TOPIC 1 Introduction to Operation Management

Operations management is an area of management concerned with designing and controlling

the process of production and redesigning business operations in the production of goods or
services.

It involves the responsibility of ensuring that business operations are efficient in terms of using
as few resources as needed and effective in terms of meeting customer requirements.

It is concerned with managing the process that converts inputs (in the forms of raw materials,
labor, and energy) into outputs (in the form of goods and/or services).

Historical Development of Operations Management

Operations in some form has been around as long as human endeavour itself but, in
manufacturing at least, it has changed dramatically over time, and there are three major phases -
craft manufacturing, mass production and the modern period. Let's look at each of these
briefly in turn.

Craft manufacturing

Craft manufacturing describes the process by which skilled craftspeople produce goods in low
volume, with a high degree of variety, to meet the requirements of their individual customers.
Over the centuries, skills have been transmitted from masters to apprentices and journeymen, and
controlled by guilds. Craftspeople usually worked at home or in small workshops. Such a system
worked well for small-scale local production, with low levels of competition. Some industries,
such as furniture manufacture and clockmaking, still include a significant proportion of craft
working.

Mass production

In many industries, craft manufacturing began to be replaced by mass production in the 19th
century. Mass production involves producing goods in high volume with low variety – the
opposite of craft manufacturing. Customers are expected to buy what is supplied, rather than
goods made to their own specifications. Producers concentrated on keeping costs, and hence
prices, down by minimising the variety of both components and products and setting up large
production runs. They developed aggressive advertising and employed sales forces to market
their products.

An important innovation in operations that made mass production possible was the system of
standardised and interchangeable parts known as the ‘American system of manufacture’
(Hounshell, 1984), which developed in the United States and spread to the United Kingdom and
other countries. Instead of being produced for a specific machine or piece of equipment, parts
were made to a standard design that could be used in different models. This greatly reduced the
amount of work required in cutting, filing and fitting individual parts, and meant that people or
companies could specialise in particular parts of the production process.
A second innovation was the development by Frederick Taylor (1911) of the system of
'scientific management’, which sought to redesign jobs using similar principles to those used
in designing machines. Taylor argued that the role of management was to analyse jobs in order
to find the ‘one best way’ of performing any task or sequence of tasks, rather than allowing
workers to determine how to perform their jobs. By breaking down activities into tasks that were
sequential, logical and easy to understand, each worker would have narrowly defined and
repetitious tasks to perform, at high speed and therefore with low costs (Kanigel, 1999).

A third innovation was the development of the moving assembly line by Henry Ford. Instead
of workers bringing all the parts and tools to a fixed location where one car was put together at a
time, the assembly line brought the cars to the workers. Ford thus extended the ideas of scientific
management, with the assembly line controlling the pace of production. This completed the
development of a system through which large volumes of standardised products could be
assembled by unskilled workers at constantly decreasing costs – the apogee of mass production.

The modern period

Mass production worked well as long as high volumes of mass-produced goods could be
produced and sold in predictable and slowly changing markets. However, during the 1970s,
markets became highly fragmented, product life cycles reduced dramatically and
consumers had far greater choice than ever before.

An unforeseen challenge to Western manufacturers emerged from Japan. New Japanese

production techniques, such as total quality management (TQM), just-in-time (JIT) and
employee involvement were emulated elsewhere in the developed world, with mixed results.

More recently, the mass production paradigm has been replaced, but there is as yet no single
approach to managing operations that has become similarly dominant. The different approaches
for managing operations that are currently popular include:

 Flexible specialisation (Piore and Sabel, 1984) in which firms (especially small firms)
focus on separate parts of the value-adding process and collaborate within networks
to produce whole products. Such an approach requires highly developed networks,
effective processes for collaboration and the development of long-term relationships
between firms.
 Lean production (Womack et al., 1990) which developed from the highly successful
Toyota Production System. It focuses on the elimination of all forms of waste from a
production system. A focus on driving inventory levels down also exposes
inefficiencies, reduces costs and cuts lead times.
 Mass customisation (Pine et al., 1993) which seeks to combine high volume, as in mass
production, with adapting products to meet the requirements of individual
customers. Mass customisation is becoming increasingly feasible with the advent of new
technology and automated processes.
 Agile manufacturing (Kidd, 1994) which emphasises the need for an organisation to be
able to switch frequently from one market-driven objective to another. Again, agile
 manufacturing has only become feasible on a large scale with the advent of enabling
technology.

