Plenert 2000 International Operations Management

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1. Operations Management

meetingZ,Inc.Z, Inc. is a multi nati onal conglom erate wrhich is primarily a produc-

er of hearne-duty const ruction eq uipment, like earth mo vers,

graders, and haulers. Their headquarters is in Jackson, Alich igan,and one of their manufacturing facil it ies at this location produces

transmissians. Although transmission production is somewhat out-side of their core competency, the plant has been successful for Z,

Inc. in the past. This production faci lity divaspart of their diversifica-

tion program where they attempted to make sure they had support-ing industries outside af their core competency that cauld protect

their cash-flaav.

Transmission production is extremely labor intensive, resulting ina value-added labor contribution of about 20 percent. Labor rates

in the Jackson, Alichigan area were some of the highest in the na-

tion, primar ily because of the large union inAuence in the area. The

plant was about 30 years old and a )ot of the equipmentwas out ofdate. This caused the labor intensity to be even higher than normal.An updated plant would increase automation and therefore, it divas

believed, would increase quality and reduce lead time. An updated

plant coul d be do ne in severalwais, either by improving the au-

tomation in the existing facility, r by completely replacing the fa-

cility. Either way, Z, Inc. anticipated resistancefrom the union be-cause there xvould be a reduction in the current v;ork force due ta

the automation. At a board meeting of the Z company, the falloiv-

ing conversation took place:

Baard Member ZA (com men ts arebeing directed at the CEO):"The transmission facility is again shavving a ha]f-million dollar lass

for the month. The PAL (Profit and Loss) report for the plantsllo% rs:

Plenert, Gerhard J.. International Operations ManagementCopenhagen,, DNK Copenhagen Business School Press, 2002. p 33http: //site.ebrary.corn/fib/unorte/Docoid=10026359&ppg=33Copyright 2002 Copenhagen Business School Press. All rights Reserved

May not be reproduced in any form without permission from the publisher, except fair uses permitted under U S. or applicable copyright law.


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Sales 5 9,500,000Labor Expense I 2,000,000

Materials Expense I 4e000,000

Equipment Expense $1,000,000

Overhead Expense S 3,000,000.

XVe're loosing ground with this plant."

Board %member ZB. "I agree.'5'e need a recommendation on hoav

to handle the transmission business. Are ive outside of our experti-

se?Or, is there a svay to turn this faci lity prof it able again?"

The CEO wa s le ft wi th th e t ask of o r ganizing a recom-mendation.' Before we look too closely at the Z, Inc.'s problem, let' s

review some of the basics of operations management. The purposeof this review is to standardize on termino logy, svhich can often be

quite inconsistent throughout the operations management industry.

Some Basic Operations ManagementTerminology and Concepts

There are three levels of management:

Strategic h,1anagement

Tactical Management

Ope rat ional A lanagement.

Strategicmanagement focuseson planning and developing thebu-siness as a svhole. Typical Iob t it les inc lude the Board of Directors

I. As part of the discussion throughout this chapter and the rest of the book, tvc

will take further visits into the CEO's conversations and his analysis process.At thc same time, you (thc reader) arc invited to formulate your oNn opin-ions and recommendations on how Z, Inc.'s transmission production should

be handled. Th>s case and many others in th is book arc based on actual expc-

r icnccs that thc author ve nt th ro ugh in his 20+ ye ars of operat ions manage-ment Ide has, hnivcver, changed th names of the company and the p~~plc.and has simplified the numbers, in order to protect the misguided. Tbc ac-tions that are taken in these cases arc not to bc considered the "right ansNcr"

or "correct solution." Ihcsc actions arc onc of many options and thcsc op-

tions v ill be considered as altcrnativcs throughout thc book.




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of trade-o8's.%'orld Class A?anagement wisdom suggests that thereis more positive synergy to be gained by focusing theseorganiza-tions on a common goal. Therefore, the critical part of the process

is to identify ivhat that goal should be. Chapter 3 will focus on a di-

scussion of goat-setting and discusses hoav critical thesegoah are tothe over-all successful performanceof the international organiza-tion

Once again sve see that this book focuses on the operations ma-

nagement function and takes a look at how this function is effected

when globalization occurs svithin the business. Globalization can re-

fer to:

International sourcing of product s

International production of the goods and.'or services

Int ern ational transportation of the productsInternational markets for the produ cts produced .

%'ithin the operations rnanagernent framework we see that there are

numerous types of industries. Each of these industries have diffe-

ring requirements for successful performa nce. For example, we see:

%'holesaling This process includes an extensive purchasing and

inventory management function. Packaging and shipping may

also be a large piece of operations management. Examples inclu-de the major shippersand resellers throughout the vvorld like Hy-undai of Korea.

