OPERATIONS

MANAGEMENT
OPERATIONS
 INDEX

TOPIC 1. Business Strategy...........................................9

1.1. BRIEF HISTORICAL REVIEW OF THE CONCEPT
STRATEGY................................................................................................11

1.2. BUSINESS STRATEGY.............................................................................12

1.3. GAME THEORY.........................................................................................14

1.4. WHY SOME COMPANIES ARE MORE PROFITABLE THAN OTHERS

OTHER? STRATEGIC ANALYSIS TOOLS ...............................................19
1.4.1. Porter's five forces

1.4.2. SWOT analysis

1.4.3. Porter's five forces vs. SWOT analysis: what is the difference?

1.5. THE BCG-MATRIX (GROWTH-MATRIX)

PARTICIPATION).......................................................................................29

1.6. BLUE OCEAN STRATEGY........................................................................33

1.7. INTERNATIONAL STRATEGY: TOWARDS SUCCESS

BUSINESS .................................................................................................34

KEY IDEAS ........................................................................................................37

GLOSSARY .......................................................................................................39

BIBLIOGRAPHY ................................................................................................41

TOPIC 2. Operations Management.............................43

2.1. OPERATIONS MANAGEMENT .................................................................45
2.1.1. What is operations management?

2.2. THE OPERATIONS MANAGER: COMPETENCIES

REQUIRED PROFESSIONALS AND FUNCTIONS ..................................47
2.3. THE IMPORTANCE OF OPERATIONS MANAGEMENT
IN THE COMPANY ....................................................................................49

2.4. ELEMENTS OF AN OPERATING SYSTEM ..............................................50

KEY IDEAS ........................................................................................................59

GLOSSARY .......................................................................................................61

BIBLIOGRAPHY ................................................................................................63

TOPIC 3. Demand..........................................................69
3.1. THE IMPORTANCE OF DEMAND PLANNING .........................................71

3.2. ADVANTAGES OF DEMAND PLANNING.................................................72

3.3. DISADVANTAGES OF THE PLANNING OF

THE CLAIM................................................................................................73

3.4. PLANNING AND CONTROL METHODS FOR

THE CLAIM................................................................................................73

KEY IDEAS ........................................................................................................81

GLOSSARY .......................................................................................................83

BIBLIOGRAPHY . ..............................................................................................85

TOPIC 4. Product development...................................87

4.1. PRODUCT DESIGN AND DEVELOPMENT..............................................89

4.2. IDENTIFICATION OF OPPORTUNITIES ..................................................91

4.3. THE DESIGN AND DEVELOPMENT PROCESS OF NEW PRODUCTS

PRODUCTS AND THEIR RELATIONSHIP TO MARKETING...................94

4.4. DESIGN AND DEVELOPMENT OF PRODUCTS AND SERVICES:

ISO 9001:2015 ...........................................................................................95

4.5. PRODUCT DESIGN AND DEVELOPMENT PHASES ..............................96

4.6. PROTOTYPING .........................................................................................97

4.7. PATENTS AND INTELLECTUAL PROPERTY ..........................................99

4.8. TRENDS IN PRODUCT DESIGN AND DEVELOPMENT
FROM THE HUMAN FACTOR ................................................................100

4.9. THE IMPORTANCE OF OPTIMIZING THE DESIGN PROCESS AND

DEVELOPMENT ......................................................................................102

KEY IDEAS ......................................................................................................105

GLOSSARY .....................................................................................................107

BIBLIOGRAPHY . ............................................................................................109

TOPIC 5. Operating systems......................................111

5.1. PRODUCTION RATE (THROUGHPUT) ..................................................113
5.2. MAXIMUM PRODUCTION RATE: CAPACITY
AND BOTTLENECK.................................................................................115
5.2.1. Capacity of a single-product system

5.2.2. Multi-product system capability

5.2.3. Preparation times in batch processes

5.2.4. Decrease in capacity due to quality problems

5.3. METHODOLOGIES FOR THE IMPROVEMENT OF

SYSTEM CAPACITY ...............................................................................123
5.4. FLOW TIME, CYCLE TIME (CT), TAKT TIME (TT)
Y LEAD TIME (LT) ...................................................................................124
5.5. WORK IN PROGRESS (WIP)..................................................................125
KEY IDEAS ......................................................................................................127
GLOSSARY .....................................................................................................129
BIBLIOGRAPHY . ............................................................................................131

