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What is operations management? What does it encompass?
Operations Management:The design, direction and control of the processes that transform inputs into finished services and goods Encompasses: Design of products and processes that create them Selection of inputs and their sources Management of the ongoing processes to ensure efficient, on-time delivery of specified outputs
Operations is one of the three primary functional areas. What are the other two
Marketing and finance
What are operations design choices?
What are operations system choices?
- Supply chain management
- Inventory management
- Quality management
Operations Management looks at the process of
providing services, trying to find ways to make the process:
- more efficient
- faster in response
- capable of offering more variety
- a better experience for customers
Materials inventory or customer queue
Operations Strategy as a ______ strategy to support the overall organizational strategy
how the functional area of operations is intended to support the overall corporate strategy
What are the trade offs in competitive priorities
Flexibility/variety (customizability, output variety, volume flexibility
Low delivery lead time (time to fill orders, product/service development time)
Process configuration choice derives from competitive priorities:
Must prioritize dominant needs for meeting market requirements
Competencies take time to build -- chosen path has to be maintained over time to develop competencies
Competitive advantage in operations comes from finding ways to minimize the tradeoffs that must be made among time -- cost -- flexibility and other dimensions
In many cases, Process Structure dictates
the range of Resource Flexibility, Capital Intensity and Customer Involvement that makes sense with the chosen process configuration
What are the three operations environments?
Make-to-order (Project/Job Shop)
Assemble-to-order (Batch Flow, Line flow)
Make-t-stock (Continuous flow, line flow)
Product or service is designed and produced once the customer’s order has been received.Project: Flexibility needed to manage very different outputs or activities
Product or service is designed and produced once the customer’s order has been received.
Major components of the final products are stockpiled; customer orders specify particular component combinations that can be produced relatively quickly.
ie. motor vehicle assembly plant
Product is produced in anticipation of customer order. Customer is served from finished-goods stock, usually with a short lead time.
i.e. Worker paced line flow, machine line flow
Project scheduling techniques:
–Critical Path Method as the most widely used technique
–Program Evaluation and Review Technique for projects with considerable time uncertainty (don’t panic if we don’t get to this)
Project-based work has been growing in significance:
–Rapid development of new products and services–Team-based, cross
-functional management structures, temporary assignments, fluidity
Project management techniques also useful when:
- –Tasks need cross-functional co-ordination
- –Tasks are unfamiliar in scope and complexity
- –Environment is uncertain, need more management attention
Project manager’s basic task:
complete the project’s designated scope within provided resources (budget) within the required time
Pure Project Structure
PM has control of project personnel
PM has authority over technical choices
Project Matrix Structure
PM has limited authority over project personnel
Technical choices made in functional departments
Functional project Structure
Functional managers assign project staff
Personnel may only contribute time to project
Personnel control, technical choices remain with dept.
Critical path method (CPM)
developed for work where there is good knowledge of likely activity durations:
–Uses deterministic (fixed) time estimates
–Diagrams use “activity on node” (AON) convention
Program Evaluation & Review Technique (PERT)
was created for big projects with little info about probable time needed for activities
–Uses probabilistic time estimates
–Diagrams use “activity on arrow” (AOA) convention
CPM diagrams, how to
1.Determine all activities needed, their precedence relationships, likely duration and resource requirements
2.Draw AON network diagram based on the precedence relationships, showing expected duration for each activity.
3.Make the forward pass through the network (starting at first activities), calculating early start times (ES) and early finish (EF) for each activity
4.Make the backward pass from the last activities to the first. Start with the late finish (LF) for end event: use the designated project completion time or, if there isn’t one, use the EF of last activities. Calculate LF and late start (LS) times for each activity.
What does a note look like?
Circle, early start late start, activity duration, early finish, late finish
Critical path/project managment... 1.To reduce project duration, “crash” activities that are:
1.on the critical path and will make a difference in the project’s duration
The cheapest to crash or have the least implications in other dimensions
Optimistic time, most likely time, pessimistic time
(O + 4m + b )/6
Major issues in developing capacity:
using other variables (timing, inventory, flexible resources) to smooth capacity requirements
What are some strategic capacity decisions?
