The management of operations – INFO

Week 13 – Operations Management and Operations Performance (Ch. 1 and 2)

Why Operations Management? (Chapter 1- operations management)

Porter, M.E. (1985) Competitive Advantage: Creating and Sustaining Superior

Performance, New York, Free Press

Defining Operations Management

• Operations management is about managing the way goods or services are

produced or provided.
• Activity of managing the resources that create and deliver services and
products
• It is concerned with everything we wear, eat, sit on, use or read.
• Every service we receive in a hospital, a restaurant, every lecture you receive
in university, have all exploited Operations Management techniques
• It aims to produce goods or services needed by customers with the right
quality, on-time, in the right quantity and at the right (lowest) cost
Aims of Operations Management
• To give a foundation in operations management by studying a number of
operations management techniques that can be applied to real world
problems.
• You will also learn when to apply an operations management technique to a
given situation.
• And understand how to interpret the results and draw the correct conclusion
from them.
• So as to appreciate the use of different types of operations management
approaches to problem solving.
The new operations agenda
- Changes in buss enviro have led to significant impact on the challenges faced
by operations managers
- E.g. many industries have experienced increasing cost-based competition
while simultaneously their customers’ expectations of quality and variety
have increased
- Market have become more global, sometimes meaning a demand for a
higher variety, or even totally customized products and services
- Rapidly developing technologies leading to more frequent, new
product/service introductions + customers have increased ethical and
environmental sensitivity

Additional definitions...
• Operations
 Comprising all the activities necessary for the day-to-day fulfilment of
customer requests, including sourcing products and services from
suppliers and transporting products and services to customers
 Process
 An arrangement of resources that produce some mixture of products
and services (transform inputs into outputs) that satisfy customer
needs. They are the building blocks of all operations and form an
internal network within the organisation

What are processes?

All processes are input transformation–output systems that use ‘transforming’
resources to work on ‘transformed’ resources in order to produce products and
services
- All operations create and deliver service and producing by changing inputs (of
transforming and transformed resources) into outputs using an input-
transformation-output process
- Most operations produce a mix of tangible products and intangible services
- Critical that operations managers are aware of customer’s needs (both
current and potential) in order to determine the operations strategic
performance objectives which in turn defines the service/product offering to
be designed, created and delivered
- Operations consists of a collection of processes interconnecting with each
other to form a network (transformed resources flow between them)

Levels for Understanding Processes

1. At the inter-company level (or likewise, inter-region or inter-division level),
2. At the inter-function level within the company (e.g., the Sales function
interacting with the Operations function for planning), and
3. At the within function level, which is the level where process management is
usually taken to be.

The three levels of analysis (hierarchy of operations)

Operations and process management requires analysis at three levels: the supply
network, the operation, and the process
Operations and process management analysis for the Programme and Video
Division (PVD) of a national broadcasting company at three levels: the supply
network, the operation, and individual processes

Operations management is relevant to all parts of the business

- All parts of the business manage processes so all parts of the business have
an operations role and need to understand operations management
principles
- Therefore, there are two meanings of operations:
- Operations as a function, meaning the part of the organization which creates
and delivers services and produces for the organizations external customers
- Operations as an activity, meaning the management of the processes within
any of the organizations functions

A Typology of Operations

Whenever a successful company outlines process management as its competitive

weapon – again, we can think of Toyota and its Toyota Production System –
companies rush to try and implement the same approach to process
management. However, if the process characteristics for this company are
different from those pertaining to Toyota’s assembly line, the results may be
disastrous.
Thus it is important to understand process characteristics – typically volume and
variety of the products and services produced – to figure out whether the Toyota
Production System is even applicable to the process in question.

Although all operations processes are similar in that they all transform inputs,
they do differ in number of ways: Four characteristics of processes are the so-
called 4-Vs: volume of output, variety of output, variability in the demand for the
output and the degree of visibility which customers have of the creation of their
output i.e. how much of the operation is exposed to customers.

-
-
- High volume e.g. hamburger production at McDonalds (repeatability of the
tasks and systemization of the work where standard procedure are set down
specifying how each part of the job should be carried out; which encourages
specialization – this all gives low unit costs) VS small local cafeteria serving
few ‘short-order’ dishes
- High-variety service e.g. a taxi company (flexible to pick up and drop off
anywhere, good knowledge of areas but higher unit cost per Km travelled) VS
a bus service (few well-defined routes with a set schedule)
- E.g. holiday result – in peak season hotel will be full to capacity due to more
demand VS off-peak season (less demand, routine, predictable, no need to
hire extra staff)
- Generally customer-processing operations are more exposed to customer
(e.g. a retail, brick-and-mortar store) than material- or information-
processing operations.

Four Vs analysis for some retail banking processes

 The implications of the four Vs of operations processes
- All dimensions have implications for the cost of creating and delivering
services and products
- Operations and processes can (other things being equal) reduce their costs by
increasing volume, reducing variety, reducing variation and reducing visibility
- To some extent, position of an operation in the 4 dimensions is determining
by the demand of the market its serving. BUT most operations have some
discretion in moving themselves on the dimensions

What do operations managers do?

- Direct the overall strategy of the operation
- Designing the operations resources and processes
- Planning and control the process delivery
- And developing process performance

Environmental view of Operations

OBJECTIVE TO CONTROL:- Cost Quality, Availability & Environmental Impact

Social, environmental, and economic sustainability

- Activities of operations managers have a huge impact on their organizations

enviro sustainability
- E.g. the enviro impact of products which cannot be recycled and processes
which consume large amounts of energy
- Many of operations management’s enviro issues are concerned with waste (if
improved, would also save costs for the org.)

The model of operations management

Therefore, operations management activities can be grouped into 4 broad

categories:
- Directing the overall strategy of the operation
- Designing the operations products, services, and processes
- Planning an controlling delivery
- And developing performance (improving the operations capabilities)
 Operations and Competitive Advantage (Chapter 2- operations performance)

Why is operations performance vital in any organization?

 The view that operations can ‘make or break’ any business – not just
because the operations function is large and generally represents the bulk
of asses and the majority of an org’s people, but because operations
function give the power to compete by providing the ability to respond to
customer and by developing capabilities that will keep an org ahead of
competitors in the future
 Operations can ‘make’ org as it is concerned with doing things better –
better quality, service, responsiveness, reliability, flexibility, cost, use of
capital and facilities
 Through continual learning that can come from improvement of activities,
operations management can build the capabilities that can have
significant strategic impact + relationship between process and outcome
 But then things go wrong in operations, the reputational damage can last
for years
Performance at three levels
 The broad, societal level (using idea of triple bottom line – people, planet,
profit)
 The strategic level of how an operation can contribute to the organizations
overall strategy
 The operational level, using the five operations ‘performance objectives’

Competitive advantage:
performance at the five competitive objectives (how performance is judged at
an operational level)

 Do things right – quality advantage – no mistakes. Satisfy customer

trough error-free goods and services which are ‘fit for their purpose
  Do things fast – speed advantage – increasing availability of goods and
services
 Doing things on time – dependability advantage – keep delivery promises
 Being able to change what you do – flexibility advantage – vary and adapt
activities to cope with unexpected circumstances or to give customers
individual treatment (change far enough and fast enough to meet
customer requirements)
 Doing things cheaply – cost advantage – produces/service prices
appropriately for market while giving the org a return

Why is quality important?