In various ways, these approaches all seek to combine the high volume and low cost associated
with mass production with the product customisation, high levels of innovation and high levels
of quality associated with craft production.

Role of the Operations Manager

Operations managers are responsible for managing activities that are part of the production
of goods and services. Their direct responsibilities include managing both the operations
process, embracing design, planning, control, performance improvement, and operations
strategy. Their indirect responsibilities include interacting with those managers in other
functional areas within the organisation whose roles have an impact on operations. Such areas
include marketing, finance, accounting, personnel and engineering.

Operations managers' responsibilities include:

 Human resource management– the people employed by an organisation either work

directly to create a good or service or provide support to those who do. People and the
way they are managed are a key resource of all organisations.
 Asset management– an organisation's buildings, facilities, equipment and stock are
directly involved in or support the operations function.
 Cost management– most of the costs of producing goods or services are directly related
to the costs of acquiring resources, transforming them or delivering them to customers.
For many organisations in the private sector, driving down costs through efficient
operations management gives them a critical competitive edge. For organisations in the
not-for-profit sector, the ability to manage costs is no less important.

Decision making is a central role of all operations managers. Decisions need to be made in:

 designing the operations system

 managing the operations system
 improving the operations system.

The five main kinds of decision in each of these relate to:

1. the processes by which goods and services are produced

2. the quality of goods or services
3. the quantity of goods or services (the capacity of operations)
4. the stock of materials (inventory) needed to produce goods or services
5. the management of human resources.
The transformation model
The discussion above has highlighted the role of operations in creating and delivering the goods
and services produced by an organisation for its customers. This section introduces the
transformation model for analysing operations. This is shown in Figure 1, which represents
the three components of operations: inputs, transformation processes and outputs. Operations
management involves the systematic direction and control of the processes that transform
resources (inputs) into finished goods or services for customers or clients (outputs). This basic
transformation model applies equally in manufacturing and service organisations and in both the
private and not-for-profit sectors.

Inputs

Some inputs are used up in the process of creating goods or services; others play a part in the
creation process but are not used up. To distinguish between these, input resources are usually
classified as:

 transformed resources – those that are transformed in some way by the operation to
produce the goods or services that are its outputs
 transforming resources – those that are used to perform the transformation process.

Inputs include different types of both transformed and transforming resources.

Three types of resource that may be transformed in operations are:

 materials – the physical inputs to the process

 information that is being processed or used in the process
 customers – the people who are transformed in some way.

Many people think of operations as being mainly about the transformation of materials or
components into finished products, as when limestone and sand are transformed into glass or an
automobile is assembled from its various parts. But all organisations that produce goods or
services transform resources: many are concerned mainly with the transformation of
information (for example, consultancy firms or accountants) or the transformation of
customers (for example, hairdressing or hospitals).

Galloway (1998) defines operations as all the activities concerned with the transformation of
materials, information or customers.

The two types of transforming resource are:

 staff – the people involved directly in the transformation process or supporting it

 facilities – land, buildings, machines and equipment.
The staff involved in the transformation process may include both people who are directly
employed by the organisation and those contracted to supply services to it. They are sometimes
described as ‘labour’. The facilities of an organisation – including buildings, machinery and
equipment – are sometimes referred to as ‘capital’. Operations vary greatly in the mix of labour
and capital that make up their inputs. Highly automated operations depend largely on capital;
others rely mainly on labour.

