Operation Management

Production Operation Production Operation ManagementManagement

Junaid ZamirJunaid Zamir

SP06-BB-0010SP06-BB-0010

22

Chapter 1 – Chapter 1 – Operations and Operations and ProductivityProductivity

What Is Operations Management?What Is Operations Management?

Production is the creation of goods and Production is the creation of goods and servicesservices

Operations management (OM) is the set Operations management (OM) is the set of activities that creates value in the of activities that creates value in the

form of goods and services by form of goods and services by transforming inputs into outputstransforming inputs into outputs

44

Organizing to Produce Goods and Organizing to Produce Goods and ServicesServices

Essential functions:Essential functions: Marketing – generates demandMarketing – generates demand Production/operations – creates the Production/operations – creates the

productproduct Finance/accounting – tracks how well Finance/accounting – tracks how well

the organization is doing, pays bills, the organization is doing, pays bills, collects the moneycollects the money

55

Why Study OM?Why Study OM?

OM is one of three major functions (marketing, OM is one of three major functions (marketing, finance, and operations) of any organizationfinance, and operations) of any organization

We want (and need) to know how goods and We want (and need) to know how goods and services are producedservices are produced

We want to understand what operations We want to understand what operations managers domanagers do

OM is such a costly part of an organizationOM is such a costly part of an organization

What does it coversWhat does it covers

PlanningPlanning OrganizingOrganizing StaffingStaffing LeadingLeading ControllingControlling

Basic Management FunctionsBasic Management Functions

77

Design of goods and servicesDesign of goods and services What good or service should we offer?What good or service should we offer? How should we design our products and How should we design our products and

services? services?

Managing qualityManaging quality How do we define quality?How do we define quality? Who is responsible for quality?Who is responsible for quality?

areas it coversareas it covers

88

Process designProcess design What process will the product require?What process will the product require? What equipment and technology is What equipment and technology is

necessary for these processes?necessary for these processes? Location strategyLocation strategy

Where should we put the facility?Where should we put the facility? On what criteria should we base the On what criteria should we base the

location decision?location decision?


99

Layout strategyLayout strategy How should we arrange the facility?How should we arrange the facility? How large must the facility be to meet our How large must the facility be to meet our

plan?plan? Human resources and job designHuman resources and job design

How do we provide a reasonable work How do we provide a reasonable work environment?environment?

How much can we expect our employees How much can we expect our employees to produce?to produce?


1010

Supply chain managementSupply chain management Should we make or buy this component?Should we make or buy this component? Who are our suppliers and who can integrate Who are our suppliers and who can integrate

into our e-commerce program?into our e-commerce program? Inventory, material requirements planning, and Inventory, material requirements planning, and

JITJIT How much inventory of each item should we How much inventory of each item should we

have?have? When do we re-order?When do we re-order?


1111

New Trends in OMNew Trends in OM

Global focusGlobal focus Just-in-time performanceJust-in-time performance Supply chain partneringSupply chain partnering Rapid product developmentRapid product development Mass customizationMass customization Empowered employeesEmpowered employees Environmentally sensitive productionEnvironmentally sensitive production

1212

Productivity ChallengeProductivity Challenge

Productivity is the ratio of outputs (goods and Productivity is the ratio of outputs (goods and services) divided by the inputs (resources services) divided by the inputs (resources

such as labor and capital)such as labor and capital)

1313

Measurement ProblemsMeasurement Problems

Quality may change while the quantity Quality may change while the quantity of inputs and outputs remains of inputs and outputs remains constantconstant

External elements may cause an External elements may cause an increase or decrease in productivityincrease or decrease in productivity

1414

Productivity VariablesProductivity Variables

LaborLabor - contributes 10% of the - contributes 10% of the annual increaseannual increase

CapitalCapital - contributes about 38% - contributes about 38% of the annual increaseof the annual increase

ManagementManagement - contributes - contributes about 52% of the annual about 52% of the annual increaseincrease

1515

Chapter 4 – Chapter 4 – ForecastingForecasting

1616

What is Forecasting?What is Forecasting?

Its is the art and science of predicting a future Its is the art and science of predicting a future events.events.

It uses historical data to predict future.It uses historical data to predict future.

It deals in areas ofIt deals in areas of ProductionProduction InventoryInventory Personnel'sPersonnel's

1717

Short-range forecastShort-range forecast Generally forGenerally for less than 3 monthsless than 3 months Used for planning purchases, job schedulingUsed for planning purchases, job scheduling

Medium-range forecastMedium-range forecast For 3 months to 3 yearsFor 3 months to 3 years Sales and production planning, budgetingSales and production planning, budgeting

Long-range forecastLong-range forecast 33++ years years New product planning, research and developmentNew product planning, research and development

Forecasting Time HorizonsForecasting Time Horizons

1818

Distinguishing DifferencesDistinguishing Differences

Medium/long rangeMedium/long range forecasts deal with more forecasts deal with more comprehensive issues and support comprehensive issues and support management decisions regarding planning management decisions regarding planning and products, plants and processesand products, plants and processes

Short-termShort-term forecasts tend to be more accurate forecasts tend to be more accurate than longer-term forecaststhan longer-term forecasts

1919

Product Life CycleProduct Life Cycle

Product design Product design and development and development criticalcritical

Frequent product Frequent product and process and process design changesdesign changes