What does quality mean in: A hospital

- Patient receive most appropriate treatment which is carried out in correct
manner
- Patients are consulted and kept informed
- Staff are courteous, friendly and helpful

What does quality mean in: An automobile plant

- All assembly is to specification
- Product is reliable, all parts are made to specification and the product is
attractive and blemish-free

 Quality is consistent conformance to customers’ expectations ‘doing things right’

– most visible part of operation – easy for customers to judge

External and internal benefits of conformance quality

Irrespective of a product or service’s specification quality, producing it in a way

that it conforms to its specification consistently brings benefits to any operation

Externally – it enhances the product or service in the market, or at least avoids

customer complaints.

Internally – it brings other benefits to the operation.

• It prevents errors slowing down throughput speed.
• It prevents errors causing internal unreliability and low dependability.
• It prevents errors causing wasted time and effort, therefore saving cost.

Why is speed important?

What does speed mean in: a hospital

 The time between requiring treatment and receiving treatment is kept to
a minimum.
 The time for test results, X-rays etc. to be returned is kept to a minimum.
What does speed mean in a: automobile plant
  Time between dealers requesting a vehicle of a particular specification
and receiving it is minimized.
 Time to deliver spare’s to service centres is minimized.

External and internal benefits of speed

Externally – it means the elapsed time between a customer asking for a product or
service and getting it (in a satisfactory condition).
It often enhances the value of the product or service to customers.

Internally – it brings other benefits to the operation.

 It helps to overcome internal problems by maintaining dependability (faster
delivery of services and products)
 It reduces the need to manage transformed resources as they pass through
the operation, therefore saving cost.
 Reduces inventories – the longer items take to move through a process, the
more time they will be waiting  higher inventory
 Reduces risk

Why is dependability important?

What does dependability mean in a: hospital

 Proportion of appointments that are cancelled is kept to a minimum.
 Keeping appointment times.
 Test results, X-rays etc. are returned as promised

What does dependability mean in a: automobile plant

 On-time delivery of vehicles to dealers.
 On- time delivery of spare’s to service centres.

 It means doing things in time for customers to receive products/services exactly

when they are needed, or at least when they are promised

External and internal benefits of Dependability

Externally – it enhances the product or service in the market, or at least avoids

customer complaints.

Internally – it brings other benefits to the operation

• It prevents late delivery slowing down throughput speed (i.e. saves time).
• It prevents lateness causing disruption and wasted time and effort, thereby
saving cost.
• Gives stability and reliable delivery
 Why is flexibility important?

Being able to change what?

• The products and services it brings to the market – Product/service flexibility
• The mix of products and services it produces at any one time – Mix flexibility
• The volume of products and services it produces – Volume flexibility
• The delivery time of its products and services – Delivery flexibility

What does flexibility mean: in a hospital

 Introducing new treatments
 A wide range of treatments
 The ability to adjust the number of patients treated
 The ability to reschedule appointments.

What does flexibility mean: in an automobile plant

 The introduction of new models
 A wide range of options
 The ability to adjust the number of vehicles manufactured
 The ability to reschedule manufacturing priorities
 Flexibility can give the potential to create new, wider variety, differing volumes
and different delivery dates of products/services, and save costs

External and internal benefits of flexibility

External – increased ability of operations to do different things for different

customers (mass customization – high variety of product/services with ability to
produce it in high volume to reduce cost)
Agility – implying that an operation and the supply chain of which its part can
respond to uncertainty in the market. Thus, agility means responding to market
requirements by producing new and existing products/services fast and flexibly

Internal
- Speeds up response
- Saves time e.g. resources ‘changing over’ from one task to another
- Maintains dependability – keep the operation on schedule when unexpected
events disrupt the operation’s plans

Why is cost important?

 Cost is always important objective for operations management, even is the

organization doesn’t compete directly on price

What does Cost mean in… a hospital

… an automobile plant?

 Cost reduction through internal effectiveness – each of the performance

objectives has several internal effects, but ALL affect cost. Thus, important way to
improve cost performance is to improve performance of other objectives:

The benefits of excelling at the five objectives

 High-quality operations do not waste time or effort having to redo things, nor
are their internal customers inconvenience by flawed service
 Fast operations reduce the level of in-process inventory between micro
operations, as well as reducing administrative overheads
 Dependable operations do not spring any unwelcome surprises on their
internal customers. They can be relied on to deliver exactly as planned 
eliminates wasteful disruption and allows the other micro operations to
operate efficiently
 Flexible operations adapt to changing circumstances quickly and without
disrupting the rest of the operation. Flexible micro operation can also change
over between tasks quickly without wasting time and capacity
The polar representation of relative importance of performance objectives for a
product/service
 A line describes the relative importance of each performance objective. The
closer the line is to common origin, the less important it is to the operation

Polar diagrams

Polar diagrams are used to indicate the relative difference of each “Key performance
Indicator”

They can also be used to indicate the difference between different products and
services produced by an operation or process.

Polar diagrams for a proposed police performance method

Polar diagrams for a taxi service versus a bus service

Week 14 – Operations strategy (Chapter 3)

Intro
 Organizations cannot plan in detail every aspect of its future actions; always
degree of uncertainty about future conditions and adjustment plans need to
accommodate to circumstances
 Simply reacting to current, possibly short-term issues can lead to constant
changes in direction and the operation becoming volatile and unstable
 That is why organizations need the ‘backdrop’ of a well-understood strategic
direction – set of general principles to guide decision-making after performance
objectives articulated  operational strategy

What is strategy and what is operations strategy?

Strategy includes:
• Setting broad objectives that direct an enterprise towards its overall goal.
• Planning the path (in general rather than specific terms) that will achieve
these goals.
• Stressing long-term rather than short-term objectives.
• Dealing with the total picture rather than stressing individual activities.
• Being detached from, and above, the confusion and distractions of day-to-
day activities.
Thus strategy is the total pattern of decisions and actions that influence the long-
term direction of the business and move the org closer to its long-term goals

Operations strategy
 Concerns the pattern of strategic decisions and actions that set the role,
objectives and activities of the operation
What is the role of the operations function? - From implementing to supporting to
driving strategy

 Implementing business strategy – the most basic role of operations. Without

effective implementation, strategies will be ineffective
 Supporting business strategy – developing the capabilities which allow the
organization to improve and refine its strategic goals (e.g. flexibility & speed)
 Driving business strategy – by giving it a unique and long-term advantage (e.g.
continuous innovation).

Operations Management contribution to Strategy

How is Operations Strategy different to Operations Management?

Hayes and Wheelwright’s four stages of operations contribution

Hayes and Wheelwright proposed four stages used to evaluate the role and
contribution of the operations function (from a negative to positive role):
Stage 1. Internal neutrality - Holding the company back from competing effectively.
Inward looking and little contribution towards competitive success. Improve by
‘avoiding making mistakes
Stage 2. External neutrality - Making the company as good as its competitors –
comparing operations function with similar orgs in market – measuring itself against
competitors performance and trying to implement ‘best practice’
Stage 3. Internally supportive - Best in industry (with “best practices”) – by proving a
credible operations strategy which has a clear view of company’s competitive or
strategic goals and supporting it by developing appropriate operations resources
Stage 4. Externally supportive - Redefine industry expectations by giving the
company an operations advantage success – stage 4 operations are innovative,
creative and proactive and are driving the company’s strategy by being ‘one step
ahead’ of competitors – forecasting likely changes to markets and supply, developing
the operations-based capabilities requires to compete in future market conditions

Stage 1: Internal neutrality - This is the very poorest level of contribution by the
operations function and the effect is to harm the organization’s ability to compete
effectively. In stage 1, the operations function is inward-looking and, at best, reactive
with very little positive to contribute towards competitive success. Its vision is to be
‘internally neutral’, so as to stop holding the organization back in any way. It
attempts to achieve this by ‘avoiding making mistakes.

