• OPERATIONS MANAGEMENT (OM) is the science and art of ensuring

that goods and services are created and delivered successfully to customers.
− Design of goods, services, and the processes that create them.
− Day-to-day management of those processes.
− Continual improvement of these goods, services, and processes.
 ORGANIZATIONAL FUNCTIONS
− Finance/Accounting: Obtains funds, Tracks money
− Marketing: Gets customers
− Operations: Creates product or service

 RESPONSIBILITIES OF OM: planning, controlling/improving, organizing,

staffing, directing
 OM DECISIONS:
− Strategic: Product/Service Design, Process Selection, Capacity Planning,
Facility Location, Facility Layout, Job Design
− Tactical: Quality Control, Demand Forecasting, Supply Chain Management,
Production Planning, Inventory Control, Scheduling

Policy Process Procedure

Rule Specific and

Set of activities that
detailed
What is it? Regulation must be
step of
Set of guidelines executed
actions

Legislation
Defines steps needed
Industry Defines what
to ensure policy
Why does it requirements actions
is
exist? Define need to
enforced/adhered
organizations happen
to
position

Level of High level Defines: Exact step by

detailed Includes: Who step
responsibilities When Who
 What order
and How to deal
How often with
consequences
undefined
events

At the
Review
conclusion
frequenc 6-12 months As needed
of every
y
cycle

 KEY DECISIONS OF OM:

− What: What resources/what amounts
− When: Needed/scheduled/ordered
− Where: Work to be done
− How: Designed
− Who: To do the work
 6 ERAS OF OM: focus on cost and effiency, focus on quality, focus on
customization and design, focus on time, focus on service and valu, focus on
sustinability, focus on data and analytics
 SUSTAINABILITY CONCERNS: Environmental sustainability, Social
sustainability, Economic sustainability

2. OPERATIONS STRATEGY AND SUSTAINABILITY

CHIẾN LƯỢC ĐIỀU HÀNH VÀ SỰ BỀN VỮNG
 Strategy
 A plan for achieving organizational goals
• Serves as a roadmap for reaching the organizational destinations
 Organizations have
• Organizational strategies
– Overall strategies that relate to the entire organization
– Support the achievement of organizational goals and mission
• Functional level strategies
– Strategies that relate to each of the functional areas and that support
achievement of the organizational strategy
 Tactics
 The methods and actions taken to accomplish strategies
 The “how to” part of the process
 Operations
 The actual “doing” part of the process
=> Operations strategy
The approach, consistent with organization strategy, that is used to guide the
operations function

 Quality-based strategy
 Strategy that focuses on quality in all phases of an organization
• Pursuit of such a strategy is rooted in a number of factors:
– Trying to overcome a poor quality reputation
– Desire to maintain a quality image
– A desire to catch up with the competition
– A part of a cost reduction strategy
 Time-based strategies
 Strategies that focus on the reduction of time needed to accomplish tasks
• It is believed that by reducing time, costs are lower, quality is higher,
productivity is higher, time-to-market is faster, and customer service is
improved
 Agile operations
 A strategic approach for competitive advantage that emphasizes the use of
flexibility to adaptconstraint and prosper in an environment of change
• Involves the blending of several core competencies:
– Cost
– Quality
– Reliability
– Flexibility

OM’s CONTRIBUTION TO STRATEGY

• Order qualifiers are basic customer expectations generally considered the

minimum performance level required to stay in business.
• Order winners are goods and service features and performance
characteristics that differentiate one customer benefit package from another
and win the customer’s business.

PRODUCTIVITY
 MEASURING PRODUCTIVITY

MEASUREMENT PROBLEMS
 Quality may change while the quantity of inputs and outputs remains constant
 External elements may cause an increase or decrease in productivity
 Precise units of measure may be lacking

3. GOODS AND SERVICES DESIGN

 WHAT DOES PRODUCT DESIGN DO? translate, refine, develop, formulate
quality, formulate cost, construct and test, document, translate
 PRODUCT COMPONENTS

 Evaluating Goods and Services

− Search attributes
− Experience attributes
− Credence attributes
 A Customer Benefit Package (CBP) is a clearly defined set of tangible
(goods-content) and intangible (service-content) features that the customer
recognizes, pays for, uses, or experiences: time, place, information,
entertainment, exchange, form
 A Primary Good Or Service is the “core” offering that attracts customers
and responds to their basic needs.
 Peripheral Goods Or Services are those that are not essential to the primary
good or service, but enhance it.
 A Variant is a CBP attribute that departs from
the standard CBP and is normally location- or firm-specific.