Process Process modificationsmodifications

High production High production costscosts

Limited modelsLimited models

Research & Research & developmentdevelopment

Forecasting Forecasting criticalcritical

Product and Product and process process reliabilityreliability

Competitive Competitive product product improvements improvements and optionsand options

Increase abilityIncrease ability

StandardizatioStandardizationn

minor changesminor changes

Increasing Increasing stability of stability of processprocess

Product Product improvement improvement and cost and cost cuttingcutting

Little product Little product differentiatiodifferentiationn

Cost Cost minimizationminimization

commonalitycommonality

Introduction Growth Maturity Decline

2020

Types of ForecastsTypes of Forecasts

Economic forecastsEconomic forecasts Address business cycle – inflation rate, Address business cycle – inflation rate,

money supply, housing starts, etc.money supply, housing starts, etc.

Technological forecastsTechnological forecasts Predict rate of technological progressPredict rate of technological progress Impacts development of new productsImpacts development of new products

Demand forecastsDemand forecasts Predict sales of existing products and Predict sales of existing products and

servicesservices

2121

Forecasting ApproachesForecasting Approaches

Used when situation is vague and little data Used when situation is vague and little data existexist New productsNew products New technologyNew technology

Involves intuition, experienceInvolves intuition, experience e.g., forecasting sales on Internete.g., forecasting sales on Internet

Qualitative Qualitative MethodsMethods

2222

Forecasting ApproachesForecasting Approaches

Used when situation is ‘stable’ and historical Used when situation is ‘stable’ and historical data existdata exist Existing productsExisting products Current technologyCurrent technology

Involves mathematical techniquesInvolves mathematical techniques e.g., forecasting sales of color e.g., forecasting sales of color

televisionstelevisions

Quantitative Quantitative MethodsMethods

2323

Qualitative ApproachesQualitative Approaches

Delphi methodDelphi method Panel of experts make forecastsPanel of experts make forecasts

Sales force compositeSales force composite Forecasting technique based on Forecasting technique based on

salespersons estimates of expected sales.salespersons estimates of expected sales.

Consumer Market SurveyConsumer Market Survey Input from potential customersInput from potential customers

2424

Quantitative ApproachesQuantitative Approaches

Naive approachNaive approach Assumes demand in next period is the same Assumes demand in next period is the same

as demand in most recent periodas demand in most recent period

Moving averagesMoving averages It is a series of airthmatic means used to It is a series of airthmatic means used to

monitor little or no trendmonitor little or no trend

Weighted moving averageWeighted moving average Used when trend is present Used when trend is present

2525

Form of weighted moving averageForm of weighted moving average Weights decline exponentiallyWeights decline exponentially Most recent data weighted mostMost recent data weighted most

Requires smoothing constant Requires smoothing constant (()) Ranges from 0 to 1Ranges from 0 to 1 Subjectively chosenSubjectively chosen

Involves little record keeping of past dataInvolves little record keeping of past data

Exponential SmoothingExponential Smoothing

2626

Exponential SmoothingExponential Smoothing

New forecast =New forecast = Last period’s forecastLast period’s forecast+ + aa ((Last period’s actual demand Last period’s actual demand

– – Last period’s forecastLast period’s forecast))

FFtt = F = Ft t – 1– 1 + + a(a(AAt t – 1– 1 - - F Ft t – 1– 1))

wherewhere FFtt == new forecastnew forecast

FFt t – 1– 1 == previous forecastprevious forecast

aa == smoothing (or weighting) smoothing (or weighting) constant constant (0 (0 ≤≤ a a ≤≤ 1) 1)

2727

Forecasting obtained by observing response Forecasting obtained by observing response variable at regular time periodsvariable at regular time periods

Time Series ForecastingTime Series Forecasting

2828

Persistent, overall upward or downward Persistent, overall upward or downward patternpattern

Changes due to population, technology, Changes due to population, technology, age, culture, etc.age, culture, etc.

Typically several years duration Typically several years duration

Trend ComponentTrend Component

2929

Regular pattern of up and down Regular pattern of up and down fluctuationsfluctuations

Due to weather, customs, etc.Due to weather, customs, etc. Occurs within a single year Occurs within a single year

Seasonal ComponentSeasonal Component

3030

Repeating up and down movementsRepeating up and down movements Affected by business cycle, political, and Affected by business cycle, political, and

economic factorseconomic factors Multiple years durationMultiple years duration Often causal or Often causal or

associative associative relationshipsrelationships

Cyclical ComponentCyclical Component

00 55 1010 1515 2020

3131

Unsystematic, fluctuationsUnsystematic, fluctuations Due to random variation or unforeseen eventsDue to random variation or unforeseen events Short duration and Short duration and

nonrepeating nonrepeating

Random ComponentRandom Component

MM TT WW TT FF

3232

Chapter 5 – Chapter 5 – Design of Goods Design of Goods and Servicesand Services

3333

The good or service the organization provides The good or service the organization provides societysociety

Top organizations typically focus on core Top organizations typically focus on core productsproducts

Customers buy satisfaction, not just a Customers buy satisfaction, not just a physical good or particular servicephysical good or particular service

Fundamental to an organization's strategy Fundamental to an organization's strategy with implications throughout the operations with implications throughout the operations functionfunction