Stage 2: External neutrality - The first step of breaking out of stage 1 is for the
operations function to begin comparing itself with similar companies or
organizations in the outside market. This may not immediately take it to the ‘first
division’ of companies in the market, but at least it is measuring itself against its
competitors’ performance and trying to implement ‘best practice’. In stage 2, the
vision of the operations function is to become ‘externally neutral’ with operations in
the industry.

Stage 3: Internally supportive - Stage 3 operations have typically reached the ‘first
division’ of their markets. For such operations, the vision becomes to be clearly and
unambiguously the very best in the market. They achieve this by gaining a clear view
of the company’s competitive or strategic goals and supporting it by developing
appropriate operations resources. The operation is trying to be ‘internally
supportive’ by providing a credible operations strategy.

Stage 4: Externally supportive - Stage 3 used to be viewed as the limit of the

operations function’s contribution. Yet the model captures the growing importance
of operations management by suggesting a further stage. The difference between
stages 3 and 4 is subtle, but important. A stage 4 operations function is one that is
providing the foundation for an organization’s competitive success. It is forecasting
likely changes in markets and supply, and it is developing the operations-based
capabilities which will be required to compete in future market conditions. Stage 4
operations are innovative, creative and proactive and are driving the company’s
strategy by being ‘one step ahead’ of competitors – what Hayes and Wheelwright
call being ‘externally supportive’.
Four perspective on operations strategy (and pressures that form its content)

 Operations strategy is a top-down reflection of what the business wants

operations to do
 Operations strategy is a bottom-up activity where operations improvements
cumulatively build strategy (day-to-day experience suggests what buss should
do)
 Operations strategy involves translating market requirements into operations
decisions (outside-in perspective)
 Operations strategy involves exploiting the capabilities of operations resources
in chosen markets (inside-out perspective)

What is the difference between a top-down and bottom-up view of operations

strategy?

Top-down strategies
 A large corporation will need a strategy to positon itself in its global, econ,
political and social enviro. These decisions will guide the buss in relation to its
customers, markets, competitors
 Decisions such as these from the corporate strategy of the corporation. Each
business unity thus has its own buss strategy which sets out individual
mission and objectives
 Thus, the role of operations is one of implementing or ‘operationalizing’
business strategy/ how functional strategies SHOULD be put together (i.e.
Buss strategy should reflect top-down corporation and/or business
objectives.
Bottom-up strategies
 Alternative view that many strategic ideas emerge over time from
organizational experience
 Sometimes companies move in a particular strategic direction because the
ongoing experience of providing products/services at an operational level
convinces them that it is the right things to do
  Idea of strategy being shaped by operational-level experience over time
called the concept of ‘emergent strategies’  shape the operations
objectives and action, at least party. By the knowledge gained from day-t0-
day activities
 Thus requires an ability to learn from experience and a philosophy of
continual and incremental improvement

Top-down and bottom-up perspectives of operations strategy

For operations strategy to make sense, it must do so “top down” and “bottom up”.
Top down means that the operations strategy must follow from the business
strategy, which in a large company, must follow from corporate strategy. Bottom up
means that the strategy recognises the resources and the capabilities available.

- The two opposite strategies then become mutually reinforcing

- E.g. top-down perspective sets the overall direction and objectives for
operations decisions and activities, but, the experience gained form day-to-
day activities can be accumulated and built into capabilities that an
organization could possible exploit strategically
Top–down and bottom–up strategy influences for the metrology systems company

In the operations area especially, we

need to include the accumulated
learning that comes from day-to-day
management of operations resources.
This is why we need to consider a
“bottom-up” perspective and the
operations resource perspective rather
than only a “top-down” strategy-driven
approach. This is also why many (but not
all) companies and industries hire CEOs
from within the same company or at
least within the same industry.

What is the difference between a ‘market requirements’ and an ‘operations

resources’ view of operations strategy?

1. Market-requirements-based strategies
 To adequately survive in the long-term, operations must have an
understanding of what markets requires so it can ensure the achievement of
the right priory between performance objectives (quality, speed, dep, flex,
cost)
 Whatever competitive factors are important to customers should influence
the priority of each performance objective
 Thus, operations strategy should reflect the requirements of the business’s
markets

Order-winning and qualifying objectives

 Competitive factors can be classified as order winners or qualifiers
 Order-winners are the competitive factors that directly and significantly
contribute to winning business (gain more business the better they are)
 Qualifiers are the competitive factors that have a minimum level of
performance (qualifying level) below which customers are unlikely to
consider an operation’s performance satisfactory (i.e. they are the ‘givens’ of
doing business)
 Adding Delights, Delights become Order Winners and Order Winners become
Qualifiers
Is operations strategy aligned to market requirements?
 This may be stating the obvious but it is a good question to ask especially
when the market requirements are changing drastically due to say, increased
oil prices or increased awareness of environmental issues.
 Different customers require different weight on different performance
objectives, after all, and your business strategy should decide which
customers to target and which ones not. Then you have to look at the
operations strategy.

2. The operations resources perspective

 Resource-based view holds that firms with an ‘above-average’ strategic
performance are likely to have gained their sustainable competitive adv. because
of core competences (or capabilities) or their resources
 Therefore understanding and developing the capabilities of operations resources,
is important perspective on operations strategy

Operations strategy is the strategic reconciliation of market requirements with

operations resources
Operations Strategy decision areas

‘Market requirements’ and ‘operations resource’ analysis of a lighting company

Tangible resources: Equipment, staff

Intangible resources: Reputation, relationships, experience
Another ‘simplified’ view

Therefore, Operations Strategy is...

…the total pattern of decisions which shape the long-term capabilities of any type of
operation and their contribution to overall strategy, through the reconciliation of
market requirements with operations resources.

The operations strategy matrix

The operations strategy matrix defines operations strategy by the intersections of

performance objectives and operations decisions.
Design, deliver and develop decisions impact operational objectives.
How can Operations Strategy form the basis for operations improvement: the
concept of “fit”

 The whole purpose of operations improvement is to make operations

performance better at serving its markets
 Thus, there should be a fit between what an operation is trying to achieve in
its markets (market requirements) and what it is good at doing (operations
capabilities)
 Achieving alignment between ‘required market performance’ and ‘actual
operations performance’
 Achieving sustainable alignment to adapt to new market conditions
 And improving overall performance – the more demanding the level of
market requirements the greater will have to be the level of operations
capabilities

The process of operations strategy stages:

1. Formulation
2. Implementation
3. Monitoring
4. Control

Formulation – the process of clarifying the various objectives and decisions that
make up the strategy, and the links between them. The formulation process should
be trying to achieve:

Fit means ensuring comprehensiveness, correspondence, coherence and criticality

Implementation – way that strategies are operationalized or executed (ensuring
intended strategies are actually achieved). Successful implementation must include –
clarity of strategic decisions, motivational leadership and project management to
ensure changes are successfully implemented

Implementing Operations Strategy:

Understanding current and intended market requirements and operations resource

capabilities so that the extent and nature of the change can be assessed

But excessively tight fit...

Can increase the risks of misalignment between market requirements and

operations resource capability.