Under-utilized capacity is expensive, so the firm needs enough to suit requirements without over-expanding
Larger capacity cushion (1 - utilization rate) is more appropriate when demand variability and inability to inventory outputs constrain options
Timing decisions for adding new capacity affected by fixed-to-variable cost ratio and market demand projections
Demand management may be more effective than adding capacity
Capacity Planning requires
forecasting future demand: time horizon depends on timespan for bringing new capacity on line
What factors should be considered when deciding capacity?
Seasonality and extent of demand variability
Cost of idle capacity vs. cost of additional capacity
Impact of making customers wait
How much capacity should be put in one facility? What should you think of?
Economies vs. diseconomies of scale
What are some strategies for managing demand?
Move demand to off-peak times (of day, month or year) using promotions or differential pricing
Create products or services that utilize otherwise-idle capacity (complementary products or services)
Yield management for fixed-capacity facilities, to promote timely ordering of services
How do you manage wait lines?
- Use of Queuing Theory as an approach to estimate the behaviour of queues or waiting lines:
- –How long customers may be expected to wait
- –How many people or inventory items might have to be accommodated as part of the queue
Different waiting line models: the advantages of the “multi-channel” system
Perceived vs. actual wait times for customers in queues
Waiting lines (queues) provide ability to “smooth” demand by temporarily storing customers or inventory
Waiting line analysis most useful where inter-arrival times and service times vary; capacity requirements are not easily determined
- Analysis depends on system’s:
- –Basic form or model
- –Customer population
- –Arrival process
- –Priority rule or queue discipline
Like at the bank
Single Channel queue
Like at the boarder/ BC ferries
What are some factors to think about in multi-channel queues?
1. Determine customers’ wait time tolerance
2. Estimate period-by-period arrival rates
3. By trial and error, determine the number of servers, s, that will reduce expected wait times to tolerable levels for the different arrival rates by period.
4. Ensure that space requirements for expected queue can be met.
Customers react to ___, rather than ___ wait times
Customers react to perceived, rather than actual wait times
Let customers know how long they can expect to be waiting
Provide customers with distractions
Pre-service vs. in-process wait
Involve customers in service while they are waiting
Use FCFS queue discipline for customers; otherwise, segment customers for obvious priority reasons
What are some strategies to manage perceived and real waiting times?
Animate: Provide entertainment (Disneyland lines, recorded music, TV screens)
Discriminate: Create separate lines (airline “executive class,” ER entrance to hospital)
Automate: Use technology to reduce service times (ATMs, trouble-shooting software, databases, triage approaches)
Obfuscate: Hide the line (multi-stage waiting areas in theme parks, waiting area – lounge – restaurant)
Congregate: Promote waiting in groups
Physical positioning of process activity centres within facilities
Layout designs are
Layout designs are major long-term decisions based on prior choices of:
- –Process choice
- –Overall capacity and scale of facility
- –Choice of process technologies
(what the textbook calls “flexible-flow layout”), where there is no dominant process flow pattern
(what the textbook calls line process layout), where the workflow has a dominant pattern
where the work with specific patterns is managed in separate line flow-like layouts
where the layout is dictated by having immobile work requirements (e.g., construction)
what are some examples of process layout?
Project, Job Shop
What are some examples of product layout?
Batch flow, line flow, continuous flow
What should you do when developing a process layout?
Group similar processes together -- usually need similar skills and resources, similar supervision
Separate the incompatible centres -- noise, fumes, dust producers away from operations that they might aversely affect; put customer areas away from areas we don’t want them near
Location of some centres may be fixed by their need for utilities or access to entries
Otherwise, try to minimize the travel distance covered by the “typical” product / customer going through or maximize the proximity of related units through closeness factors assessed for each pair of process centres
Discuss Load Distance method for process layout assessment
Load: Determine representative workflow and process steps needed for each job; derive the typical number of trips between the centres (in both directions)
Distance: determine distance between all possible pairs of centre locations.