Product DecisionProduct Decision

3434

Product Strategy OptionsProduct Strategy Options

DifferentiationDifferentiation Shouldice HospitalShouldice Hospital

Low costLow cost Mobile PhonesMobile Phones

Rapid responseRapid response Wal-martWal-mart

3535

Product Life CycleProduct Life Cycle

Product design Product design and development and development criticalcritical

Frequent product Frequent product and process and process design changesdesign changes

Process Process modificationsmodifications

High production High production costscosts

Limited modelsLimited models

Research & Research & developmentdevelopment

Forecasting Forecasting criticalcritical

Product and Product and process process reliabilityreliability

Competitive Competitive product product improvements improvements and optionsand options

Increase abilityIncrease ability

StandardizatioStandardizationn

minor changesminor changes

Increasing Increasing stability of stability of processprocess

Product Product improvement improvement and cost and cost cuttingcutting

Little product Little product differentiatiodifferentiationn

Cost Cost minimizationminimization

commonalitycommonality

Introduction Growth Maturity Decline

3636

New Product OpportunitiesNew Product Opportunities

1.1. Understanding the customerUnderstanding the customer

2.2. Technological changeTechnological change

3.3. Political/legal changePolitical/legal change

4.4. Market practice, professional standards, Market practice, professional standards, suppliers, distributorssuppliers, distributors

5.5. Developing new products faster can result in a Developing new products faster can result in a competitive advantagecompetitive advantage

3737

Quality Function DeploymentQuality Function Deployment

Identify customer wantsIdentify customer wants Identify how the good/service will satisfy Identify how the good/service will satisfy

customer wantscustomer wants Relate customer wants to product howsRelate customer wants to product hows Evaluate competing productsEvaluate competing products Compare performance to desirable technical Compare performance to desirable technical

attributesattributes

3838

Manufacturability andManufacturability and Value Engineering Value Engineering

Benefits:Benefits: Reduced complexity of productsReduced complexity of products Additional standardization of productsAdditional standardization of products Improved functional aspects of productImproved functional aspects of product Improved job design and job safetyImproved job design and job safety Improved maintainability (serviceability) of Improved maintainability (serviceability) of

the productthe product Robust designRobust design

3939

Issues for Product DevelopmentIssues for Product Development

Robust designRobust design Modular designModular design Computer-aided design (CAD)Computer-aided design (CAD) Computer-aided manufacturing (CAM)Computer-aided manufacturing (CAM) Virtual reality technologyVirtual reality technology Value analysisValue analysis Environmentally friendly designEnvironmentally friendly design

4040

Defining The ProductDefining The Product

First definition is in terms of functionsFirst definition is in terms of functions specifications are developed during specifications are developed during

the design phasethe design phase Manufactured products will have an Manufactured products will have an

engineering drawingengineering drawing Bill of material (BOM) lists the Bill of material (BOM) lists the

components of a productcomponents of a product

4141

Engineering drawingEngineering drawing

Shows dimensionsShows dimensions

Bill of Material Bill of Material

Lists components, quantities and where Lists components, quantities and where usedused

Shows product structureShows product structure

Product DocumentsProduct Documents

4242

Service DesignService Design

Service typically includes direct interaction Service typically includes direct interaction with the customerwith the customer Increased opportunity for Increased opportunity for

customizationcustomization Reduced productivityReduced productivity

Cost and quality are still determined at the Cost and quality are still determined at the design stagedesign stage Delay customizationDelay customization ModularizationModularization Reduce customer interaction, often Reduce customer interaction, often

through automationthrough automation

4343

Chapter 6 – Chapter 6 – Managing QualityManaging Quality

4444

Defining QualityDefining Quality

The totality of features and The totality of features and characteristics of a product or characteristics of a product or

service that bears on its ability to service that bears on its ability to satisfy stated or implied needssatisfy stated or implied needs

American Society for QualityAmerican Society for Quality

4545

Quality and StrategyQuality and Strategy

Managing quality supports Managing quality supports differentiation, low cost, differentiation, low cost, and response strategiesand response strategies

Quality helps firms increase Quality helps firms increase sales and reduce costssales and reduce costs

Building a quality Building a quality organization is a demanding organization is a demanding tasktask

4646

The Flow of ActivitiesThe Flow of Activities

Organizational PracticesLeadership, Mission statement, Effective operating procedures, Staff support, TrainingYields: What is important and what is to be

accomplished

Quality PrinciplesCustomer focus, Continuous improvement, Benchmarking, Just-in-time, Tools of TQMYields: How to do what is important and to be

accomplished

Employee FulfillmentEmpowerment, Organizational commitmentYields: Employee attitudes that can accomplish

what is importantCustomer SatisfactionWinning orders, Repeat customersYields: An effective organization with

a competitive advantage

4747

Different ViewsDifferent Views

User-based – better performance, User-based – better performance, more featuresmore features

Manufacturing-based – conformance Manufacturing-based – conformance to standards, making it right the first to standards, making it right the first timetime

Product-based – specific and Product-based – specific and measurable attributes of the product measurable attributes of the product

4848

Implications of QualityImplications of Quality

Company reputationCompany reputation Perception of new productsPerception of new products Employment practicesEmployment practices Supplier relationsSupplier relations

Product liabilityProduct liability Reduce riskReduce risk

Global implicationsGlobal implications Improved ability to competeImproved ability to compete