TOPIC 6. Process planning and management..........133

6.1. ORGANIZATION AND MANAGEMENT BY PROCESSES .....................135
6.1.1. Management models and process-based approach

6.1.2. Steps for setting up a process-based management system

 6.2. QUALITY MANAGEMENT .......................................................................146
6.2.1. Introduction to the concept of quality

6.2.2. Logistics KPIs

6.3. LOGISTICS MARKETING ........................................................................150

KEY IDEAS ......................................................................................................155

GLOSSARY .....................................................................................................157

BIBLIOGRAPHY...............................................................................................159

TOPIC 7. Operational planning..................................161

7.1. THE PLANNING AND CONTROL SYSTEM OF
OPERATIONS (SPCO)............................................................................163

7.2. PLANNING HORIZON: SHORT, MEDIUM AND LONG TERM

165

7.3. OPERATIONAL PLANNING (MEDIUM TERM) .......................................166

7.4. MRP SYSTEM (MATERIAL REQUIREMENTS PLANNING)...................167

7.5. PRODUCTIVITY IMPROVEMENT: JUST IN TIME (JIT), LEAN

MANUFACTURING AND KANBAN. THE TOYOTA MODEL...................171

7.6. TOC: THEORY OF CONSTRAINTS ........................................................178

7.7. COMPARISON OF THE THREE MODELS OF THE

OPERATIONAL PLANNING ....................................................................181

KEY IDEAS ......................................................................................................183

GLOSSARY .....................................................................................................185

BIBLIOGRAPHY ..............................................................................................187

TOPIC 8. The human factor in operations

management...............................................................189

8.1. HUMAN RESOURCES AS A FACTOR

DIFFERENTIAL........................................................................................191
8.2. SELECTION BY COMPETENCIES: KNOWLEDGE,
SKILLS AND ATTITUDES .......................................................................191
8.3. CONTINUOUS EMPLOYEE TRAINING ..................................................192

8.4. COMPENSATION, INCENTIVES AND DEVELOPMENT

PROFESSIONAL .....................................................................................192

8.5. THE IMPORTANCE OF TASK DESIGN BASED ON

THE WORKERS ......................................................................................192

KEY IDEAS ......................................................................................................195

GLOSSARY .....................................................................................................197

BIBLIOGRAPHY . ............................................................................................199
TOPIC 1
Business strategy
 Operations management
Business strategy

OBJECTIVES
• To know the origin and evolution of the strategy concept.

• Identify the different types of strategy: corporate, business or competitive and

cooperative or functional.

• To understand game theory, describing the prisoner's dilemma as one of the

fundamental problems of this theory.

• Differentiate the main strategic analysis tools: Por- ter's five forces, the SWOT matrix and
the BCG matrix, applying them to the analysis of real companies under factual
assumptions.

• To understand what internationalization strategies consist of, differentiating the

necessary stages and types of strategies.

• List the steps to be taken to carry out the internationalization of a company.

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1.1. BRIEF HISTORICAL REVIEW OF THE STRATEGY
CONCEPT
Many believe that the concept of strategy has a business root, but nothing could be further
from the truth. Etymologically, the word strategy comes from the Greek word strategos,
composed of the words stratós (army) and aguein (to lead, to guide); that is, it refers to the
one who leads the army, the general. It has been used for many years in the military world
to indicate great plans, kept secret, with which a battle could be won. In this way, we can
associate this military concept to the business world, formulating it as a company that has a
(competitive) advantage that another does not have.

The bibliographical references of this first war origin of the term can be found in the work The
Art of War, by the Chinese military strategist and philosopher Sun Tzu (400-340 B.C.). This
work was so significant that Gerald Michaelson, in his book Sun Tzu. The Art of War for
Managers (2006)1 shows us how many of these ideas are still used today: just substitute some
military terms for business terms, such as enterprise instead of army, resources instead of
armaments, or competition instead of enemy.