Outputs

The principal outputs of a doctor's surgery are cured patients; the outputs of a nuclear
reprocessing plant include reprocessed fuel and nuclear waste. Many transformation processes
produce both goods and services. For example, a restaurant provides a service, but also produces
goods such as food and drinks.

Transformation processes may result in some undesirable outputs (such as nuclear waste in
the example above) as well as the goods and services they are designed to deliver. An important
aspect of operations management in some organisations is minimising the environmental
impact of waste over the entire life cycle of their products, up to the point of final disposal.
Protecting the health and safety of employees and of the local community is thus also the
responsibility of operations management. In addition, the operations function may be responsible
for ethical behaviour in relation to the social impact of transformation processes, both locally and
globally. For example, in the United States, manufacturers of sports footwear have come under
fire for employing child labour and paying low wages to workers employed in their overseas
factories.

Transformation processes

A transformation process is any activity or group of activities that takes one or more inputs,
transforms and adds value to them, and provides outputs for customers or clients. Where the
inputs are raw materials, it is relatively easy to identify the transformation involved, as when
milk is transformed into cheese and butter. Where the inputs are information or people, the
nature of the transformation may be less obvious. For example, a hospital transforms ill patients
(the input) into healthy patients (the output).

Transformation processes include:

 changes in the physical characteristics of materials or customers

 changes in the location of materials, information or customers
 changes in the ownership of materials or information
 storage or accommodation of materials, information or customers
 changes in the purpose or form of information
 changes in the physiological or psychological state of customers.

Often all three types of input – materials, information and customers – are transformed by the
same organisation. For example, withdrawing money from a bank account involves information
about the customer's account, materials such as cheques and currency, and the customer. Treating
a patient in hospital involves not only the ‘customer's’ state of health, but also any materials used
in treatment and information about the patient.

One useful way of categorising different types of transformation is into:

 manufacture – the physical creation of products (for example cars)

 transport – the movement of materials or customers (for example a taxi service)
 supply – change in ownership of goods (for example in retailing)
 service – the treatment of customers or the storage of materials (for example
hospital wards, warehouses).

Several different transformations are usually required to produce a good or service. The overall
transformation can be described as the macro operation, and the more detailed transformations
within this macro operation as micro operations.
TOPIC 2 Process Strategy and Capacity Planning

Capacity planning is the process of determining the production capacity needed by an organization to
meet changing demands for its products. In the context of capacity planning, design capacity is the
maximum amount of work that an organization is capable of completing in a given period.

Three key inputs to capacity planning

1. The kind of capacity that will be needed

2. How much capacity will be needed
3. When will it be needed

Strategy

The broad classes of capacity planning are lead strategy, lag strategy, match strategy, and
adjustment strategy.

 Lead strategy is adding capacity in anticipation of an increase in demand. Lead

strategy is an aggressive strategy with the goal of luring customers away from the
company's competitors by improving the service level and reducing lead time. It is also a
strategy aimed at reducing stockout costs. A large capacity does not necessarily imply
high inventory levels, but it can imply higher cycle stock costs. Excess capacity can also
be rented to other companies.

 Lag strategy refers to adding capacity only after the organization is running at full
capacity or beyond due to increase in demand . This is a more conservative strategy
and opposite of a lead capacity strategy. It decreases the risk of waste, but it may result in
the loss of possible customers either by stockout or low service levels. Three clear
advantages of this strategy are a reduced risk of overbuilding, greater productivity due to
higher utilization levels, and the ability to put off large investments as long as possible.
Organization that follow this strategy often provide mature, cost-sensitive products or
services.
  Match strategy is adding capacity in small amounts in response to changing demand
in the market. This is a more moderate strategy.

 Adjustment strategy is adding or reducing capacity in small or large amounts due to

consumer's demand, or, due to major changes to product or system architecture.