 DESIGNING GOODS AND SERVICES

  Reverse engineering is the dismantling and inspecting of a competitor’s
product to discover product improvements.
 Research & Development (R&D):
 Basic Research - advances knowledge about a subject without near-term
expectations of commercial applications.
 Applied Research - achieves commercial applications.
 Development - converts results of applied research into commercial
applications.

 Prototype testing -The process by which a model (real or simulated) is

constructed to test the good’s physical properties or use under actual operating
conditions, as well as consumer reactions to the prototype.
 Product-by-Value Analysis: Lists products in descending order of their
individual dollar contribution to the firm, Helps management evaluate
alternative strategies.

 PRODUCT DESIGN CONSIDERATIONS: legal and ethical cpnsideratios,

human factors, cultural factors, environmental factors

 DESIGNING FOR MASS CUSTOMIZATION: Mass customization,

Delayed differentiation, Modular design
  Quality function deployment (QFD) is an approach to guide the design,
creation, and marketing of goods and services by integrating “the voice of the
customer” into all decisions.
 THE KANO MODEL: basic quality, performance quality, excitement
quality
 Concurrent engineering or simultaneous development - Bringing
engineering design and manufacturing personnel together early in the design
phase.

 PRODUCTION REQUIREMENTS
− Forecasts
− Manufacturability - The ease of fabrication and/or assembly.
o Design for manufacturability (DFM) The designing of products that
are compatible with an organization’s capabilities.
o Design for assembly (DFA) Design that focuses on reducing the
number of parts in a product and on assembly methods and sequence.
o Product simplification is the process of trying to simplify designs to
reduce complexity and costs and thus improve productivity, quality,
flexibility, and customer satisfaction.
 Product families - high degree of similarity of features and components, A
part can be used in multiple products
 Service Delivery System Design includes: Facility location and layout, The
servicescape, Process and job design, Technology and information support
systems, Organizational structure
 Service Encounter Design: Focuses on the interaction, directly or indirectly,
between the service provider(s) and the customer.

4. CAPACITY MANAGEMENT
• Capacity is the capability of a manufacturing or service resource such as: a
facility, process, workstation, piece of equipment. To accomplish its purpose
over a specified time period.
 • Capacity is determined by: The resources available to the organization —
how they are organized, and their efficiency, Specific work methods.
 Designed Capacity: The maximum capacity that can be achieved under
ideal conditions
 Effective capacity: The percent of design capacity actually expected
 Rated Capacity: Maximum usable capacity of a particular facility
 RC = (Capacity)(Utilization)(Efficiency)
UTILIZATION

EFFICIENCY

• Safety capacity (often called the capacity cushion) is an amount of capacity

reserved for unanticipated events, such as demand surges, materials shortages,
and equipment breakdowns.
• Average safety capacity (%) = 100% − Average resource utilization %
• Economies of scale are achieved when the average unit cost of a good or
service decreases as the capacity and/or volume of throughput increases.
• Diseconomies of scale occur when the average unit cost of the good or
service begins to increase as the capacity and/or volume of throughput
increases.

 LONG-TERM CAPACITY STRATEGIES: amount, timing, font

4 basic strategies:
1. One large capacity increase.
2. Small capacity increases that match average demand.
3. Small capacity increases that lead demand.
4. Small capacity increases that lag demand

 EVALUATING ALTERNATIVES: Cost–Volume Analysis, Financial

Analysis, Decision Theory, Waiting-Line Analysis
 COST–VOLUME ANALYSIS: Objective: Find the point ($ or units) at
which total cost equals total revenue
 BREAK-EVEN ANALYSIS
 MULTIPRODUCT BREAK-EVEN ANALYSİS: Each product’s
contribution is weighted by its proportion of sales

 FINANCIAL ANALYSIS: Cash flow, Present value

3 most commonly used methods: Payback, Present value, Internal rate of
return

BOTTLENECK ANALYSIS AND THEORY OF CONSTRAINTS

 MEASUREMENTS – THROUGHPUT: The average number of entities
completed per unit time— the output rate—from a process is called
throughput.
 THEORY OF CONSTRAINTS
– Constraint: Anything that limits an organization from moving
toward or achieving its goal.
– A physical constraint is associated with the capacity of a resource
(e.g., machine, employee).
– A nonphysical constraint is environmental or organizational (e.g.,
low product demand or an inefficient management policy or procedure).
– 7 categories of constraints: market, resource, material, finance,
supplier, knowledge or competency, policy