Until almost the 19th century, the word strategy was still linked to two main concepts:
strategist is a person with leadership and command skills. Thus, strategists of the stature of
Julius Caesar, Charlemagne and Napoleon were born.

The arrival of the Industrial Revolution brought with it much more complex business
organizations, and the terms strategy and business began to be interconnected, although it
was not until the 20th century that the two concepts became inextricably linked.

In the 1940s, John Von Neumann and Oskar Morgenstern developed Game Theory. Von
Neumann showed interest in some aspects of games by observing, for example, that the
false clues players tried to give in poker using the rules of the game were not a trivial matter.
From the mid-1920s to the 1940s he investigated the mathematical structure of poker and
other games, publishing the results of his analyses with Morgenstern in 1944 in the book
Game Theory and Economic Behavior, concluding that the theorems could be applied to
other fields such as economics, politics or war.

In the 1960s and 1970s, new masters of strategy appeared for whom the global vision of
organizations (unifying each of the business areas) facilitates the articulation and
dynamization of strategy. The visualization of organizations with respect to their environment,
analyzing the market and the competition, was introduced into strategy. Pioneering authors
emerged at this time, such as Igor Ansoff, Alfred Chandler and Peter Drucker.

But the great development of business strategy came in the 1980s, a decade in which the
work of the aforementioned authors continued. New experts in strategy also appeared. One
of the great references of this period (and today) was Michael E. Porter, who defined the
concept of "competitive advantage" as a source of differentiation.

1 MICHAELSON, G. A. (2006). Sun Tzu. The art of war for managers. Management 2000. 4th Edition.

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 Operations management
Business strategy

In the 1990s, Gary Hamel induced a change in the line of work, leading it towards greater
innovation and business profitability thanks to his writings, among which his article Strategy
as Revolution (1996) stands out. Peter M. Senge, in his book The Fifth Discipline (1993),
developed the notion of organization as a system (from the point of view of General Systems
Theory), which brought about a dramatic change in professional mentality. He revolutionized
the concept of management with the theory that organizations are capable of learning,
depending on the interaction and development of the people in them. Norton and Kaplan
defined the Balanced Scorecard concept in The Balanced Scorecard. Measures that drive
performance (1992), which helped companies to identify which strategy to follow and to define
the metrics necessary for their success.

DID YOU KNOW Organizational strategy as we understand it today is the result of several
THAT...? stages developed over time: financial planning (long-term), strategic
planning and strategic leadership. In each of these stages, researchers
have developed tools that have produced very significant contributions
in the business field: the SWOT Matrix, the BCG Matrix, the Ansoff
Matrix and Porter's five forces, among others.

1.2. BUSINESS STRATEGY

After the global pandemic of COVID-19 started in 2020, the Spanish multinational Movistar
accepted the challenge of teaching senior citizens how the digital world works, in order to
help them have virtual contact with their relatives, pay bills or simply do their shopping.

They designed digital content for this segment under the name "Conectados con Eli de
Movistar" (Connected with Eli by Movistar). These contents consisted of videos through
social networks (Youtube, Facebook and Instagram, among others) to interactively share
messages and examples on the use of new technologies: they were practically tutorials on
various topics.

With this initiative, Movistar proved the benefits of adapting its strategy and content to a
specific segment of the population. It achieved not only a positive reception from the audience,
but also the satisfaction of generating content with a purpose in favor of society.

Business strategy can be defined as "the active process of determining and guiding the
company's course of action toward its objectives" (Igor Ansoff, 1965). A framework for
making decisions about how to play the game of business. Decisions that occur daily in every
organization and include everything from capital investments, operational priorities, and
marketing campaigns, to hiring, branding efforts, etc.

Strategy in organizations answers the following questions:

• What is the value to be contributed?

• What needs must we meet to achieve excellence?

• What profitability will we obtain?

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TYPES OF BUSINESS STRATEGY

1. Corporate strategy. Corporate strategy is the strategy related to the mission, vision and
values of an organization. Its focus is not on the operation of the company, but on the
image it wants to give of itself to its target public. It will define the market to which its
products or services will be destined, and will be responsible for optimizing the processes
that help in strategic decision making.