Movement in market requirements and operations

resources produces misalignment
But excessively tight fit... (2)
Can increase the risks of misalignment between market requirements and
operations resource capability

Looser fit between market requirements and

operations resources preserves alignment

Deviating from fit...

Exposing the operation to risk – e.g. delays in improvement of website means

customers do not receive level of service promised. Thus, the risk to the org is that
the reputation will suffer because market expectations exceed the operations
capability to perform at the appropriate level

Therefore, improvement activity needs to move the operation back to the line of fit
(improvement priorities are determined by importance for customers and
performance against competitors or similar operations)
OS monitoring – monitoring should be capable of providing early indications by
diagnosing data and triggering appropriate changes in how the operations strategy is
implemented (and to ensure planned activities are occurring after implementation)

OS control – strategic control involves the evaluation of results from monitoring and
implementation with intention of correcting future action if required

90% of strategy is implementation: Mintzberg

Which companies have redefined the industry’s expectations through their OS ?

 Dell - pioneered adoption of postponed manufacturing – Dell 1100MP

Projector
 Operations strategy at Ryanair

Week 15- Product and service innovation

Nature and purpose of the design activity

 Products, services and the processes which produce them all have to be
designed
 Decisions taken during the design of a product or service will have an impact
on the decisions taken during the design of the process which produces those
products or services and vice versa

Example – The troubled history of the Airbus A380, page 110

• What were the causes of the delays in the ‘time to market’ of the Airbus
A380?
• What were the effects of the delays in the ‘time to market’?
Design of products/services and processes: interrelated and should be treated
together

The overlap of activities is greater in service design

Why is design so important?

UK Design Council Survey
 Design helps businesses connect strongly with their customers.
 90% of businesses growing rapidly say design is significant to them, only 26%
of static companies say the same.
 Design reduces costs by making processes more efficient. It can also reduce
the time to market for new products and services.
 Almost 70 % of companies seeing design as integral have developed new
products and services in the last three years, compared to only a third of
businesses overall.
  Companies who were ‘effective users of design’ had financial performances
200% better than average.

What is designed in a product or service?

 A concept - the understanding of the nature, use and value of the service or
product;
 A package - the group of ‘component’ products and services that provide
those benefits defined in the concept;
 A process - the way in which the component products and services will be
created and delivered.

Example – Spangler, Hoover and Dyson

https://www.youtube.com/watch?v=AMgeNjXtYx4
https://www.youtube.com/watch?v=I-WRgQlzES8

 What was Spangler’s mistake?

 What do you think makes ‘good design’ in markets such as domestic
appliances?
 Why do you think two major vacuum cleaner manufacturers rejected Dyson’s
ideas?
 How did design make Dyson a success?

The product and service design activity as a process

The stages of product / service design

Concept generation
 Ideas from customers formally through Marketing activities
 Listening to customers – on a day-to-day basis
 Ideas from competitor activity – For example, reverse engineering
 Ideas from staff – Especially those who meet customers every day
 Ideas from research and development.

Concept screening
Broad categories of evaluation criteria for assessing concepts

Design involves progressively reducing the number of possibilities until the final
design is reached
Example – Square watermelons
 What market-related questions would you ask before producing square
watermelons commercially?
 What finance-related questions would you ask before producing square
watermelons commercially?
 What operations-related questions would you ask before producing square
watermelons commercially?

Preliminary design

Design evaluation and improvement

There are various ways of evaluating preliminary designs.
These include:
- Quality function deployment;
- Value engineering;
- Taguchi methods.

Prototyping and final design

Prototypes are needed, so products and services can be tested.
 Prototypes come in various forms:
- Card models;
- Clay models;
- Computer stimulations.
 CAD has considerably simplified the production of prototypes.

Sequential and simultaneous arrangement of the stages in the design activity

Where should the management attention be?

Example - The Pagani Huayra - https://www.youtube.com/watch?v=YeibvuHig2s

Week 16- The structure and scope of operations

Considerations in Process Design

• Am I doing things in the correct order?
• Are my premises laid out effectively?
• How should I organise the work?
• How do I maintain the quality of
• the product/service?
• Should I use people or machines?
• Can I deliver the product/service in a more environmentally friendly way?

Process design: Outline

• Processes, products and services
• Volume and variety in process design
• Process mapping

Processes, products and services

What are processes?

All processes are input–transformation–output systems that use ‘transforming’

resources to work on ‘transformed’ resources in order to produce products and
services

What is process design? process positioning + process analysis

Process design is treated in two parts: Positioning, that sets the broad characteristics
of the design; and Analysis, that refines the details of the design
Nature and purpose of the design activity
• Products, services and the processes which produce them all have to be
designed.
• Decisions taken during the design of a product or service will have an impact
on the decisions taken during the design of the process which produces those
products or services and vice versa.

Example - Waitrose in Ampthill, Bedfordshire.

The process is embedded in

the service.

Volume and variety in process design

Volume and variety are the key characteristics in the design of processes, with two
types of processes being those that have
(1) high variety and low volume, and
(2) low variety and high volume.
Process design characteristics depend on the volume-variety considerations.

In between these extremes, we can have other types. For manufacturing, these are:
1. Project environments (high variety of projects, but each is just a one-off),
2. Job shop (making a few of a wide variety of products on demand),
3. Batch production (larger numbers from a smaller variety),
4. Assembly line (limited variety going in huge volumes across an assembly line),
and
 5. Process manufacturing (single variety product moving in huge quantities
across the supply chain).
A depiction of these five types on a volume-variety graph is called product-process
matrix.

Project processes (e.g. construction)

• One-off, complex, large-scale “products” with high work content
• Specially made, every one “customized”
• Defined start and finish: time, quality and cost objectives
• Many different skills have to be coordinated

Jobbing processes (e.g. constructing something at home)

• Very small quantities: “one-offs”, or only a few required
• Specially made: high variety, low repetition, “strangers”, every one
“customized”
• Skill requirements are usually very broad
• Skilled jobber, or team, completes whole product

Batch processes (e.g. cooking)

• Higher volumes and lower variety than for jobbing
• Standard products, repeating demand. But can make specials
• Specialized, narrower skills
• Set-ups (changeovers) at each stage of production

Mass processes (e.g. automobile parts)

• Higher volumes than batch
• Standard, repeat products (“runners”)
• No set-ups, or almost instantaneous ones
• Low and/or narrow skills

Continuous process
• Extremely high volumes and low variety: often single product
• Standard, repeat products (“runners”)
• Highly capital-intensive and automated
• Few changeovers required
• Difficult and expensive to start and stop the process

Professional services – experts in offices

Service shops e.g. gyms
Mass services e.g. attraction parks (Thorpe park)

Different process layouts are appropriate for different volume–variety

combinations
Process Technologies & Volume-Variety

Process technology needs to be appropriate for the position of the process. For high
volume and low variety processes, we need technology that is automated and
dedicated, and very often, large-scale. For instance, think of a paper mill as a single
process that manufactures paper.
At the opposite end of the spectrum, you need technology that can handle a low
volume of a wide variety of needs so the equipment needs to be general purpose,
usually but not always, small in scale. Such technology has to be flexible in meeting a
wide variety so it needs to be flexible with a small efficient batch size possible, even
that of a batch of one unit.

Job Design & Volume-Variety

Job design means how people carry out their tasks within the process. Again the
issue at the heart of job design is the position of the process on the product-process
matrix.
High-variety and low-volume processes require broad, relatively undefined jobs with
the individual having decision-making discretion. As you can imagine, such a job
entails intrinsic job commitment.
On the other hand, a low-variety high-volume jobs tend to be narrow in scope (i.e.,
very specialised). They are defined closely and involve little decision-making
discretion. Henry Ford’s assembly line entailed moving workers to such jobs from
previously high-variety low-volume jobs. Companies with such processes tend to be
large so there are many workers who can be readily replaced so the workers may
form unions to counter that.