• A Bottleneck is the work activity that effectively limits throughput of the

entire process. Identifying and breaking process bottlenecks is an important
part of process design and improvement, and will increase the speed of the
process, reduce waiting and work-in-process inventory, and use resources
more efficiently.
• The Theory of Constraints (TOC) is a set of principles that focuses on
increasing total process throughput by maximizing the utilization of all
bottleneck work activities and workstations.
• The bottleneck time is the time of the slowest workstation (the one that
takes the longest) in a production system
• The throughput time is the time it takes a unit to go through production
from start to end

5. PROCESS SELECTION AND TECHNOLOGY IMPLEMENTATION

 Process design is an important operational decision that affects the cost of
operations, customer service, and sustainability.
 Types of Goods and Services
– Custom, or make-to-order, goods and services
– Option, or assemble-to-order, goods and services
– Standard, or make-to-stock, goods and services
 Process Design Methodology
1. Define the purpose and objectives of the process.
2. Create a detailed process or value stream map that describes how the
process is currently performed.
3. Evaluate alternative process designs.
4. Identify and define appropriate performance measures for the
process.
5. Select the appropriate equipment and technology.
6. Develop an implementation plan to introduce the new or revised
process design.

 Projects are large-scale, customized initiatives that consist of many smaller

tasks and activities that must be coordinated and completed to finish on
time and within budget.
 Job shop processes are organized around particular types of general-
purpose equipment that are flexible and capable of customizing work for
individual customers.
 A product life cycle is a characterization of product growth, maturity, and
decline over time.
– 4 phases: introduction, growth, maturity, decline and turnaround
– A product’s life cycle has important implications in terms of process
design and choice.
 Process Design – 4 Levels
– Task—a specific unit of work required to create an output.
– Activity—a group of tasks (sometimes called a workstation) needed
to create and deliver an intermediate or final output.
– Process—a group of activities.
– Value chain—a network of processes.
• Technology—both physical and information—has dramatically changed
how work is accomplished in every industry, from mining to manufacturing
to education to health care.
• Numerically controlled (N/C) machines Machines that perform operations
by following mathematical processing instructions.
• Automatic identification systems (AISs): Improved data acquisition,
Reduced data entry errors, Increased speed, Increased scope of process
automation
• A robot is a programmable machine designed to handle materials or tools in
the performance of a variety of tasks.
• Computer-integrated manufacturing systems (CIMS) represent the union
of hardware, software, database management, and communications to
automate and control production activities.
• E-service refers to using the Internet and technology to provide services that
create and deliver time, place, information, entertainment, and exchange
value to customers and/or support the sale of goods.
• ERP
–A computer system that integrates application programs in accounting,
sales, manufacturing, and other functions in the firm
–This integration is accomplished through a common database shared by all
the application programs
–Produces information in real time and ties in customers and suppliers
• Customer Relationship Management (CRM) is a business strategy
designed to learn more about customers’ wants, needs, and behaviors in
order to build customer relationships and loyalty, and ultimately enhance
revenues and profits

6. RESOURCE MANAGEMENT
• Resource Management: Deals with the planning, execution, and control
of all the resources that are used to produce goods or provide services in a
value chain.
• planning is the development of a long-term output and resource plan in
aggregate units of measure.
• Disaggregation is the process of translating aggregate plans into short-term
operational plans that provide the basis for weekly and daily schedules and
detailed resource requirements.
• Execution refers to moving work from one workstation to another, assigning
people to tasks, setting priorities for jobs, scheduling equipment, and
controlling processes.
• The Planning Process: Determine the quantity and timing of production for
the intermediate future
– Objective is to minimize cost over the planning period by adjusting
o Production rates, Labor levels, Inventory levels, Overtime work,
Subcontracting rates

 Aggregate Planning Strategies

– Requirements for aggregate planning:
o A logical overall (aggregate) unit for measuring sales and output
o A forecast of demand for an intermediate planning period in these
aggregate terms
o A method for determining the costs
o An aggregate planning strategy that combines forecasts and costs so
that scheduling decisions can be made for the planning period
– Level Production:
Maintaining a steady rate of production while meeting variations in demand by a
combination of options
 Using part-timers, overtime, or idle time to absorb changes
 Using subcontractors and maintain a stable workforce
 Backordering, satisfying the demand of one period in one or more
periods later.
o Daily production is uniform
o Use inventory as buffer
o The underlying philosophy is that stable employment leads to:
 better quality
 less turnover
 less absenteeism
 more employee commitment.
o This strategy works well when demand is stable
Chase Demand: Matching capacity to demand by keeping production in each
period equal to the expected demand for that period. Favored by many service
organizations