4949

Key Dimensions of QualityKey Dimensions of QualityKey Dimensions of QualityKey Dimensions of Quality

PerformancePerformance FeaturesFeatures ReliabilityReliability ConformanceConformance

DurabilityDurability ServiceabilityServiceability AestheticsAesthetics Perceived qualityPerceived quality ValueValue

5050

Costs of QualityCosts of Quality

Prevention costs - reducing the Prevention costs - reducing the potential for defectspotential for defects

Appraisal costs - evaluating Appraisal costs - evaluating products, parts, and servicesproducts, parts, and services

Internal failure - producing Internal failure - producing defective parts or service before defective parts or service before deliverydelivery

External costs - defects discovered External costs - defects discovered after delivery after delivery

5151

TQMTQM

Total Quality is a description of the Total Quality is a description of the cultureculture, , attitudeattitude and and organizationorganization of a company of a company that strives to provide customers with that strives to provide customers with products and services that satisfy their products and services that satisfy their needs. It covers entire organization, from needs. It covers entire organization, from supplier to customersupplier to customer

Requires commitment by managements Requires commitment by managements toward excellence in all aspects of toward excellence in all aspects of products and services that are important products and services that are important to the customerto the customer

5252

Seven Concepts of TQMSeven Concepts of TQM

Continuous improvementContinuous improvement Six SigmaSix Sigma Employee empowermentEmployee empowerment BenchmarkingBenchmarking Just-in-time (JIT)Just-in-time (JIT) Taguchi conceptsTaguchi concepts Knowledge of TQM toolsKnowledge of TQM tools

5353

Continuous ImprovementContinuous Improvement

Represents continual improvement of all Represents continual improvement of all processes processes

Involves all operations and work centers Involves all operations and work centers including suppliers and customersincluding suppliers and customers People, Equipment, Materials, People, Equipment, Materials,

ProceduresProcedures

5454

Six SigmaSix Sigma

Two meaningsTwo meanings Statistical definition of a process Statistical definition of a process

that is 99.9997% capable, 3.4 that is 99.9997% capable, 3.4 defects per million opportunities defects per million opportunities (DPMO)(DPMO)

A program designed to reduce A program designed to reduce defects, lower costs, and improve defects, lower costs, and improve customer satisfactioncustomer satisfaction

5555

Employee EmpowermentEmployee Empowerment

Getting employees involved in product and process Getting employees involved in product and process improvementsimprovements

TechniquesTechniques Build communication networks Build communication networks

that include employeesthat include employees Develop open, supportive supervisorsDevelop open, supportive supervisors Move responsibility to employeesMove responsibility to employees

5656

Quality CirclesQuality Circles

Group of employees who meet regularly Group of employees who meet regularly to solve problemsto solve problems

Trained in planning, problem solving, and Trained in planning, problem solving, and statistical methodsstatistical methods

Very effective when done properlyVery effective when done properly

5757

BenchmarkingBenchmarking

Determine what to Determine what to benchmarkbenchmark

Form a benchmark teamForm a benchmark team Identify benchmarking Identify benchmarking

partnerspartners Collect and analyze Collect and analyze

benchmarking informationbenchmarking information Take action to match or exceed Take action to match or exceed

the benchmarkthe benchmark

5858

Just-in-Time (JIT)Just-in-Time (JIT)

Relationship to quality:Relationship to quality:

JIT cuts the cost of qualityJIT cuts the cost of quality JIT improves qualityJIT improves quality Better quality means less Better quality means less

inventory and better, easier-to-inventory and better, easier-to-employ JIT systememploy JIT system

5959

Taguchi ConceptsTaguchi Concepts

Engineering and experimental design Engineering and experimental design methods to improve product and methods to improve product and process designprocess design

6060

Tools of TQMTools of TQM

Tools for Generating IdeasTools for Generating IdeasCheck sheetsCheck sheetsScatter diagramsScatter diagramsCause-and-effect diagramsCause-and-effect diagrams

Tools to Organize the DataTools to Organize the DataPareto chartsPareto chartsFlowchartsFlowcharts

Tools for Identifying ProblemsTools for Identifying ProblemsHistogramHistogramStatistical process control chartStatistical process control chart

6161

InspectionInspection

Involves examining items to see if an Involves examining items to see if an item is good or defectiveitem is good or defective

Detect a defective productDetect a defective product Does not correct deficiencies in Does not correct deficiencies in

process or productprocess or product It is expensiveIt is expensive

IssuesIssues When to inspectWhen to inspect Where in process to inspectWhere in process to inspect

It is necessary for both services It is necessary for both services and good industry.and good industry.