Performance objectives in terms of “flows” of inputs and outputs

Flow objectives are:

Flow rate or throughput rate: the rate at which units emerge from the process,
including how many movies a distribution house releases a year or how many new
drugs a pharmaceutical company releases every five years. The number of units
going into the process is an arrival rate. The cycle time is the inverse of throughput
rate: how much time passes between successive units emerging from the process. So
if the throughput rate is 10 units of output an hour, the cycle time is 1/10th of an
hour, i.e., 6 minutes.

Throughput time: This is how much time each unit spends in the process. As regards
throughput rate and throughput time: the former is measured in number of units in
an hour/month/year etc., and the latter is measured in time, hours/days/years etc.
Work-in-progress: Number of units in the process at any instant, but typically this
number varies so we can average this over time

Utilisation of process resources: The proportion of available time for which resources
within the process are performing useful work (although usually we assume that all
work is “useful” to avoid getting into discussion of what is “useful”)

Process mapping

Decision flow charts: mapping symbols

Different companies, different industries, different consultancies and even different

operations improvement methodologies recommend different symbols for process
mapping. These need not be radically different from each other. The choice is
determined by a simple criterion: who is your audience? If your audience is a
particular company, industry or certain types of operations experts, your choice is
pretty much fixed by that. This figure provides some commonly used symbols from
two different domains with their use.
The ‘supply and install’ operations

In Unit 1, we talked about three levels of processes:

• at the inter-company or inter-location level,
• within the company but across functions, and
• within the function.
Typically, people mean the third of these when they talk about “processes” and
sometimes the second. Even here, we need to understand the process at different
levels of detail: think of this as starting at a high level to describe the process in
terms of 5-10 sub-processes and then zooming on each element to see it as 5-10
sub-sub-processes, and then zooming in on each to see sub-sub-sub-processes, etc.

The numbers are just a guideline, in reality most process maps will have 2-3 levels
only with the lowest level having lots of elements. For an example, see Figure.

Process map for

‘enquire to
delivery’ process
at stage lighting
operation
Example with symbols in use for mapping a process

The ‘collect and check’ process mapped to show different levels of process visibility

Another aspect of process mapping, quite important in service situations, is process

visibility as regards the customer. With slight modification, we can show the process
map in layers depending on the interaction with the customer and the customer’s
exposure to the process. An example of this might be different restaurant designs
that have different levels of exposure of the cooking to the customer ranging from
not at all to the food being prepared on the customers’ table itself. This figure
provides an example showing these layers.

Example: process map describing expense processing

Week 17- layout and flow

Different process types imply different volume-variety characteristics for the

process
 Also called product-process matrix; see Hayes and Wheelwright (1979)

Service process types

Different types of layout (locations of resources)

• Fixed position –the product or service remains largely stationary, and

transforming resources are moved to and from it
• Functional layout –similar resources or processes are located together
 • Cell layout –brings some order to the complex flows which can arise with
functional layout
• Product / line layout –locating transforming resources in a sequence defined
by the processing needs of a product or service

Process layout example (path of one customer)

Cell layout example

Product layout example (army induction centre)

Case: Red Hot World Buffet
• Fixed position
• Functional layout
• Cell layout
• Product line layout
• http://www.youtube.com/watch?v=aW8TT0IqcOw

A restaurant complex with all four basic layout types

Functional types and basic layout types

Flow (layout), technology and job design are all influenced by process positioning
(1)

Flow (layout), technology and job design are all influenced by process positioning
(2)
Process productivity

• Throughput rate (flow rate): the rate at which units emerge from the
processes
• Throughput time: the average elapsed time taken for input to move through
the process and become output
• Work in progress: the number of units in process (waiting to be processed)
• Utilization: the percentage of time resources are performing useful work

Long and thin vs. short and fat layouts

Long and thin vs. short and fat layouts

• Long or short describes the number of stages

• Fat or thin describes the amount of work at each stage

Advantages of long-thin processes:

• controlled flow
• simple materials handling
• lower capital requirement (no duplication)
• greater efficiency
• higher space utilisation

Advantages of short-fat processes:

• higher mix flexibility
• higher volume flexibility greater robustness
• less monotonous
• higher ownership

Moving to the cellular manufacturing concept

Operations Management in Emirates catering (1)

• Video available at:
https://www.youtube.com/watch?v=IxMXU-S5Bzc
• Operations Strategy and process design/Process layout?
Operations Management in Emirates Catering (2)

Operations Management in Emirates Catering (3)

• Types of processes
 Batch
• Layout
 Cell
Long-thin vs. Short-fat?

Week 18: Planning and Control capacity

What is planning and Control? (1)

• Planning is a formalization of what is intended to happen at some time in the

future.
• A plan does not guarantee that an event will actually happen, it is a
statement of intention.
• Although plans are based on expectations, during their implementation
things do not always happen as expected.
• Control is the process of coping with any changes that affect the plan. It may
also mean that an ‘intervention’ will need to be made in the operation to
bring it back ‘on track’.
What is Planning and Control? (2)

The volume/variety effects of planning and control

Dependent and independent demand (1)

Dependent and independent demand (2)

Planning and Control activities

Loading – The reduction of time available for ‘valuable operating time

Finite and infinite loading

Finite loading limits the loading on each centre to their capacities, even if it means
that jobs will be late.
Infinite loading allows the loading on each centre to exceed their capacities to ensure
that jobs will not be late

Figure 10.8 Finite and infinite loading of jobs on three work centres A, B and C.
Finite loading limits the loading on each centre to their capacities, even if it means
that jobs will be late. Infinite loading allows the loading on each centre to exceed
their capacities to ensure that jobs will not be late
Sequencing passengers onto an aircraft

Pull and push philosophies of planning & control (1)

Pull and push philosophies of planning & control (2)

Pull and push philosophies of planning & control (3)

The drum, buffer, rope concept

Capacity Management

What is Capacity? (1)

• Aggregate capacity of a hotel:

 rooms per night
• Aggregate capacity of an aluminium producer:
 Tonnes per month
What is capacity? (2)

The objectives of capacity management

To provide an ‘appropriate’ amount of capacity at any point in time.

The ‘appropriateness’ of capacity planning in any part of the operation can be judged
by its effect on…

Objectives of capacity planning and control

Measuring capacity

• Capacity can be accurately measured for operations

 is highly standardized and repetitive
 E.g., a television factory produce 2,000 units of model A each year
• How about an operation which produces more than one types of products,
and the throughput time for each product differs?

Measuring Capacity: an example

• An air-conditioner factory produces three types of air-conditioners: “de luxe”,

“standard”, “economy”
• Assembly time: 1.5hrs for “de luxe”, 1hr for “standard”, 0.75hr for
“economy”. Total assembly workers = 800 hrs
• What is the capacity when the product mix is 2:3:2?
• What is the capacity when the product mix is changed to 1:2:4?