Logistics This process involves routing management and loca-

tion tracking of products and equipment. For example,%'al iliartconsiders the lo gist ics func tion to be their competitive edge in

performanceby always having what the customer wants availablewhen the customer wants it. The airlines industry, as in the case

of Brit ish Ai rw ays or L u f th ansa, schedules not ju st passengers,

but also crewrs, meals, luggage, equipment maintenance, preven-

tive maintenance, ground support, airport schedules, etc... and isan extremely complexexampleof the logistics process xvhich ivillbe discussed in more detail in Chapter 9.

Retail ing llsis requires a pu rchasing and inventory rnanage-

rnent function, but may also inctude a production management




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Job Shop This is a discrete manufacturing facility that producescustomized products. The layout is similar to Cha rt l . l , b ut th e

flow of product can vary dramatically from one product to the

nest. Custom product shops like airplane manufacturers Airbus

or Boeing, or shipbuilders make excellent examples. Flow Di sc rete A1anufacturing This factory focuses onthe con-

tinuous movement of materials through the facility. The focus is

on the mini mization of mat er ials ivi thin the or ganization since

materials are considered to be th e cri ti cal high -cost resource in

this repetitive process. The assembly line or the Japanese JIT gu-st-in-Time) production process are examples of this tiptoe of ma-nufacturing environment (See Chart 1.2). Toyota manufacturingis the master of this process and another excellent example is the

Saturn facility in the L'nited States.

Each of these different operations environments requires it's own

specific set of tools, as >veil as some common tools, like inventory

management. In Chapter 5 ive will be discussing some of the alter-

native planning and control mechanisms, as well as a variety of in-

formation systems. These often vary dramatically in an international

envil ollme nt .

Chart J.2. Hotv Discrete.'lfanit facturittp

Process A Process (' Proc ess E

Plocess 8 Process D

The manufacturing i operations cycle is a flow systemand like all

systems, it contains the basic components of Input, Process, Out-put, and Feedback. In evaluating the operations cycle, as in all sy-stems, the key point of evaluation is the output, making sure that we

satisfy the information needs of the operational process. This evalu-

ation is followed by a close look at the input elements which assures




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A Littd History

us that the necessary data f' tools are available to create the output.

Last of all, ive look at the process tool which can take a variety of

forms (see Chart 1.3 and Chapter 5). This basic flow systemsrno-del will be followed throughout this book ~vhen planning options

are discussed. The key to selecting and developing a successful ope-rations management system is in mak in g sur e the results (output)

satisg the goals. That is why we vi ll s p e nd the ne xt fe av chapters

discussing goal and systems planning options.

Chart I. 3'. The Production.'Openrlions Aoeesstng Cycle

Illpllts Process Oulpllts

Change Conllot

Feedback

A Little History

As mentioned earlier, operations management goes back to the be-

ginning of man. However, looking into the more recent past, say 50

years, we find that the most dramatic changes have taken place du-

ring these feiv years of history.There are several reasons for these

changes. The first seems to be world%'ar II. Prior to%'O' II theoperations methodologies were primarily manual. Tools like EOQ

(Economic Order Quantity), LP (Linear Programming}, and the 2-Bin system were considered to be "state of the art". Short ly after

%'orld%''ar II the computer became available, which created compu-tationally over-burdenedsystems like6iRP and PERT,'CP ili (Pro-ject Evaluation and Review Technique /' Critical Path AIeth odol ogy)

feasible. Also, after this war, the Japanese >vere going th ro ugh a re-

construction of their industry in a country that had no natural re-




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sources, minimal cash flow, and lots of people. In order to g row

their industry, they had to bring materials into the country, convert

them to end products as quickly as possible, and ship them. Theydidn't care how many people it took because there was a plentiful

avork force. This materials efficiency focused strategy became theroots of ivhat is nosv knows' through out t he xvorld as Just-in-Time

{JIT).ll.eanwhile, during the same time as Japan's reconstruction and

the introduction of co mp ute rs, Israel was becoming a new na tio n

and also needed to develop new industries. Rather than copying

Europe or the L'SA they took advantage of their plentiful supply of

PhDs and decided to develop their own production methodology.

The result was the Optomizied Production Technology (OPT) (Theory of Constraints {TOC} philosophy which p romotedthe ideathat production eKciency was achieved through the successful ma-nagement of some operational ""bottleneck" xvithin the organization.