6262

Chapter 11 – Chapter 11 – Supply Chain Supply Chain ManagementManagement

6363

The Supply ChainThe Supply Chain

Supply chain management is the Supply chain management is the integration of the activities that procure integration of the activities that procure materials and services, transform them materials and services, transform them into intermediate goods and the final into intermediate goods and the final

product, and deliver them to customersproduct, and deliver them to customers

6464

Supply Chain ManagementSupply Chain Management

1.1. Transportation vendorsTransportation vendors

2.2. Credit and cash transfersCredit and cash transfers

3.3. SuppliersSuppliers

4.4. Distributors Distributors

5.5. Accounts payable and receivableAccounts payable and receivable

6.6. Warehousing and inventoryWarehousing and inventory

7.7. Order fulfillmentOrder fulfillment

8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and production informationproduction information

6565

Make-or-Buy DecisionsMake-or-Buy Decisions

1.1. Maintain core competenceMaintain core competence

2.2. Lower production costLower production cost

3.3. Unsuitable suppliersUnsuitable suppliers

4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)

5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities

6.6. Obtain desired qualityObtain desired quality

7.7. Remove supplier collusionRemove supplier collusion

8.8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive commitment for a suppliercommitment for a supplier

9.9. Protect personnel from a layoffProtect personnel from a layoff

10.10. Protect proprietary design or qualityProtect proprietary design or quality

11.11. Increase or maintain size of companyIncrease or maintain size of company

Reasons for MakingReasons for Making

6666

Make-or-Buy DecisionsMake-or-Buy Decisions

1.1. Frees management to deal with its core Frees management to deal with its core competencecompetence

2.2. Lower acquisition costLower acquisition cost

3.3. Preserve supplier commitmentPreserve supplier commitment

4.4. Obtain technical or management abilityObtain technical or management ability

5.5. Inadequate capacityInadequate capacity

6.6. Reduce inventory costsReduce inventory costs

7.7. Ensure alternative sourcesEnsure alternative sources

8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources

9.9. ReciprocityReciprocity

10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret

Reasons for BuyingReasons for Buying

6767

OutsourcingOutsourcing

Transfers traditional internal Transfers traditional internal activities and resources of a firm to activities and resources of a firm to outside vendorsoutside vendors

Firms outsource information Firms outsource information technology, accounting, legal, technology, accounting, legal, logistics, and productionlogistics, and production

6868

Supply Chain StrategiesSupply Chain Strategies

Negotiating with many suppliersNegotiating with many suppliers

Long-term partnering with few Long-term partnering with few supplierssuppliers

Virtual companies that use Virtual companies that use suppliers on an as needed basissuppliers on an as needed basis

6969

Vertical IntegrationVertical Integration

Figure 11.2Figure 11.2

Raw material (suppliers)Raw material (suppliers)Iron oreIron ore SiliconSilicon FarmingFarming

Backward integrationBackward integrationSteelSteel

Current transformationCurrent transformationAutomobilesAutomobiles Integrated circuitsIntegrated circuits Flour millingFlour milling

Forward integrationForward integration Distribution systemsDistribution systems Circuit boardsCircuit boards

Finished goods Finished goods (customers)(customers) DealersDealers Computers Watches Computers Watches

CalculatorsCalculators Baked goodsBaked goods

Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration

7070

Virtual CompaniesVirtual Companies

Rely on a variety of supplier Rely on a variety of supplier relationships to provide services on relationships to provide services on demanddemand

Fluid organizational boundaries that Fluid organizational boundaries that allow the creation of unique enterprises allow the creation of unique enterprises to meet changing market demandsto meet changing market demands

Exceptionally lean performance, low Exceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed

7171

Vendor SelectionVendor Selection

Vendor evaluationVendor evaluation Find potential vendorsFind potential vendors

Determine the likelihood of them Determine the likelihood of them becoming good suppliersbecoming good suppliers

Vendor DevelopmentVendor Development TrainingTraining

Engineering and production helpEngineering and production help

Establish policies and proceduresEstablish policies and procedures

7272

Vendor SelectionVendor Selection

NegotiationsNegotiations Cost-Based Price Model Cost-Based Price Model - supplier - supplier

opens books to purchaseropens books to purchaser

Market-Based Price ModelMarket-Based Price Model - price - price based on published, auction, or based on published, auction, or indexed priceindexed price

Competitive BiddingCompetitive Bidding - used for - used for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships establishing long-term relationships difficultdifficult

7373

Distribution SystemsDistribution Systems

TruckingTrucking

Moves the vast majority of Moves the vast majority of manufactured goodsmanufactured goods

RailroadsRailroads

Capable of carrying large loadsCapable of carrying large loads

AirfreightAirfreight

Fast and flexible for light loadsFast and flexible for light loads

May be expensiveMay be expensive

WaterwaysWaterways

Typically used for bulky, low-value Typically used for bulky, low-value cargocargo

7474

Distribution SystemsDistribution Systems

PipelinesPipelines Used for transporting oil, gas, Used for transporting oil, gas,

and other chemical productsand other chemical products

7575

Chapter 12 – Chapter 12 – Inventory Inventory ManagementManagement

7676

InventoryInventory

One of the most expensive assets One of the most expensive assets of many companies representing as of many companies representing as much as 50% of total invested much as 50% of total invested capitalcapital

Operations managers must balance Operations managers must balance inventory investment and customer inventory investment and customer serviceservice

7777

Functions of InventoryFunctions of Inventory

1.1. To separate various parts of the production To separate various parts of the production processprocess

2.2. To save firm from fluctuations in demand and To save firm from fluctuations in demand and provide a stock of goods that will provide a provide a stock of goods that will provide a selection for customersselection for customers

3.3. To take advantage of quantity discountsTo take advantage of quantity discounts

4.4. To hedge against inflationTo hedge against inflation

7878

Types of InventoryTypes of Inventory

Raw materialRaw material Purchased but not processedPurchased but not processed

Work-in-processWork-in-process Undergone some change but not completedUndergone some change but not completed A function of cycle time for a productA function of cycle time for a product

Maintenance/repair/operating (MRO)Maintenance/repair/operating (MRO) Necessary to keep machinery and processes Necessary to keep machinery and processes

productiveproductive

Finished goodsFinished goods Completed product awaiting shipmentCompleted product awaiting shipment

7979

ABC AnalysisABC Analysis

ABC analysis is a business term used to define an inventory categorization technique often used in material management.