Measuring Capacity
• Design capacity is the theoretical capacity or an operation or machine
• Effective capacity is the actual capacity remains, after considering various
unavoidable losses (change over, preventive maintenance, quality check, shift
change, etc.)
• Utilization = actual output / design capacity
• Efficiency = actual output / effective capacity

Input & output capacity measures for different operations

Table 11.1 Input and output capacity measures for different operations
Note: The most commonly used measure is shown in bold
The nature of aggregate capacity

Causes of seasonality

Reconciling capacity and demand (3)

Reconciling capacity and demand (4)

Reconciling capacity and demand (5)

Week 20 – operations improvements

What is lean?
 A philosophy
 A mindset
 A way of thinking about how to add value without adding cost
 A way of becoming more competitive
 A way of increasing capacity without the need to increase resources

Aims of lean

• Close Integration of the whole Value Chain from raw material to finished
product through partnership oriented relations with suppliers and
distributors
• Just in Time - processing; a part that moves to a production operation is
processed immediately - no waiting
• Pull system - production is based on orders than forecasts
• Minimal inventories - at each stage of the production process
• Total Quality control - active involvement by operators in trouble shooting
and problem solving to improve quality and eliminate waste
• Right First Time - rather than rework by building quality in the process and
implementing real time quality feedback procedures

Benefits of lean

• Waste and in effect cost reduction

• Decreased manufacturing cycle times – quicker to the customer
• Inventory reduction while increasing customer service levels (transfer of
warehousing space to production space)
• Increase in current facilities capacity
• Improved quality (less ‘fire fighting’ because operations more organised and
less mistakes are being made)
• Higher return on investment / higher profits
• Higher system flexibility - which allows you to take more orders
• YOUR ORGANISATION BECOMES MORE COMPETITIVE!!!!

Learning to
see
  Transportation
 Inventory
 Motion (too many moves in the process)
 Waiting
 Over – production (mismatch between supply and demand)
 Over-processing (too many steps in the process)
 Defects
 Skills (lack of skills in the workforce)

Wastes

Type of waste Evidence of waste

Transportation
Inventory
Motion
Waiting (for something to happen or
for something to arrive)
Over-production
Over-processing
Defects
Skills

Lean transformation process

Start to improve – Value Stream Mapping

 ‘Wherever a product for the customer exists, there is also a value stream. The
challenge is to see and improve it’ (Mike Rother, John Shook, 2000)
 Value stream; all activities (value and non-value) to get a product from raw
material to manufacturing and up to the customer (manufacturing stream),
and from the product concept up to the start of production (development
stream)

E.g. NHS – reduce things that do not add value to patients

Lean operations and Just-In-Time

• Whilst it could be argued that the identification and elimination of waste has
always been on the agenda of well managed organisations, the concept is
often linked to the work of Toyota who developed a set of principles and
practices to operationalise it.
• Part of Toyota’s approach was to identify the following areas of waste:-
• Over Production
• Waiting Time
• Transport
• Process
• Inventory
• Motion
• Defects
Therefore…

“The key principle of lean operations is relatively straightforward to understand: it

means moving towards the elimination of all waste in order to develop an operation
that is faster and more dependable, produces higher quality products and services
and, above all, operates at low cost.”

To achieve Lean operations

• Start with 5S‟s

• Value stream mapping
–Eliminate non-value adding activities
–If possible, transform push operations to pull operations
• Reduce the levels of inventory and slack resources to reveal operations
problems
• Continuous improvement and quality culture

5 S means…

• Sort (Seiri): Eliminate what is not needed and keep what is needed.
• Straighten (Seiton)-Position things in such a way that they can be easily
reached whenever they are needed.
• Shine (Seiso) -Keep things clean and tidy; no refuse or dirt in the work area.
• Standardize (Seiketsu) -Maintain cleanliness and order –perpetual neatness.
• Sustain (Shitsuke) -Develop a commitment and pride in keeping to standards.

The inventory problem

Value Stream Mapping

• Focuses on value-adding activities. It distinguishes between value-adding and

non-value-adding activities. It is similar to process mapping but different in
four ways:
• It uses a broader range of information than most process maps.
• It is usually at a higher level (5–10 activities) than most process maps.
• It often has a wider scope, frequently spanning the whole supply chain.
• It can be used to identify where to focus future improvement activities.

Value Stream Mapping – An Example

Just-in-Time (JIT) (1)

• Aims to meet demand instantly, with perfect quality and no waste

• Improved overall productivity and elimination of waste
• Cost-effective production and delivery of only the necessary quantity of parts
at the right quality, at the right time and place, while using a minimum
amount of facilities, equipment, materials and human resources

Just-in-Time (JIT) (2)

• JIT is dependent on the balance between the supplier’s flexibility and the
user’s flexibility
• JIT is accomplished through the application of elements that require total
employee involvement and teamwork
• A key philosophy of JIT is simplification
JIT (Pull) Operations

JIT material flow

JIT (Kanban) inventory: the “two-bin” and “three-bin” re-ordering systems

JIT and Capacity Utilisation

JIT – Prerequisites?

• JIT is not a way to achieve quality

• JIT is only possible after processes bought under control (low variation)
–It requires a continuous improvement culture
–It requires 5 S (Sort, Straighten, Shine, Standardize, Sustain)
–It requires total visibility
–It requires reliable material supply & transforming resources
–Etc…(low variable demand)
• Otherwise -Just-in-trouble!

Lean and JIT in services

• Replenishment of supermarket shelf based on pull-principle

• Fast-food restaurant only cook and assemble food only after customers order
the food
• Visa application via online only and embassy officers work at the pace of visa
applications using a just-in-time product layout
• Hospitals and the Health Service (Productive Ward)
Week 21- Supply Chain Management & Enterprise Resource Planning

Supply Chain Management definition

Supply Chain Management definition

• Supply Chain Management (SCM) is the management of a network of

relationships within firm and between interdependent organisations and
business units consisting of material suppliers, purchasing, production
facilities, logistics, marketing, services, finances and information from the
original producer to final customer with the benefits of adding value,
maximising profitability through efficiencies and achieving customer
satisfaction.

• Supply chain management takes an end-to-end perspective from the

upstream of the supply chain to the downstream end of the supply chain
(customer)
• Farm to fork
• Cradle to grave
• Dust to rust

Global supply chains

• ‘Singer Sewing Machine Company buys sewing machine shells from a

subcontractor in the United States, the motors from Brazil, the drive shafts
from Italy and assembles the finished machine in Taiwan. It then markets the
finished machines in most countries of the world.’

Supply Chain Management (product-process matrix)

The product-process matrix (along with its services equivalent) is useful for
understanding the flows. These flows pertain to not only materials – raw materials,
components, work-in-progress, finished goods, containers, truckloads, railcars, etc. –
but more importantly information and cash (Figure).

Supply chain visibility

• Supply chain visibility is the ability to see information at the various points
across the supply chain as and when required
 To help to manage complexity
 It is highly desirable, but difficult to achieve

Supply Chain mapping: cycle view and process view

Process Views of a Supply Chain

• Cycle view: processes in a supply chain are divided into a series of cycles,
each performed at the interfaces between two successive supply chain stages
• Push/pull view: processes in a supply chain are divided into two categories
depending on whether they are executed in response to a customer order
(pull) or in anticipation of a customer order (push)

Cycle View of a Supply Chain

• The supply chain is a concatenation of cycles with each cycle at the interface
of two successive stages in the supply chain. Each cycle involves the customer
stage placing an order and receiving it after it has been supplied by the
supplier stage.
• One difference is in size of order. Second difference is in predictability of
orders - orders in the procurement cycle are predictable once manufacturing
planning has been done.
• This is the predominant view for ERP systems. It is a transaction level view
and clearly defines each process and its owner.
 Each cycle occurs at the interface between two successive stages
 Customer order cycle (customer-retailer)
 Replenishment cycle (retailer-distributor)
 Manufacturing cycle (distributor-manufacturer)
 Procurement cycle (manufacturer-supplier)
 Cycle view clearly defines processes involved and the owners of each process.
Specifies the roles and responsibilities of

Push/Pull View of Supply Chains

• In this view processes are divided based on their timing relative to the timing
of a customer order. Define push and pull processes.
• They key difference is the uncertainty during the two phases.