From Chart 1.4 we see the historical development of numerous

operational methodologies. XVe end up with pre%'orld IVar II opera-tions scheduling systems that had the following focus:

EOQ Economic Order Quantity (EOQ) is a planning systemfocused on managing inventory levels. EOQ is the most com-

monly used production planning philosophy because of it's sim-plicity and minimal data requirements.

LP Linear Programming is anoptimization process that facili-tatesoptimalroutings and loadings and minimizes costs. This canbe expanded thr ough the use of I nt eger Pro grammin g (I P) o r

Geometric Programm ing (GP) in more complez situations.

2-Bin This system is a simplistic volume based replenishment

v;hich requires no sophistication or automation but generally cre-

ates a lot of inventory.

These are systems that are still very much in use today, and so their

timelines continue through to the year 2000 and beyond. However,

afterworld'War II, sve had several events that would initiate the re-invention of POM m et h.odologies. Theseivere:




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astiI'l.tttiL.(~)I(I't

I'rolcclI;titluatton

adRt..iteii

Iet.ltniquLtI'J-.R

It

(tltlcBIIutill'Icllloilolonntin O~~'rations Afr icannk'i](

any number of things. Input can be varied so much so that anycompany or country can claim exceHent productivity, depending onhow it's measured. This international inconsistency in the definition

of what should be included as input also complicates comparisons

of productivity between countries and companies. It has gotten tothe point where th only effective comparisons that can be drawn

for productivity is to compare a company or country xvith itself overtime to see if it is improving.

arity.iu(P)'DEAL.' ll\'i fiP'

lripttr

In the W'estern countries, productivity almost always means labor

productivity. The Input in the productivity formula is either direct

labor hours or direct labor cost. Because of its focus on labor, theUnited States leads the world in productivity. But there are also dis-

advantages associated ivith labor productivity as a measure of natio-

nal productivity. fhe primary disadvantage is that labor is less than

ten percent of the value-added content of most manufactured pro-

ducts. Therefore, being labor effilcient doesn't necessarily mean that

the United States is producing product efficiently. Recently it has

been discovered that increasing labor productivity, in some cases,

can actual)y result in a loss of profitability, rather than an increase

of profit abil ity. For a more detailed discussion of this, issue, see

Chapter 3.

Ac'.ifSa jesPmchrr. li vi (l~- Dir ec(LoEmi Oortrso~ DijeeI Labor DoElors

Internationally, we find a multitude of measures of productivity per-

forrnance. For examples in Japan we find s everal producti vity m ea-

sures, one of which is value-added productivity. Value-addd pro-

ductivity focuses on getting as much increased value out of the pro-

duction process as possible. For example, as a Japanese producer

we are building a TV, and the TV h as a tu ner and po wer supply,each of ivhich costs 85 to produce.%7e can sell the tuner for $10 on

the open market. The 510 includes $5 of production costs and 55of increased value added.%'e can sell the popoversupply for on]y $7on the open market (only 52 of increased value added). W,'ewould




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get more value-added content out of producing the tuner, and havethe USA subcontractor produce the power supplies. Both countries

wou]d input 55 of productive effort, but for that effort theJapanesewou]d gain $5 of increased value added and the US would only

gain 52 of increased value added. It's easy to seesvhythe balance oftrade has tended to favor Japan using a value-added productivitycalculation.

A'et SalesProd)(c'.Ii I of Goo' Sold

Another popular productivity measure is Total Factor Productivity.

%Pith Total Factor Productivity, the input includes all the resource

elements that went into the production process. For example, mate-

rials costs, machine costs, and even overhead costs would be includ-ed along v,ith the labor costs. Total Factor Productivity is consider-

ed to be a mo re accu rate measure of the over all pro duc tiv ity of a

particular production environment.

Set SalesP!'udt! C I !1! tl /

Lcll?or+ .'1 faIc'.rial'+ EI Ier y + A fachtn!.'1'1'+t.'h.'.

Aiore recently, a measure of productivity known as Criti cal Re-source Productivity has become popu lar be cause it is easy to mea-

sure and fo cuses an organization on i t' s most eff ec tiv e area of irn-provement. For exam ple, in th e aut om ob ile ind ust ry, 7 to 10 pe r-cent of the va]ue added cost content of the vehicle is labor while 5t)

to 60 percent of the va]ue added cost content is in materials. Hen-

ce, materials is the critical resource (the dominant value addedcomponent) and,materials productivity is a lot more meaningfulthan labor productivity as a measure of operational performance.