Transport cost: If some trips are more expensive (e.g., needs equipment to move workpieces, people, luggage), cost per unit distance are also needed
By trial and error, select possible layouts that meet restrictions, searching for one that minimizes total Σ Loadij X Distanceij X Transport Costij
the physical environment that customers experience in front of the “line of visibility”
Layout needs to consider appeal, safety, signals for customers to understand how to perform their role
Environment affects both employees and customers
Layout of retail facilities may be based on maximizing possible sales opportunities:
High-demand items placed far from entrances to drive customers past more display areas
Centres may be located based on purchase patterns, such as co-locating complementary goods or services
Supply Chain Management
the integration of the firm’s systems with those of the organizations supplying and receiving the firm’s goods and services
Encompasses purchasing, internal inventory management and distribution / logistics
May involve managing the firm’s role in its supply chain, extending back through second- and third-tier suppliers or into customers’ systems
Growing significance of supply chain management
General increase in reliance on “buy” rather than “make” choice, brought about by shifts in strategy, increased vendor reliability and communication systems leading to outsourcing
Typically 50-70% of a manufacturing firm’s revenue goes to purchasing goods and services; far more leverage in improving purchasing than in expanding markets or reducing labour costs
Buy” option makes sense if:–Supplier has scale economies–Supplied service or product doesn’t contribute to firm’s core competencies–Supplier relationship can evolve so that transaction costs of purchasing are substantially less than costs of producing the product internally
Increasingly important role of Purchasing Function
In the past, purchasing strategy focused on cost reduction, pushing suppliers to offer lowest cost; often, contracts for the same purchased items went to multiple suppliers to have them compete to maintain the business
Gradual trend towards cooperative supplier relationships, often with growing buyer-supplier interdependence
“Sole-sourcing” (restricting purchases of an item to one supplier) offers advantages but requires a different relationship with the supplier to mitigate the risks to both parties
Different skills needed and risks involved in purchasing function, which might not be recognized in the department’s relative status within the firm
For commodity goods or services, use
arm’s length contractual relationships that focus on price and quality performance
Provide multiple suppliers of similar items with sole-source contracts for different specific items; mitigate risk of having a sole source for an item by having contracts among rival suppliers for different but similar items requiring similar skills
For near-core goods or services, develop
For near-core goods or services, develop close supplier relationships that foster coordination, quick response and joint innovation / design. In some cases, suppliers work integrally within the firm’s operations
For near-core goods or services, develop close supplier relationships that foster coordination, quick response and joint innovation / design. In some cases, suppliers work integrally within the firm’s operations
Trade-off recognized between having materials or services readily available and having low cost
- With mature industries, more predictable demand and lower margins, “efficiency” dominates:
- –Little on-hand stocks for “just in case” situations
- –Emphasis on reliable delivery and quality to reduce risks with lean operations
- “Responsive” strategy used where demand and timing are less predictable, sales depend on speed-to-market:
- –More on-hand inventory for quicker reaction
- –Emphasis on delivery speed and flexibility
Supplier integration advantages
- Firms realize cost reductions by having suppliers carry inventory and provide it on short notice
- –Dell attained 70+ inventory turns because suppliers must provide components after customer orders are received
“Bullwhip effect” is reduced by improved information sharing – suppliers may have access to customer’s production schedule, better able to anticipate longer-term volume requirements
As firms outsource major components of products / services, they become more reliant on suppliers for technical expertise and ability to integrate those components
Supply chain integration trade offs
Closer relationships allow flexibility for short-term problem solving (not fixed to a rigid contract) but may lock the buyer firm in with a particular supplier–Is the supplier going to be the best option five years into the future?
Near-core technology suppliers may be able to offer product and process technology assistance, complementary services, etc. However, what are the risks if the “technology trajectory” is uncertain?
Trade offs in inventory levels placement
Inventory is one means of cushioning against unexpected demand but is expensive. Low inventory levels are more vulnerable to bullwhip effects as sudden shocks get amplified back through supply chain
Higher inventory levels (especially FG) provide more responsiveness -- at a cost
Forward placement of inventory in the pipeline allows more rapid order fulfillment but usually requires higher inventory levels than is achieved with inventory pooling
With batch, line flow and continuous flow processes, management controls...
the design and chooses volume and timing for different outputs.