 Supply chain processes fall into one of two categories depending on the timing of
their execution relative to customer demand
 Pull: execution is initiated in response to a customer order (reactive)
 Push: execution is initiated in anticipation of customer orders (speculative)
 Push/pull boundary separates push processes from pull processes

Push/Pull Processes for automotive Supply Chain

Push/Pull Processes for the Dell Supply Chain (prior to 2007)

Enterprise Resource Planning

Enterprise Resource planning is...

“…a process or approach which attempts to consolidate all of a company's
departments and functions into a single computer system that services each
department's specific needs.”
- Supply Chain and Vendor Management
- Projects and HR Management
- Manufacturing Producion & Service Management & Delivery
- Finance and ACCOUNTING
- Customer Relationship Management

ERP integrates planning and control information from all parts of the organization
Resource planning and control requires and produces vast amounts of information.
Good decisions require that data be integrated. For instance, if an order comes in for
ten widgets and a shipment is made corresponding to the ten widgets, then order
status (“shipped”), inventory (decreased by ten widgets), and accounts receivable
(based on the invoice) need to be integrated.
One reason why companies use enterprise resource planning or ERP is for its
integrating the data for the purposes of resource planning and control (Figure).

Key operations questions

• What is ERP?
• How did ERP develop?
• How should ERP systems be implemented?

What is ERP (YouTube video)

- Initially it was a convergence of systems e.g. finance, HR management,
manufacturing systems
- Appealed because it brought together in real time information that
organizations needed to make decisions about the enterprises resources
- What is the business value – 3 layers –
- 1) Cost reduction (e.g. how to improve productivity of staff by using different
systems)
- 2) Business productivity benefits (how often am I incorporating the best
practices into the business, am I operating purchase orders the most efficient
way possible) looking at the way that process and information can be
employed to create new best practices e.g. changing the way you do change
management in order to be more process-oriented
- Your ERP isn’t working if you’re running into problems changing the business

Think about all the core processes needed to run a company: finance, HR,
manufacturing, supply chain, services, procurement, and others. At its most basic
level, ERP integrates these processes into a single system.
But new ERP systems are anything but basic. They use the latest technologies – such
as machine learning and AI – to provide intelligence, visibility, and efficiency across
every aspect of a business.

Benefits of ERP
- Higher productivity - Streamline and automate your core business processes
to help everyone in your organization do more with fewer resources.
- Better insights - Eliminate information silos, gain a single source of truth, and
get fast answers to mission-critical business questions.
- Accelerated reporting - Fast-track business and financial reporting and easily
share results. Act on insights and improve performance in real time.
- Lower risk - Maximize business visibility and control, ensure compliance with
regulatory requirements – and predict and prevent risk.
- Simpler IT - By using integrated ERP applications that share a database, you
can simplify IT and give everyone an easier way to work.
 - Improved agility - With efficient operations and ready access to real-time
data, you can quickly identify and react to new opportunities.

Week 22 – inventory management

• Examine the importance of inventory to the supply chain
• Brief overview and Introduction to the EOQ model
• Stock categorisation and classification

Inventory is a stock or store of product or goods essential to balance production

and delivery

Typical inventory consists of:

 Basic raw materials
 Work in progress such as assemblies
 Components at manufacturing stations
 Finished goods inventory
 Replacement parts, tools, jigs and sundry supplies
 Pipeline stock (in warehouses, trucks or retail warehouses)
 Maintenance repair and operating supplies (MRO)

Inventory is created to decouple differences in timing between supply and demand

Inventory is holding material or finished goods to manage demand variability

Why do we hold inventory?
 To meet anticipated customer demand
 To smooth uncertainty in supply and demand
 To uncouple stages in the supply chain
 Manage production stoppages (e.g. downtime)
 Avoid stock outs and maintain service (customer goodwill)
 To save cost by buying economic lots (e.g. bulk buying)
  To hedge against future price rises

Inventory plays a critical role in the supply chain and in competitive strategy

• Inventory exists because of a mismatch between supply and demand and is a

source of cost, and influences responsiveness
• Inventory impacts:
 Material flow time: the time elapsed from when material enters the
supply chain to when it exits
 Throughput: the rate at which sales to end consumers occur
• Inventory = Throughput x Time
 Assuming that throughput is relatively fixed, Inventory and flow-time
are “synonymous”. Therefore decreasing the inventory decreases
flow-time.

Single-stage and two-stage inventory systems

A multi-stage inventory system

Although useful, because of the high cost, inventory should be minimized

• Inventory uses up cash (around 25% of value pa)

 Capital charges and management
• Inventory takes up space
 In buildings to store as well as production floor space
 In people, computers and documentation
• It is liable to:
 Damage or shrinkage
 Obsolescence when old parts become redundant
 Limited shelf life (such as food)

Common causes of poor inventory control

• Overbuying when a shortage is threatened

• Overbuying because of discounts (savings < holding cost)
• Holding unused stock instead of returning to store
• Short term management action to reduce investment in stock
• Reduction at end of financial year to make books look good
• Keeping production fully utilised when no orders
• Overproduction
• Producing earlier than customer is prepared to accept

Before we move on is there such a thing as a service inventory?

• Service inventory are steps executed prior to the customer receiving the
service
 For example pre-checks health, credit or checking in online
 Allows buffering of resources and decoupling
In a service such as dental patients form the stock and the work in progress
• Waiting rooms as inbound inventory
• At the treatment location who is the work in progress!
• Treatment the production process
 User of the service participates in its delivery
 Not sure about the intangible service elements!
• Appointments the scheduling system

Three main costs come into play in an inventory System

• The procurement costs of acquiring stock

 Ordering cost (administrative, inspection, transportation etc.)
• Holding costs
 Maintenance and Handling
 Taxes, insurance and capital costs
 Obsolescence and damage
 Space required to hold inventory, the cost of the money needed to
acquire inventory and the risk of loss through inventory obsolescence
• Stock-outs costs (opportunity costs)
 Lost sales (Customer goodwill)
 Backorders

Managing inventory economically involves balancing holding and acquisition cost

• Fundamentally two issues concern us in inventory management

 How much of an stock item should be ordered at a time?
 When should the stock item be ordered
• Main factors in balancing
 Inventory lot size
 Replenishment lead time
 Stock outs (managing)
 Reorder point
 Safety stock

Inventory

Order Size

Time
Assumptions: No stock-outs, order arrives on zero stock
Profile of the inventory over time

What is EOQ?

Economic order quantity (EOQ) is the ideal order quantity a company should
purchase for its inventory given a set cost of production, a certain demand rate, and
other variables. This is done to minimize inventory holding costs and order-related
costs.