Proactive: Involve demand options: Attempt to change demand to match

capacity
 Influence the demand
 Backordering
 Producing counter-seasonal products
Reactive: Involve capacity options: Attempt to change capacity to match
demand
 Changing Inventory Levels
 Varying workforce size by hiring or firing (layoffs)
 Varying production rate through overtime or idle time
 Subcontracting
  Using part-time workers

 Demand Options (Proactive)

Influencing demand
• Use advertising or promotion to increase demand in low periods
• Attempt to shift demand to slow periods
Back ordering during high- demand periods
• Requires customers to wait for an order without loss of goodwill or the order
• Most effective when there are few if any substitutes for the product or
service
• Often results in lost sales
Producing counterseasonal products
• Develop a product mix of counter-seasonal items (furnaces and air
conditioners)
• However, may lead to products or services outside the company’s areas of
expertise

 Capacity Options (Reactive)

Changing inventory levels
• Increase inventory in low demand periods to meet high demand in the future
• High inventory may increase costs associated with storage, insurance,
handling, obsolescence, and capital investment
• Low inventory may cause shortages which may mean lost sales due to long
lead times and poor customer service
Varying workforce size by hiring or firing (layoffs)
• Training and separation costs (benefit severiance) for hiring and laying off
workers
• New workers may have lower productivity
• Laying off workers may lower morale and productivity
Varying production rate through overtime or idle time
• Allows constant workforce
• May be difficult to meet large increases in demand
• Overtime can be costly and may drive down productivity
• Absorbing idle time may be difficult
Subcontracting
• Temporary measure during periods of peak demand
• May be costly
• Assuring quality and timely delivery may be difficult
• Exposes your customers to a possible competitor
Using part-time workers
• Useful for filling unskilled or low skilled positions, especially in services

 Disaggregation in Manufacturing
– 3 important techniques for disaggregating aggregate plans into executable
operations plans: Master production scheduling (MPS), Materials
requirements planning (MRP), Capacity requirements planning (CRP)

 Materials Requirements Planning (MRP)

o A forward-looking, demand-based approach for planning the
production of manufactured goods and ordering materials and
components to minimize unnecessary inventories and reduce costs.
o A computer-based information system that translates master
production schedule (MPS) requirements for end items into time-
phased requirements for dependent inventories.
o Input: Bill-of-Material (BOM), On-hand inventory data, Expected
receipts, Master Production Schedule (MPS), Lead Time

 Bills of Material (BOM)

 List of components, ingredients, and materials needed to make product
 Provides product structure
 o Items above given level are called parents
o Items below given level are called children

 Lead Times
– The time required to purchase, produce, or assemble an item
o For production – the sum of the order, wait, move, setup, store, and
run times
o For purchased items – the time between the recognition of a need and
the availability of the item for production

 Lot-for-Lot (L4L) ordering

• The order or run size is set equal to the demand for that period
• Minimizes investment in inventory
• It results in variable order quantities
• A new setup is required for each run
 Economic Order Quantity (EOQ)
• Can lead to minimum costs if usage of item is fairly uniform
• This may be the case for some lower-level items that are common to
different ‘parents’
 Periodic Order Quantity (POQ)
• Provides coverage for some predetermined number of periods
• The EOQ attempts to minimize the total cost of ordering and carrying
inventory and is based on the assumption that demand is uniform.
• Often demand is not uniform, particularly in material requirements
planning, and using the EOQ does not produce a minimum cost.
• The period-order quantity lot-size rule is based on the same theory as
the economic-order quantity.
• It uses the EOQ formula to calculate an economic time between
orders. This is calculated by dividing the EOQ by the demand rate.
• Scheduling refers to the assignment of start and completion times to
particular jobs, people, or equipment. All organizations perform scheduling to
some extent… Scheduling applies to all aspects of the value chain
• Flow system: High-volume system with Standardized equipment and
activities
• Flow-shop scheduling: Scheduling for high-volume flow system

 Scheduling Low-Volume Systems

– Loading - assignment of jobs to process centers
– Sequencing - determining the order in which jobs will be processed