With an estimated global market value of approximately US$10.7 billion, Nike has
positioned itself as the leading brand in the sporting goods design, development and
manufacturing industry. However, it has had to establish and maintain its place in a
competitive and changing marketplace. To achieve this, Nike has designed and refined a
series of strategies that have contributed to the conception and refinement of the brand
that the world knows today. Nike's success lies in its ability to understand its market,
design an inspiring brand for a complex, dynamic and changing marketplace, and
develop an identity that makes it unique. This is a very telling example of corporate
strategy.

The corporate strategy sets long-term goals.

2. Business or competitive strategy. This is the strategy focused on how the company is
to be marketed, containing the marketing strategies, which will include, among other
things, an analysis of the state of the target market. It is essential that this strategy be in
line with the company's image.

A graphic example of competitive strategy is Primark, the most important textile company
in Ireland and England, with more than 180 stores between these two countries. It is a
company that targets a young public, under 35 years of age, concerned about trends and
the environment. Its success is based on a wide range of products, with an excellent
quality-price ratio. It has adapted to its target public by creating a new business model
framed in the low cost.

Behind this phenomenon is a whole evolution in consumer shopping behavior. It is the

opportunity, not so much for low-cost shopping, but for intelligent consumption. It is
generating a substantial change in the consumer landscape and, consequently, in
marketing, since "the fundamental core of low cost is in the variation of the concept of
price" (Paul Marchant, CEO at Primark).

The business or competitive strategy sets medium-term goals.

3. Cooperative or functional strategy. This is the strategy that establishes the organizational
scheme: the necessary departments, the roles of each member, their schedules and salaries,
and any other necessary logistical element that allows control of the processes that achieve
the products or services that satisfy the needs of the clients. It is very important that this
strategy be in line with corporate and business strategies.

A few years ago, Kevin Rollins, president and CEO of Dell, said: "Our company's approach
to the corporate environment is based on three concepts: flexibility, simplicity and
effectiveness, which are the most critical requirements for users". Dell, in addition to
selling PCs to users, made the leap to the corporate market by offering technological
solutions within the reach of any company under the slogan "Empower the Enter- prise".
This new direction in the company's strategy was achieved by adapting

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Business strategy

Dell's own design of new internal processes, new departments and new solutions to
respond to the current digital scenario faced by all organizations. Probably without the
implementation of this functional type strategy, Dell would not have been able to meet the
needs and satisfaction of its customers.

These strategies are designed for the short term.

1.3. GAME THEORY

THEORETICAL FOUNDATIONS

Game theory, which some authors refer to as interactive decision theory or social situation
theory, is, according to Deutsch et al. (1986) cited by San Román (2002), "one of the twelve
basic innovations of twentieth century economic thought".

The foundation of this theory, which has served as the basis for subsequent contemporary
developments, can be found in the Theory of Games and Economic Behaviour, written by
Von Neumann and Morgenstern and published in 1944.

Binmore (1994) shows us the two different approaches:

1. Strategic or non-cooperative approach.

Describes a game with two players with opposing interests, who separately seek an
optimal strategy for their own interests. It requires a very detailed definition of what each
player can and cannot do during the game. These games are called competitive or zero-
sum games, since any gain for one player entails a loss of exact value for the other
player. These games analyze how the players (rational individuals) act with each other to
maximize their own goals, maximization leading to the highest value to be achieved,
which usually coincides with the maximum value that can be achieved in the game.

2. Coalitional or cooperative approach.

It describes the optimal behavior in games with a large number of players. Coo perative
games study how players (rational individuals) interact with each other to pursue
interdependent goals, how they try to maximize the particular interests of each one while
achieving shared goals, previously agreed upon. The maximization of particular goals
means, in this case, the highest value to be achieved jointly with the other party, and is not
necessarily the highest value to be achieved within the game.

Soto (2005), knowing that the behavior of one individual impacts the state of the rest,
establishes the following model assumptions:

1. Each player has two or more options, which he calls moves.

2. Each combination of moves leads players to win, lose, or fold, resulting in

the game is over.

14
 3. Each player's payout is related to his situation at the end of the game.

4. Each player knows his opponents, the rules of the game, what each player may or may
not do and the retributions of the other players.

5. All the players are rational individuals; therefore, each player will choose the option that
most beneficial or useful to you.