The required parameters to calculate EOQ:

Total cost = purchase cost + ordering cost + holding cost

TC = Total cost
D = Annual demand
C = unit cost
Q = order quantity
S = ordering cost
H = Holding cost

TC = DC + (D/Q)S + (Q/2)H

EOQ =

EOQ - Cost Minimization Goal

Main assumptions (disadvantages) of EOQ formula

• Demand and ordering cost are constant (and known accurately)

• Maximum inventory is equal to order quantity,
• A new order is delivered when the inventory is zero
• Lead time is fixed
• No discount is avaliable for bigger orders
• Replenishment is delivered at once
• Unlimited stock holding capacity
• Lack of inflation

When to order and how much to order – Fixed-Order Quantity (FOQ)

Fixed-Order Quantity System

– an order of fixed quantity, Q, is placed when inventory drops to a reorder point,
ROP

The Fixed Order Quantity is the inventory control system, wherein the maximum
and minimum inventory levels are fixed, and maximum and fixed amount of
inventory can be replenished at a time when the inventory level reaches the auto set
reorder point or the minimum stock level.

To solve the stock control problem we must decide when to order and how much
to order

• FOQ systems are an advantage when:

 Usage rate is reasonably constant
 Variable demand but negligible delivery lead-time
 Low unit value stock
 Stock easily monitored
 Reliably constant lead-time
• FOC systems are an advantage when:
 High unit value stock (needs frequent checks)
 The supplier needs a regular or frequent order pattern
 Supplier provides large number different items

Safety or buffer stock is needed to account for uncertainty

• Is excess stock held to account for demand or lead time variability

• Usually set at 95% of demand during the lead time
• Service level is probability demand will not exceed supply in the lead time

Safety stock is a term commonly used to describe a certain amount of inventory kept by a
business in reserve, to protect against unforeseen events such as spikes in demand or supply
shortages. Most businesses employ some kind of minimum level of stock in this way. The
principal goal of safety stock is to ensure that there is sufficient product available to the
customer.

Safety stock is necessary because in most industries it is impossible to predict with 100%
certainty the amount of stock that will be needed, and the amount of stock available, to supply
customers over a given period of time. Demand is variable to at least some degree, affected by
seasonal effects, one-off ‘shock’ events, new customers being engaged, or old customers leaving.
The best that a business can do is to make forecasts that are as accurate as possible, but
ultimately these are just predictions. It is also impossible to fully guarantee an expected level of
supply, as suppliers have their own problems in meeting demand requirements, and thus may
not always deliver what is needed on time. Due to this uncertainty, having an amount of
inventory in reserve can allow a business to weather any difficulties with demand or supply, and
keep the customer satisfied.

- In some industries such as airline with 300,000 parts conventional stock

control simply does not work.

So inventory is fun and exciting but we must keep it under control!

 It is expensive to hold and manage

 Potentially obscures problems in the operation
 Carries with it risks of
- Obsolescence
- Loss (pilferage and Ullage)
 But
- Acts as decoupling along the supply chain
- Supports the management of availability

Week 23 – Quality and Risk management

 Discuss quality and TQM concepts

 Understand the implications of the cost of (poor) quality
 Discuss the main principles / tools for quality management

Quality management

Perceived quality is governed by the gap (magnitude and direction) between

customers’ expectations and their perceptions of the product or service
A ‘Gap’ model of quality

Figure 17.4 The customer’s domain and the operations domain in determining the
perceived quality, showing how the gap between customers’ expectations and their
perception of a service or product could be explained by one or more gaps
elsewhere in the model

The perception–expectation gap

Quality characteristics of goods and services

 Functionality – how well the product or service does the job for which it was
intended.
 Appearance – aesthetic appeal, look, feel, sound and smell of the product or
service.
 Reliability – consistency of product or services performance over time.
 Durability – the total useful life of the product or service.
 Recovery – the ease with which problems with the product or service can be
rectified or resolved
 Contact – the nature of the person-to-person contacts that take place.

Total quality management

What does total quality management include?

 Includes all parts of the organization

 Includes all staff of the organization
 Includes consideration of all costs
 Includes every opportunity to get things right
 Includes all the systems that affect quality
 And it never stops!

Total Quality Management: extending earlier approaches to quality management

Preventing errors in the first place brings a more than equivalent reduction in
other cost categories

Increasing the effort spent on preventing errors occurring in the first place brings a
more than equivalent reduction in other cost categories

Traditional cost
of quality model
TQM culture characteristics

 Responsibility for the well-being of the organisation accepted by all

 Mutual respect across and between all levels
 Willingness to take part in improvement initiatives (Quality Circles)
 Removal of them and us culture
 Pride in the organisation

TQM: achievement of culture?

 Top management commitment (not a passing fad)

 Demonstration of commitment by “actions” not “words” (Statements,
Posters, Speeches etc. are soon seen as rhetorical if not backed up by action)
 Actions Including:

• Blame and recrimination replaced by investigation of root

causes of problems

• Open book policy (communication)

• Adoption of changes and recognition of effort

Risk management

What is Risk (1)

 Exposure to the chance of injury or loss

 Hazard or dangerous chance
 Chance of loss
 Degree of probability of such a loss

What is Risk (2)

 Risk  ambiguous concept

 Many definitions of Risk, depending on their application and situational
context
 Risk denotes probability of specific eventualities
 Technically, Risk has no value so these eventualities can be beneficial or
adverse (e.g. Financial risk) (?)

Risk = Probability * Consequences

What is Risk Management?

• Edwards & Bowen (1998) define risk management as: ‘…a systematic
approach to dealing with risk. A risk management system should: establish an
appropriate context; set goals and objectives; identify and analyse risks;
influence risk decision making; and monitor and review risk responses.’
(p.339)

• ‘Risk Management is the systematic process of identifying, analysing and

responding to project risk. It includes maximising the probability and
consequences of positive events and minimizing the probability and
consequences of positive events and minimising the probability and
consequences of adverse events to project objectives.’ (Project Management
Institute)

Risk Management

 Focuses on ensuring value for stakeholders

 Risk is an inherent property of business (incl. operational) processes
 Risk is mitigated by process design
 Feedback is obtained through risk indicators assigned to systems and
processes
 Risk is mitigated through optimised processes

Who is involved in Risk Management?

 Customer
 End-user
 Team
 Management
 Product Management
 Related Projects
 Subcontractors
 Suppliers
 Risk management is therefore communication (?)
Failure management: dependent on likelihood of occurrence & negative
consequences of failure

Causes of failure

 Supply failure
 Human failures
 Organisational failure
 Technology and facilities failure
 Product/service design failure
 Customer failure
 Environmental disruption

Why Systems fail

Bath-tub curves

Complacency is an intrinsic flaw that prevents organizations from pushing

beyond the status quo to achieve exceptional successes.

How failure is measured

The three tasks of failure prevention and recovery

Failure management

Failure rate

 ...is calculated as the number of failures over a period of time.

 E.g. the security of an airport can be measured by:

 The number of security breaches per year

 E.g. The failure rate of an engine:

 Number of failures by the operating time

FR = (number of failures/total number of products tested)*100

FR = number of failures/operating time

A mixture of maintenance approaches is often used – in a motor car, for example

Failure modes
Risk mitigation actions

Mitigation planning – is the activity of ensuring that all possible failure

circumstances have been identified and the appropriate mitigation actions
identified.

Economic mitigation – includes actions such as insurance against losses from failure,
spreading the financial consequences of failure.
Containment (spatial) – means stopping the failure physically spreading to affect other parts
of an internal or external supply network.
Containment (temporal) – means containing the spread of a failure over time.
Loss reduction – covers any action that reduces the catastrophic consequences of failure by
removing the resources that are likely to suffer those consequences.
Substitution – means compensating for failure by providing other resources that can
substitute for those rendered less effective by the failure.