Analysis of a range of items which have different levels of significance and should be handled or controlled differently.

8080

When carrying out an ABC analysis, inventory When carrying out an ABC analysis, inventory items are valueditems are valued with the results then ranked.

"A class" inventory will typically contain "A class" inventory will typically contain items that account for 80% of total value, items that account for 80% of total value, or 20% of total items.or 20% of total items.

"B class" inventory will have around 15% "B class" inventory will have around 15% of total value, or 30% of total items.of total value, or 30% of total items.

"C class" inventory will account for the "C class" inventory will account for the remaining 5%, or 50% of total items.remaining 5%, or 50% of total items.

ABC AnalysisABC Analysis

8181

Record AccuracyRecord Accuracy

Accurate records are a critical ingredient Accurate records are a critical ingredient in production and inventory systemsin production and inventory systems

Allows organization to focus on what is Allows organization to focus on what is neededneeded

Necessary to make precise decisions Necessary to make precise decisions about ordering, scheduling, and shippingabout ordering, scheduling, and shipping

Incoming and outgoing record keeping Incoming and outgoing record keeping must be accuratemust be accurate

Stockrooms should be secureStockrooms should be secure

8282

Holding, Ordering, and Setup Holding, Ordering, and Setup CostsCosts

Holding costs - Holding costs - holding costholding cost is money spent is money spent to keep and maintain a stock of goods in to keep and maintain a stock of goods in storagestorage (rent, space, insurance and security)

Ordering costs - the costs of placing an order Ordering costs - the costs of placing an order and receiving goodsand receiving goods

Setup costs - cost to prepare a machine or Setup costs - cost to prepare a machine or process for manufacturing an orderprocess for manufacturing an order

8383

Cycle CountingCycle Counting

Items are counted and records updated Items are counted and records updated on a periodic basison a periodic basis

Often used with ABC analysis Often used with ABC analysis to determine cycleto determine cycle

Has several advantagesHas several advantages Eliminates shutdowns and interruptionsEliminates shutdowns and interruptions

Eliminates annual inventory adjustmentEliminates annual inventory adjustment

Trained personnel audit inventory accuracyTrained personnel audit inventory accuracy

Allows causes of errors to be identified and Allows causes of errors to be identified and correctedcorrected

Maintains accurate inventory recordsMaintains accurate inventory records

8484

Independent Versus Independent Versus Dependent DemandDependent Demand

Independent demand - the Independent demand - the demand for item is independent demand for item is independent of the demand for any other of the demand for any other item in inventoryitem in inventory

Dependent demand - the Dependent demand - the demand for item is dependent demand for item is dependent upon the demand for some upon the demand for some other item in the inventoryother item in the inventory

8585

Inventory Models for Inventory Models for Independent DemandIndependent Demand

Basic economic order quantityBasic economic order quantity

Production order quantityProduction order quantity

Quantity discount modelQuantity discount model

8686

Basic EOQ ModelBasic EOQ Model

The ordering cost is constant.The ordering cost is constant.

The rate of demand is constantThe rate of demand is constant

The lead time is fixedThe lead time is fixed

The purchase price of the item is constant i.e no discount is The purchase price of the item is constant i.e no discount is

availableavailable

The replenishment is made instantaneously, the whole batch The replenishment is made instantaneously, the whole batch

is delivered at once.is delivered at once.

Economic order quantityEconomic order quantity is the level of is the level of inventory that minimizes the total inventory inventory that minimizes the total inventory holding costs and ordering costs.holding costs and ordering costs.

Assumptions :

8787

Reorder PointsReorder Points

Inventory level of an item Inventory level of an item which signals the need for which signals the need for placement of a replenishment order., placement of a replenishment order., taking into account taking into account the consumption of the item the consumption of the item during order lead time and during order lead time and the quantitu required for safety the quantitu required for safety stock.stock.

8888

Production Order Quantity Production Order Quantity ModelModel

Used when units are produced Used when units are produced and sold simultaneouslyand sold simultaneously

8989

Inve

nto

ry l

evel

Inve

nto

ry l

evel

TimeTime

Demand part of cycle Demand part of cycle with no productionwith no production

Part of inventory cycle during Part of inventory cycle during which production (and usage) which production (and usage) is taking placeis taking place

tt

Maximum Maximum inventoryinventory

Production Order Quantity ModelProduction Order Quantity Model

9090

Quantity Discount ModelsQuantity Discount Models

Reduced prices are often available when Reduced prices are often available when larger quantities are purchasedlarger quantities are purchased

TC = S + H + PDTC = S + H + PDDDQQ

QQ22

9191

Safety StockSafety Stock

Use safety stock to achieve a desired Use safety stock to achieve a desired service level and avoid stockoutsservice level and avoid stockouts

ROP ROP == d x L d x L + + ssss

9292

Chapter 13 – Chapter 13 – Aggregate PlanningAggregate Planning

9393

Aggregate PlanningAggregate Planning

Aggregate planningAggregate planning is is an operational activity which does an an operational activity which does an aggregate plan for the productions process, in aggregate plan for the productions process, in advance of 2 to 18 months, to give an idea advance of 2 to 18 months, to give an idea to management as to what quantity of to management as to what quantity of materials and other resources are to be materials and other resources are to be procured and whenprocured and when.