The input used in this productivity equation is the critical resource

in the producti on pro cess. A more det ailed discussion of crit ical re-

sources is found in Chapters 3 and 4.

5'eI Sale>I-'roclitct! v! tl' -

CA'I!ca( Rc?Sot!!'c. c? (.osts




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The Rol of 2'l'Ir2sur&'>nntin O~~'ratioirs AfricanI lk ' i ]t 19

Productivity vill be a continuing discussion throughout this book.For example, in Z, Inc. productivi ty became a critical issue. Loss of

protectabilitycould have been blamed on a lack of Total Factor Pro-ductivity. How ~vould you focus Z, Inc .'s resources to turn i t' s P8;L

statement from red to black?

Efficiency

Efficiency is a minor measure of performance which is primarilyused to evaluate internal effectiveness. For example, in the United

States, labor ef fic iency is used to compare labor performance to a

standard. This comparison to standard ivould then be used to mea-

sure if and hov much of a performance bonus svould be paid out to

a particular employee. Anything over 100 '.4 svould constitute good

performance, and anything less than 100'ro would jus tify a repri-mand.

Stet))clat'cPTitr)eEf ficieitc.v - x 1 {!0

Actual Ti iree

Is efficiency a tool that Z, Inc. could use to improve their loss of

profitability? %'ouM efficiency be something that you xvould suspectis already being used by Z, Inc.?

Financial ~MeasuresFinancial measures of performance include protit and loss numbers

from the P8'L statement as favell as performance and liquidity ratiosfrom the Balance Sheet. Appendix A (at the end of the book) in-

cludes several of the most common p erformanceratios that areused for measuring international performance. The applicability

and use of many of these numbers is questioned internationally.Forexample, the Current Ratio is considered to be good the larger the

value it has.

t Total Ctirrent .Assets j(C~n t ertt Ratioj - ( T o ta l Ct tn ent D

ebts j




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However, Inventory reduction is also considered to be good.

That rnea/ns, as inventory goes down, the in ven tory asset rati o

would improve but the current ratio ~vould get worse. W'hich ratio is

the better measure of over-all corporate goal achievement?

(Toit(I br''HINDI'I')(Ir1 vc'.)1(oui,O'ser Rc>fto J

(To(a( Cue c'o( Assets)

There are numerous stories of companies v here the president re-

duced inventories only ta get repr ima nded by the Boar d of D ir ec t-

ors for a poor Current Ratio performance. The result, in most oft hese cases, divas that the pres ident ended up bu )i ng bac k th e in -

ventory, even tho ugh it wa s ope rationa lly ine ffi cient to do so. Re-

viesv the discussion of confli ct ing g oals in Chapter 3 .

Are conflicting financial and operational goals a factor in Z, Inc.'sperformance>

BencIr ma rII r'n g

Benchrnarking is a modern buzzword ivhich refers to comparative

measures of pe rfo rmance. There are two ty pes of Be nch markin g;

Internal and Ext ernal Benchmarking. In ternal Benchmarking iswhere you use several measures of yourself and retake those same

measures over time to see if you are improving. Internal Benchmark-

ing can also measure different facilities svithin the same companyagainst each other. E>'ternal Benchmarking is where you measure

your performance against that of someone else, like a competitor orlike the industry averages that are available for your specific industry,

2to seeho~v your performance measures up. External Benchrnarking

can also be used to referto a comparison of your use of

2. (inc of thc most popular tables of industrial ratios is thc Industry Norms and

Key Business Ratios put out by Dun and Br ad street In forma t ion Ser r iccs.This report will give all the average ratios, thc average profit and loss state-

ment, and the average balance sheet for one year for each Standard Industrial

Classification (SIC) code. It is available in most business libraries but not onthe wcb. C o nt act thc Bus iness Solut ions I) cpar tmcn t at v wvN'dnb.corn for

information about asailabi]ity.




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The Ro( of 2'l'Ir2sur&'>nntin O~~'rations Afarsapnk'J](

methodologies or to ol s and t ec hni ques when co mp ared to y ou r

competitors. Appendix A includes a collection of measures of per-formance and discusses their applicabi lit y.

'fX'ould Benchmarking be useful for Z, Inc.?

Other Operational iUeasures

'.hlumerous other measures of operational performance exist, many

of v, hich measure the same thing. For example:

Inventory Level

Inventory level has become a measure of p erformancein many or-ganizations, primarily because it is important in Japanese JIT pro-

duction. Hoavever, it is nat always a valuable measure of perform-ance if it is not a critical resource, as it is in the types of products

that the Japanese produce. The d iscussion. of crit ical r esources wi llbe expanded on in Chapter 4.