Independent demand is
independent of the firm’s control and planning. Independent-demand inventory systems use replenished stockpiles of materials to meet demand that is, to some degree, uncertain
To control replenishment of stock to meet uncertain external demand, primary decisions are:
- –how much to order at one time (lot size) and
- –when to place an order to minimize both costs and the possibility of stockouts
Two basic systems of independent demand inventory systems
–Reorder point or continuous review systems that order a fixed amount when stock level drops below a particular amount
–Periodic review systems that order varying amounts at fixed intervals
Reorder point or continuous review systems
–order a fixed amount when stock level drops below a particular amount
Periodic review systems
–order varying amounts at fixed intervals
- Variable cost of holding one item in stock for a specified period (typically a year)
- –Interest or opportunity costs
- –Insurance & taxes
Setup or ordering costs:
Incurred whenever a batch of items is ordered or produced
Includes delivery costs if they are incurred with each batch
As batch sizes increase, setup / ordering costs per year go down but average inventory held goes up
Continuous Review (Reorder Point) Systems Principles
Given that you know the replenishment lead time, place an order when stock levels drop to an amount equal to the average demand during the lead time period (davgL or dL)
Amount to order each time should be a fixed quantity that minimizes the overall costs of holding + ordering the material
Continuous review system in practice, basic rules etc
Basic rule: Order quantity Q every time that the stock level falls to the reorder point, R, where R is based on typical demand during the expected delivery lead time
Demand is rarely constant, usually either greater or less than the average amount during the lead-time. If demand exceeds dL during the delivery lead-time, stockouts will occur
- Add safety stock:
- –Assume demand during different lead time periods is normally distributed around average dL–Select a target of how infrequently you want replenishment cycles to run short (cycle service level) e.g. 90% cycle service level = no more than 10% probability that material won’t last until replenishment–Determine volume of safety stock, zσdL , where 1- P(z) is the probability of having a stockout in any one lead-time
Trade-offs between Continuous Review and Periodic Review
Periodic review systems trade off lower management costs for proportionately higher inventory holding costs – more safety stock required to maintain comparable cycle service level
Costs of maintaining inventory:Order costs = (1 Year/P) times per year x SHolding costs = [½ x (D/annual number of periods) + ss] x HStockout costs: likely loss per stockout situation x proportion of periods per year (1-p) when safety stock is expected to be insufficient
Makes sense to use a Q system where:–Holding costs are high compared to cost of maintaining continuous review procedures–Items are easy to count or track–Demand is fairly constant Makes sense to use P system where:–Numerous different SKUs can be shipped simultaneously–Items are subject to spoilage–Item value is low compared to stock management costs–Demand is known to be seasonal
What determines quality of products /services?
- Product or service design
- Facilities design and layout, “servicescape”
Capability of tools and equipment to work within specifications
Suppliers capable of working within specifications
Organizational culture and systems to promote constant efforts to improve
Workers with knowledge, skills and motivation
What are the Costs of Quality?
Prevention costs: steps taken to reduce the possibility of defects
Appraisal costs: steps taken to evaluate products, measure performance
Internal failure costs: costs associated with defects or problems that are discovered before they are passed on to a customer
External failure costs: costs associated with defects or problems that reach customers
steps taken to reduce the possibility of defects
- Process & product redesign
- Employee training
- Supplier development
steps taken to evaluate products, measure performance
- Inspection of incoming goods
- Statistical process control
- Product / service testing
Internal failure costs
costs associated with defects or problems that are discovered before they are passed on to a customer
External failure costs
costs associated with defects or problems that reach customers
Complaint handling Warranty costs Product liability costs Loss of market share
Total Quality Management
Ultimate driver is customer satisfaction; whether for internal or external customer, aim for delivering exactly what is expected
Incorporate idea of continuous improvement, with expectation that quality and efficiency can always be improved
- Requires employee involvement, since all staff are expected to find ways to eliminate problems and waste in their work areas
- –Use of team-based approach; employee teams are empowered to investigate problems and experiment with possible solution
- -Based on Deming’s PDCA cycle to move continuously toward perfect consistency and greater efficiency
Plan (identify the improvement plan and make a plan)
Do (test the plan)
Check (is the plan working)
Act (implement the plan)
Quality Function Deployment:
Used to make trade-offs in product / service design, balancing competing design requirements in context of relative importance of attribute and competitors’ offerings
Designed for manufactured product development, it has been used for the design of services as well
Referred to as “the House of Quality” because of the unique matrix layout of information
A Pareto chart, named after Vilfredo Pareto, is a type of chart that contains both bars and a line graph, where individual values are represented in descending order by bars, and the cumulative total is represented by the line.
Statistical Process Control
Statistical process control (SPC) is a method of quality control which uses statistical methods. SPC is applied in order to monitor andcontrol a process. Monitoring and controlling the process ensures that it operates at its full potential.