9494

Aggregate planning has certain prerequisite inputs which Aggregate planning has certain prerequisite inputs which

are inevitable. They include:are inevitable. They include:

Information about the resources and the facilities Information about the resources and the facilities

available.available.

Demans forecast for the period for which the planning Demans forecast for the period for which the planning

has to be done.has to be done.

Cost of various alternatives and resources. This Cost of various alternatives and resources. This

includes cost of holding inventory, ordering cost, cost includes cost of holding inventory, ordering cost, cost

of production through various production alternativesof production through various production alternatives

Aggregate PlanningAggregate Planning

9595

The Planning ProcessThe Planning Process

Long-range plans (over one year)Research and DevelopmentNew product plansCapital investmentsFacility location/expansion

Intermediate-range plans (3 to 18 months)Sales planningProduction planning and budgetingSetting employment, inventory,

subcontracting levelsAnalyzing operating plans

Short-range plans (up to 3 months)Job assignmentsOrderingJob schedulingDispatchingOvertimePart-time help

Top executives

Operations managers

Operations managers, supervisors, foremen

ResponsibilityResponsibility Planning tasks and horizonPlanning tasks and horizon

9696

Aggregate Planning StrategiesAggregate Planning Strategies

1.1. Use inventories to absorb changes in Use inventories to absorb changes in demanddemand

2.2. Accommodate changes by varying Accommodate changes by varying workforce sizeworkforce size

3.3. Use part-timers, overtime, or idle time to Use part-timers, overtime, or idle time to absorb changesabsorb changes

4.4. Use subcontractorsUse subcontractors

5.5. Change prices or other factors to Change prices or other factors to influence demandinfluence demand

9797

Aggregate Planning OptionsAggregate Planning Options

OptionOption AdvantagesAdvantages DisadvantagesDisadvantages

Changing Changing inventory levelsinventory levels

Changes in human Changes in human resources.resources.

Inventory holding Inventory holding cost may increase. cost may increase. Shortages may Shortages may result in lost sales.result in lost sales.

Varying Varying workforce size workforce size by hiring or by hiring or layoffslayoffs

Avoids the costs of Avoids the costs of other alternatives.other alternatives.

Hiring, layoff, and Hiring, layoff, and training costs may training costs may be significant.be significant.

9898

Option Advantages Disadvantages

Varying production rates through overtime or idle time

Matches seasonal fluctuations without hiring/ training costs.

Overtime premiums; tired workers; may not meet demand.

Sub-contracting

Permits flexibility and smoothing of the firm’s output.

Loss of quality control; reduced profits; loss of future business.


9999


Using part-time workers

Is less costly and more flexible than full-time workers.

High turnover/ training costs; quality suffers; scheduling difficult.

Influencing demand

Tries to use excess capacity. Discounts draw new customers.

Uncertainty in demand. Hard to match demand to supply exactly.


100100


Back ordering during high-demand periods

May avoid overtime. Keeps capacity constant.

Customer must be willing to wait, but goodwill is lost.


101101

Summary of Aggregate Planning Summary of Aggregate Planning MethodsMethods

TechniquesSolution

Approaches Important Aspects

Graphicalmethods

Trial and error Simple to understand and easy to use. Many solutions; one chosen may not be optimal.

Transportation method of linear programming

Optimization LP software available; permits sensitivity analysis and new constraints; linear functions may not be realistic.

102102

TechniquesSolution

Approaches Important Aspects

Simulation Change parameters

Complex; may be difficult to build and for managers to understand.

Summary of Aggregate Planning Summary of Aggregate Planning MethodsMethods

103103

Yield ManagementYield Management

Yield managementYield management, also known as , also known as revenue revenue managementmanagement, is the process of understanding, , is the process of understanding, anticipating and influencing consumer anticipating and influencing consumer behavior in order to maximize revenue or profitsbehavior in order to maximize revenue or profits

(such as airline seats or hotel room reservations)(such as airline seats or hotel room reservations)

The challenge is to sell the right resources to the right customer at the right time for the right price.

104104

Yield Management MatrixYield Management Matrix

Du

rati

on

of

use

Un

pre

dic

tab

le

Pre

dic

tab

le

Price

Tend to be fixed Tend to be variable

Quadrant 1: Quadrant 2:

Movies HotelsStadiums/arenas Airlines

Convention centers Rental carsHotel meeting space Cruise lines

Quadrant 3: Quadrant 4:

Restaurants Continuing careGolf courses hospitals

Internet serviceproviders

105105

Chapter 14 – Chapter 14 – Material Material Requirements Requirements Planning (MRP) and Planning (MRP) and ERPERP

106106

MRPMRP

1.1. Better response to customer ordersBetter response to customer orders

2.2. Faster response to market changesFaster response to market changes

3.3. Improved utilization of facilities and laborImproved utilization of facilities and labor

4.4. Reduced inventory levelsReduced inventory levels

Material Requirements Planning (MRP) is a software based production planning and inventory control system used to manage manufacturing processes.