Inventory Turns

Inventory turns measures ho~v often inventory is used up and repla-

ced in one year. A high level of inventory turns is good since it sug-gests that you don't have a lot of inventory sitting around. Sitting

inventory is a resource svaste.

Throughput

Throughput is a measure of quality units shipped ta the customer.It incorporates a focus on quality and on delivered sales.It leaves

aut a measure of production since produced goods that are not

shipped is operationally inefficient and expensive.

Operating ExpenseOperating Expense measures the cost of running the factory floor in

aggregate. Often this measure is more meaningful when analyzedalong side of Th ro ughput. If O p era ting Expense goes up andThroughput doesn't, th en i t 's co sting us mo re to d o th e sam e

Plenert, Gerhard J.. International Operations ManagementCopenhagen,, DNK Copenhagen Business School Press, 2002. p 51http: //site.ebrary.corn/fib/unorte/Docoid=t 0026359&ppg=51Copyright 2002 Copenhagen Business School Press. All rights Reserved



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amount of business as before. A ratio of the two, called Throughput

Performance, givesus a measure of comparative performance. Themore the number grows, the better.

(Total ls)velttopl')(Iltvef1tot'\3AS''.t Ratto)(Total Crrn ent Assets)

Integration

Integration is. a measure of internal performance. It is a measure of

hoav effective the comm un ication channels svorkwithin an organiza-

tion. There are numerous ways of measuring integration which in-

clude:

Number of Cress-Functional Teams

Level of Integration %within TeamsNumber of TeamImplementedInnovations.

Cycle Time

Cycle Time is a measure of the amount of time it takes to process

an order, fron> start to finish. Reduced cycle time means increased

responsiveness to customer requirements and reduced in-processinventory levels. This ivould increase inventory turns. The Japaneseuse Cycle Time as a measure of p erformancebecause responsive-ness and reduced inventor y are both g oals of the JIT process and a

cycle time iTteasurement i mp ro vement is easi ly communicable to

employees. Cycle Time readily demonstrates an accomplishment of

all goals. For ex amp le, Toyota has a Cycle Time for automobi le

3. Custom er responsiveness can bc in crc ascd by inc reasing tLnished goods in-ventory. Howcwxrs by reducing the cycle time sufficiently, cvcn carryingfinished goods inventory can bc a liability because of it's increased carryingcost Ultimately, if wc only had to keep raiv materials inventory, and all otherlevels of inventory are committed to specific customer orders, ave would mi-nimize inventory costs.




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production of three hours. They produce a car from start to finishin three hours. The Cycle Time for American and European automanufacturers is measured in weeks and in some plants even in

months. Inventory tu rns every four ho ur s at Toy ota so that, over

two shifts, the inv entory tu rns nu mb ers are over 1M O t ur ns pe ryear. A good inventory turns number for American or European au-to manufactu rers svould be 10 tur ns per year.

Another form of cycle time that is "Product Development Cycle

Time". Here we focus on the time it takes from the conceptualiza-

tion of a new product idea, to it's being available to the customer.

Responsiveness in this area is critical for the products that require

fast responsiveness, for example, the fad fashions in the apparel in-

dustry.

A third for m o f c yc le time has gained extensive popularity be-

cause of the eCommerce push. This is the cash-to-cash cycle time .This forin of cycle time tracks the time from u hen an order is recei-

ved, until the product is paid for.%'hen considering internet speed

and responsiveness, we also need to take a close look at the financial

responsiveness of the internet transaction. For example, in the corn-

puter industry, the average cash-to-cash cycle time is 106 days and

the best of classcycle time is 21 da>s. That means that on the aver-

age, the cash for salesis tied up for about 3 'A months. The carryingcost of financing this inventory can be devastating to a computer

equipment supplier. That is why the Dell Computer model for pur-

chasing equipment on-line has become so attractive. Dell compu-ters has managed to reduce the cash-to-cash cycle time to a nega-

tive S days. They have turned the tide to ivhere they are operating

on the customers' money. It then comes as no surprise that Dell can

se'll equipment for significantly lessthan other computer equipment

vendors.

Back to Z, Inc.

Do they need operational measures of performance? %'hich mea-sures do they need.' Should Z's CEO analyze these measures prior

to making a recommendation for Z's future? Or should the Z, Inc.decision be primarily a fj.nancial one.'

This section discussing measurement systems raises more ques-

Plenert, Gerhard J.. International Operations ManagementCopenhagen,, DNK Copenhagen Business School Press, 2002. p 53

Plenert 2000 International Operations Management

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