 Forward scheduling starts as soon as the requirements are known to

determine the shipping date or the due date. Frequently results in buildup of
work-in-process inventory

 Backward scheduling begins with the due date and schedules the final
operation first (MRP). Schedule is produced by working backwards though the
processes

7. MANAGING INVENTORIES
• Inventory is any asset held for future use or sale.
• Inventory Characteristics
– Number of items: each item is identified by a unique identifier, called
a stock-keeping unit (SKU).
– A stock-keeping unit (SKU) is a single item or asset stored at a
particular location.
 – Nature of Demand: Demand can either be constant (deterministic) or
uncertain (stochastic). Static demand is stable demand. Dynamic
demand varies over time.
– Number and Duration of Time Periods: Single period, Multiple time
periods
– Lead Time: The lead time is the time between placement of an order
and its receipt.
– Stockouts: A stockout is the inability to satisfy demand for an item. A
backorder occurs when a customer is willing to wait for an item. A
lost sale occurs when the customer is unwilling to wait and purchases
the item elsewhere.
 Importance of Inventory
– One of the most expensive assets of many companies representing as much
as 50% of total invested capital
– Operations managers must balance inventory investment and customer
service
 Inventory Management: The objective of inventory management is to
strike a balance between inventory investment and customer service
 Requirements for effective inventory management
1. A system to keep track of the inventory on hand and on order.
2. A reliable forecast of demand that includes an indication of possible
forecast error.
3. Knowledge of lead times and lead time variability.
4. Reasonable estimates of inventory holding costs, ordering costs, and
shortage costs.
5. A classification system for inventory items.

 Inventory Counting Systems

– Periodic system – Physical count of items in inventory made at periodic
intervals (weekly, monthly).
– Perpetual inventory system - System that keeps of removals from
inventory continuously, thus monitoring current levels of each item.
– Two-bin system - Two containers of inventory; reorder when the first is
empty
– Point-of-sale (POS) systems - Record items at time of sale.
 Inventory Management Decisions and Costs
4 categories of inventory costs:
1. Ordering or setup costs
2. Inventory-holding costs
3. Shortage costs
4. Unit cost of the stock-keeping units (SKUs)
 Setup costs
– Ordering costs or setup costs are incurred as a result of the work
involved in placing purchase orders with suppliers or configuring
tools, equipment, and machines within a factory to produce an item.
 Inventory-holding costs or inventory-carrying costs are the expenses
associated with carrying inventory.
Average cycle INV = (Max inventory +Min inventory)/2= Q/2

• Shortage costs or stockout costs are the costs associated with a SKU being
unavailable when needed to meet demand.
• Unit cost is the price paid for purchased goods or the internal cost of
producing them. CU = D.P
• Work-in-process (WIP) inventory consists of partially finished products in
various stages of completion that are awaiting further processing.
• Finished goods inventory is completed products ready for distribution or
sale to customers.
• Safety stock inventory is an additional amount of inventory that is kept over
and above the average amount required to meet demand.
• Independent demand - demand for the item is independent of the demand
for any other item in inventory
• Dependent demand - demand for the item is dependent upon the demand
for some other item in the inventory
• Inventory managers deal with two fundamental decisions:
1. When to order items from a supplier or when to initiate production runs
if the firm makes its own items.
2. How much to order or produce each time a supplier or production order
is placed.

 Multi-Period Inventory Models

  Fixed-Order Quantity Models
• Event triggered
– Reaching a reorder point
– Running out of stock
 Fixed-Time Period Models
• Time triggered
– Sales call by supplier
– Weekly review
 The EOQ Model

 The EPQ Model

  Quantity Discount Models (QDM)
Assumptions:
– Reduced prices are often available when larger quantities are purchased
– Trade-off is between reduced purchasing and ordering cost and increased
holding cost

 Managing Fixed Period Inventory Systems

Orders placed at the end of a fixed period
Two principal decisions in a FPS:
 1. The time interval between reviews (T)
2. The replenishment level (M)
– Inventory is only counted at each review period
– May be scheduled at convenient times
– Appropriate in routine situations
– May result in stockouts between periods
– May require increased safety stock

 Single-Period Inventory Model

 Items:
o Received in the beginning of a period
o Sold during the same period.
 The unsold items:
 Not carried over to the next period.
 May be a total waste
 Sold at a reduced price
 Returned to the producer at some price less than the original
purchase price.
 The revenue generated by the unsold items is called the salvage value.