BenefitsBenefits

107107

An MRP system is intended to simultaneously An MRP system is intended to simultaneously meet three objectives:meet three objectives:

Ensure material and products are available for Ensure material and products are available for productions and delivery to customers.productions and delivery to customers.

Maintain the lowest possible level of inventory.Maintain the lowest possible level of inventory. Plan manufacturing activities and purchasing Plan manufacturing activities and purchasing

activities.activities.

108108

Dependent DemandDependent Demand

The demand for one item is related The demand for one item is related to the demand for another itemto the demand for another item

In general, used whenever a In general, used whenever a schedule can be established for an schedule can be established for an itemitem

MRP is the common techniqueMRP is the common technique

109109

Dependent DemandDependent Demand

1.1. Master production scheduleMaster production schedule

2.2. Specifications or bill of materialSpecifications or bill of material

3.3. Inventory availabilityInventory availability

4.4. Purchase orders outstandingPurchase orders outstanding

5.5. Lead timesLead times

Effective use of dependent demand Effective use of dependent demand inventory models requires the inventory models requires the followingfollowing

110110

Master Production Schedule Master Production Schedule (MPS)(MPS)

A Master Production Schedule (MPS) is a A Master Production Schedule (MPS) is a plan for production, staffing, inventory, plan for production, staffing, inventory, etcetc

Specifies what is to be made and whenSpecifies what is to be made and when Inputs from financial plans, customer Inputs from financial plans, customer

demand, engineering, supplier demand, engineering, supplier performanceperformance

It helps to forecast demand, production It helps to forecast demand, production costs, inventory costs, lead time,costs, inventory costs, lead time,

The MPS is the result of the production The MPS is the result of the production planning processplanning process

111111

Master Production Schedule (MPS)Master Production Schedule (MPS)

112112


Figure 14.1Figure 14.1

Change production

plan?Master production schedule

ManagementReturn oninvestmentCapital

EngineeringDesigncompletion

Aggregate production

plan

ProcurementSupplierperformance

Human resourcesManpowerplanning

ProductionCapacityInventory

MarketingCustomerdemand

FinanceCash flow

113113


Is capacity plan being

met?

Is execution

meeting the plan?

Change master

production schedule?

Change capacity?

Change requirements?

NoNo

Execute material plans

Execute capacity plans

Yes

Realistic?

Capacity requirements plan

Material requirements plan

Master production schedule

114114

Focus for Different Focus for Different Process StrategiesProcess Strategies

Stock to ForecastStock to Forecast

(Product Focus)(Product Focus)

Schedule finished product

Assemble to Order Assemble to Order or Forecastor Forecast(Repetitive)(Repetitive)

Schedule modules

Make to OrderMake to Order

(Process Focus)(Process Focus)

Schedule orders

Examples: Print shop Motorcycles Steel, Beer, BreadMachine shop Autos, TVs Lightbulbs

Fine-dining restaurant Fast-food restaurant Paper

Typical focus of the Typical focus of the master production master production

scheduleschedule

Number of Number of end itemsend items

Number of Number of inputsinputs

115115

A customer order in a job shop (make-A customer order in a job shop (make-to-order) companyto-order) company

Modules in a repetitive (assemble-to-Modules in a repetitive (assemble-to-order or forecast) companyorder or forecast) company

An end item in a continuous (stock-to-An end item in a continuous (stock-to-forecast) companyforecast) company

Can be expressed in any of the Can be expressed in any of the following terms:following terms:

Master Production Schedule (MPS)Master Production Schedule (MPS)

116116

Bills of MaterialBills of Material

List of components, ingredients, List of components, ingredients, and materials needed to make and materials needed to make product product

Provides product structureProvides product structure Items above given level are called Items above given level are called

parentsparents

Items below given level are called Items below given level are called childrenchildren

117117

Modular BillsModular Bills Modules are not final products but Modules are not final products but

components that can be assembled components that can be assembled into multiple end itemsinto multiple end items

Can significantly simplify planning Can significantly simplify planning and schedulingand scheduling

Bills of MaterialBills of Material

118118

Accurate RecordsAccurate Records

Accurate inventory records are Accurate inventory records are absolutely required for MRP (or absolutely required for MRP (or any dependent demand system) to any dependent demand system) to operate correctlyoperate correctly

Generally MRP systems require Generally MRP systems require 99% accuracy99% accuracy

Outstanding purchase orders must Outstanding purchase orders must accurately reflect quantities and accurately reflect quantities and scheduled receipts scheduled receipts

119119

Lead TimesLead Times

The time required to purchase, The time required to purchase, produce, or assemble an itemproduce, or assemble an item For production – the sum of the For production – the sum of the

order, wait, move, setup, store, order, wait, move, setup, store, and run timesand run times

For purchased items – the time For purchased items – the time between the recognition of a need between the recognition of a need and the availability of the item for and the availability of the item for productionproduction

120120

ERPERP

Enterprise resource planningEnterprise resource planning ( (ERPERP) is a ) is a company-wide computer software system used to company-wide computer software system used to manage and coordinate all the resources, manage and coordinate all the resources, information, and functions of a business from information, and functions of a business from shared data stores.shared data stores.

Operation Management

Business

Transcript of Operation Management