC method can be computerized and categories can be monitored or changed with greater skill and accuracy.

• Computerizing the operation and control of the classification system brings power to the ordering cycles and stock control.

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ABC Inventory Classification

Figure 20.8

Source: From Richard B. Chase, et al., Operation Management for Competitive Advantage with CD-ROM andPowerWeb. Copyright © 2004 The McGraw-Hill Companies, Inc. Reprinted with permission.

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Safety Stocks

• Inventory maintained to accommodate unexpected changes in demand and supply and allow for variations in delivery time.

• The cost of a stock-out of the item is often difficult to estimate.

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The Order Quantity

• The optimal number of units to order, referred to as the economic order quantity (EOQ), is determined by the point at which ordering costs equal carrying costs, or where total cost (ordering costs plus carrying costs) is at a minimum.• Ordering costs

• Includes the cost of preparing the order, shipping costs, and setup costs etc.

• Carrying costs• Includes storage costs, insurance, taxes,

obsolescence, and the opportunity costs of the money invested in the inventory.

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Potential Advantages of MaterialRequirements Planning (MRP)

Source: From James B. Dilworth, Production and Operations Management 4th ed., McGraw-Hill, 1989. Reprinted with permission of the author.

Figure 20.9

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Overall View of the Inputs

Source: From Richard B. Chase, et al., Operation Management for Competitive Advantage with CD-ROM andPowerWeb. Copyright © 2004 The McGraw-Hill Companies, Inc. Reprinted with permission.

Figure 20.10

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Differences between JIT and MRP

Source: From Nicholas J. Aquilano and Richard B. Chase, Fundamentals of Operations Management. Copyright © 1991 The McGraw-Hill Companies, Inc. Reprinted with permission.

Figure 20.11