Determinants of Effective Capacity

 Facilities: The size and provision for expansion are key in the design of facilities. Other
facility factors include locational factors (transportation costs, distance to market, labor
supply, energy sources). The layout of the work area can determine how smoothly work
can be performed.

 Product and Service Factors: The more uniform the output, the more opportunities
there are for standardization of methods and materials. This leads to greater capacity.

 Process Factors: Quantity capability is an important determinant of capacity, but so is

output quality. If the quality does not meet standards, then output rate decreases because
of need of inspection and rework activities. Process improvements that increase quality
and productivity can result in increased capacity. Another process factor to consider is the
time it takes to change over equipment settings for different products or services.

 Human Factors: the tasks that are needed in certain jobs, the array of activities involved
and the training, skill, and experience required to perform a job all affect the potential
and actual output. Employee motivation, absenteeism, and labor turnover all affect the
output rate as well.

 Policy Factors: Management policy can affect capacity by allowing or not allowing
capacity options such as overtime or second or third shifts

 Operational Factors: Scheduling problems may occur when an organization has

differences in equipment capabilities among different pieces of equipment or differences
in job requirements. Other areas of impact on effective capacity include inventory
stocking decisions, late deliveries, purchasing requirements, acceptability of purchased
materials and parts, and quality inspection and control procedures.

 Supply Chain Factors: Questions include: What impact will the changes have on
suppliers, warehousing, transportation, and distributors? If capacity will be increased,
will these elements of the supply chain be able to handle the increase? If capacity is to be
decreased, what impact will the loss of business have on these elements of the supply
chain?

 External Factors: Minimum quality and performance standards can restrict

management's options for increasing and using capacity.

 Inadequate planning can be a major limiting determining of effective capacity.

TOPIC 3 Supply Chain and Management

Supply chain management (SCM) is the management of the flow of goods and
services, involves the movement and storage of raw materials, of work-in-process inventory,
and of finished goods from point of origin to point of consumption.

Interconnected or interlinked networks, channels and node businesses combine in the provision
of products and services required by end customers in a supply chain.

SCM has been defined as the "design, planning, execution, control, and monitoring of supply
chain activities with the objective of creating net value, building a competitive
infrastructure, leveraging worldwide logistics, synchronizing supply with demand and
measuring performance globally."

The concept of Supply Chain Management is based on two core ideas.

Practically every product that reaches an end user represents the cumulative effort of
multiple organizations.
1st:
These organizations are referred to collectively as the supply chain.
While supply chains have existed for a long time, most organizations have only paid
attention to what was happening within their “four walls.”

2nd: Few businesses understood, much less managed, the entire chain of activities that
ultimately delivered products to the final customer.

The result was disjointed and often ineffective supply chains.

Supply chain management is the active management of supply chain activities to maximize
customer value and achieve a sustainable competitive advantage. It represents a conscious
effort by the supply chain firms to develop and run supply chains in the most effective &
efficient ways possible. Supply chain activities cover everything from product development,
sourcing, production, and logistics, as well as the information systems needed to coordinate these
activities.

The organizations that make up the supply chain are “linked” together through physical flows
and information flows. Physical flows involve the transformation, movement, and storage of
goods and materials. They are the most visible piece of the supply chain. But just as important
are information flows. Information flows allow the various supply chain partners to coordinate
their long-term plans, and to control the day-to-day flow of goods and material up and down the
supply chain.
Topic 4 Inventory Management
What is inventory?
 A complete list of items such as property, goods in stock, or content of building
 An itemized catalog or list of tangible goods or property, or the intangible attributes or
qualities

What is Inventory Management?

Effective inventory management is all about knowing what is on hand, where it is in use,
and how much finished product results.

Inventory management is the process of efficiently overseeing the constant flow of units into
and out of an existing inventory. This process usually involves controlling the transfer in of units
in order to prevent the inventory from becoming too high, or dwindling to levels that could put
the operation of the company into jeopardy.

Inventory management is a science primarily about specifying the shape and placement of
stocked goods. It is required at different locations within a facility or within many locations of a
supply network to precede the regular and planned course of production and stock of materials.