Processes are expected to vary, causing output variations
Some random variation is unavoidable; this is called common-cause variation (variation that is common to all processes)
Some variation is not random but can be traced to specific causes; this is special-cause or assignable-cause variation
Statistical process control (SPC) monitors the process to detect whether assignable-cause variation is affecting output
Using samples to indicate what is happening in the process (relying on statistical inference)
Building charts that indicate expected behaviour for the process, as measured by samples
Regularly sampling the process output, charting sample results to see if there are signs of assignable-cause variation (process potentially “out of control”)
If so, taking action to stop the process and determine the cause, putting the process back “in control”
If the process is “in control”
Sample means should tend to be close to the population mean
Sample means will vary because of common-cause variation but:
–It’s very unlikely that a sample mean would be more than 3 from the population mean
–We can infer that such a sample is a fluke or that the population mean has shifted
For any type of chart, three lines are plotted:
For any type of chart, three lines are plotted:
–Centre line is the mean of the variable (sample-mean average)
–Upper Control Limit (UCL) is the mean + 3 standard deviations of the variable
–Lower Control Limit (LCL) is the mean – 3 standard deviations of the variable
Usually expressed as mean ± 3s
In statistical quality control, the p-chart is a type of control chart used to monitor the proportion of nonconforming units in a sample, where the sample proportion nonconforming is defined as the ratio of the number of nonconforming units to the sample size, n.
Control charts: what are some readings that trigger investigation?
Single value outside control limit
Two consecutive points near the same control limit
Four out of five readings in outer third of control zone
Eight consecutive readings in a common up or down trend
Eight consecutive readings on the same side of the centre line
What is six sigma?
Six Sigma is a disciplined, data-driven approach and methodology for eliminating defects (driving toward six standard deviations between the mean and the nearest specification limit) in any process – from manufacturing to transactional and from product to service.
- 1.Focus is on understanding the needs and preferences of the customer.
- 2.Management by fact.
- 3.Unit of analysis is a process.
- 4.Proactive management style.
- 6.Strive for perfection.
What are the components of the six sigma improvement model?
Define critical outputs and identifies gaps for improvement.
Measure the work and collect data for processes that can help close the gaps.
Analyze the data.
Improve by modifying or redesigning existing procedures.
Control the new process to make sure performance levels are maintained.
An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.This method requires that producers are able to accurately forecast demand.Read more: Just In Time (JIT)
Primarily developed for high-volume manufacturing
–buildup of material in advance of demand to reduce seasonal high-capacity requirements
–material present as a result of buying or producing in batches to reduce setup/order costs
Buffer or decoupling inventory:
–allows various stages of production to operate at different rates
material held to compensate for unpredicted or non-predictable requirements
Pipeline or transit inventory:
Material that allows multiple work centres to operate simultaneously or that is needed to maintain physical flows over distance
What are some types of inventory management?
- -Anticipation inventory
- -Cycle inventory
- -Buffer or decoupling inventory
- -Safety stock
- -Pipeline or transit inventory
Holding cost doesn’t take into account
hidden costs of having lots of “stuff” around – difficult to track and control materials, safety and efficiency problems
Inventory typically allows
mistakes to be overcome – poor forecasts, defective materials and work, poor planning, unreliability of suppliers or supervision
Why is inventory viewed as evil?
Holding cost doesn’t take into account hidden costs of having lots of “stuff” around – difficult to track and control materials, safety and efficiency problems
Inventory typically allows mistakes to be overcome – poor forecasts, defective materials and work, poor planning, unreliability of suppliers or supervision
Takes up too much space
Often produced to keep people or facilities busy
With inventory, what are the two principles to keep costs low and make inventory useful?
"Pull" production rather than "Push"
- Reduce waste
- -Greatly reduce setup costs to justify reduction in order quantities:
- –Smaller lot size reduces holding costs, space needed to store materials, time to process each lot through each stage
- Time in queues drops proportionately with lot size
“Push” method: orders work expecting that all process stages will be coordinated & will finish work on schedule
“Pull” system: triggers work to replenish WIP only when products are completed at the end of the production process
Pull process stops all work when one process stage is stopped – strong incentive to ensure that all stages are functioning properly
Better to under-utilize equipment than to work part of the system at high volume -- and build up WIP