Evolution of Inventory Management

A more complicated Inventory Management System....
TOPIC 5 Just-in-Time and Lean Production

JUST IN TIME
Just-in-time (JIT) denoting a manufacturing system in which materials or components are
delivered immediately before they are required in order to minimize inventory costs.

Just in Time Manufacturing also known as "lean manufacturing" refers to a system of

manufacturing in which products are not built until the product is ordered and paid for.

JIT's main philosophy is to eliminate waste - wasted inventory, wasted stock and wasted
time. By creating and deliverying products quickly when consumers request them excess
inventory is eliminated, customers receive their orders quicker and the manufacturer
doesn't need to keep a large inventory of stock parts.

Below are just a few examples of successful JIT implementations:

Toyota is considered by many to be the poster child for JIT success. The Toyota production
strategy is highlighted by the fact that raw materials are not brought to the production floor
until an order is received and this product is ready to be built. No parts are allowed at a node
unless they are required for the next node, or they are part of an assembly for the next node. This
philosophy has allowed Toyota to keep a minimum amount of inventory which means lower
costs. This also means that Toyota can adapt quickly to changes in demand without having to
worry about disposing of expensive inventory.

Important Factors to Toyota Success:

o Small amounts of raw material inventory must be kept at each node in production,
so that production can take place for any product. These parts are then replenished
when they are used.
o Accuracy of forecasting is important so the correct amount of raw materials can
be stocked.

Dell has also leveraged JIT principles to make its manufacturing process a success. Dell’s
approach to JIT is different in that they leverage their suppliers to achieve the JIT goal. They are
also unique in that Dell is able to provide exceptionally short lead times to their customers, by
forcing their suppliers to carry inventory instead of carrying it themselves and then demanding
(and receiving) short lead times on components so that products can be simply assembled by
Dell quickly and then shipped to the customer.

Important Factors to Dell’s Success:

 Dependable suppliers with the ability to meet Dell’s demanding lead time requirements.
 A seamless system that allows Dell to transmit its component requirements so that they
will arrive at Dell in time to fulfill its lead times.
  A willingness of suppliers to keep inventory on hand allowing Dell to be free of this
responsibility

Harley Davidson’s use of JIT is mostly characterized by its transformation in the late World
War 2 era from an inefficient manufacturer that solved all of its problems with extra inventory to
a nimble manufacturer able to meet demand and provide short lead times.

Results of Harley Davidson’s JIT Implementation:

 Inventory levels decreased 75 percent.

 Increased productivity.

Harley Davidson’s success with the implementation of JIT had a lot to do with the fact that when
JIT was put into practice, process problems could no longer be hidden by costly inventory that
helped to meet ship dates. The inefficiencies in the processes were quickly identified and solved.

Just-in-time (JIT) manufacturing, also known as just-in-time production or the Toyota

production system (TPS), is a methodology aimed primarily at reducing flow times within
production as well as response times from suppliers and to customers. Following its origin and
development in Japan, largely in the 1960s and 1970s and particularly at Toyota.

History:
Evolution in Japan
During Japan's post-World War II rebuilding of industry:

1. Japan's lack of cash made it difficult for industry to finance the big-batch, large
inventory production methods common elsewhere.

2. Japan lacked space to build big factories loaded with inventory.

3. The Japanese islands were (and are) lacking in natural resources with which to build
products.

4. Japan had high unemployment, which meant that labor efficiency methods were not an
obvious pathway to industrial success.

Thus the Japanese "leaned out" their processes. "They built smaller factories . . . in which
the only materials housed in the factory were those on which work was currently being
done. In this way, inventory levels were kept low, investment in in-process inventories was
at a minimum, and the investment in purchased natural resources was quickly turned
around so that additional materials were purchased." Plenart goes on to explain Toyota's
key role in developing this lean or JIT production methodology.
LEAN PRODUCTION