IMPORTANT In summary, game theory is a general theory of rational behavior for

two or more players who have a finite number of moves that lead them
to win, lose or fold, with numerical payoffs (gains or losses) associated
with the combinations of moves they make. The players (rational
individuals) know the rules of the game and their opponents, and try to
maximize their individual gains.

THE PRISONER'S DILEMMA: CLASSIC STATEMENT

This is one of the fundamental problems of game theory. Although it was described by Merrill
M. Flood and Melvin Dresher (then working for the RAND national corporation) in 1950, it
was Albert W. Tucker who actually formalized the game and gave it the name Prisoner's
Dilemma. By means of a prison reward system, Tucker demonstrated that two people can
not cooperate with each other, even if it is against their own interests not to do so.

The classic statement of the dilemma is as follows:

The police arrest two suspects. There is insufficient evidence to convict them and, after
having separated them, he visits each of them and offers them the same deal. If one turns
the other in and his accomplice does not, the accomplice will be sentenced to the full penalty,
ten years, and the first will be released. If one denies it and the accomplice informs on him,
the first will receive that penalty and the accomplice will go free. If both denounce the other,
both will be sentenced to six years. If both deny it, all they will be able to do in the absence of
evidence is to lock them up for a year on a lesser charge.

This can be summarized as:

Suspect 2 gives away Suspect 2 denies it

Suspect 1: 6 years. Suspect 1: free.

Suspect 1 gives away
Suspect 2: 6 years. Suspect 2: 10 years.

Suspect 1 denies Suspect 1: 10 years. Suspect 1: 1 year.

Suspect 2: free. Suspect 2: 1 year.

Table 1. Prisoner's dilemma: rewards.

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Business strategy

This game analyzes the incentives (rewards) that two suspects of a crime have to betray
their partner or proclaim their innocence (denying having done it). It is a non-cooperative
game (each suspect is in a different room and does not know the answer that the other will
give), non-zero-sum (the penalty of one does not imply an equivalent reduction in the
penalty of the other), and of Nash equilibrium category.

PRISONER'S DILEMMA: IF SELFISHNESS TAKES PRECEDENCE

Let us assume initially that the only thing that matters to the two suspects is to reduce their
sentence, with their own selfishness taking precedence.

Let's look at it from the side of suspect 1:

• If suspect 2 has informed on you: if he also informs on you, both of you will serve a sentence of 6 years.

• If Suspect 2 denies it: if he turns him in, he will go free, while Suspect 2 will serve the
maximum sentence of 10 years.

And now on the side of suspect 2:

• If suspect 1 has informed on you: if he also informs on you, both of you will serve a sentence of 6 years.

• If Suspect 1 denies it: if he turns him in, he will go free, while Suspect 1 will serve the
maximum sentence of 10 years.

Thus, on an individual (i.e., non-cooperative) level, the best solution is to rat out t h e
other. It would be the best rational response, regardless of feelings toward the other suspect.
Snitching is the dominant strategy for both suspects.

As both of them will reason individually, thinking of their own interests, they will end up
informing on each other, so that they will each serve a 6-year sentence. Each has minimized
his possible sentence, but the joint solution is worse. These 6 years each is called Nash
equilibrium.

PRISONER'S DILEMMA: WHETHER THE INTEREST OF THE GROUP IS PARAMOUNT

Suppose now that what is sought is the good of the group, the best interest of the two
suspects. The best option in this case is for both to deny it, since they would be
sentenced to the minimum penalty, one year in prison. Any decision other than this would be
worse if considered together. If, despite this, one of them follows a selfish interest and
decides to inform on the other, he would go free (the best individual reward), but the other
would be sentenced to 10 years (the worst individual reward).

THE PRISONER'S DILEMMA AND PROJECT MANAGEMENT

We can extrapolate the prisoner's dilemma to project management, when two groups with
different interests and who do not know each other very well have to work together. When
you undertake a project in which you want to create a new product or service to satisfy
customer needs, there are two groups:

• Business group (promoter and customer): product users.

• Project team: product developers.

16
Initially, it is common for both groups to have high expectations of collaboration. But as soon
as negotiations begin to define the scope and requirements of the project, discrepancies will
arise and need to be confronted. If the requirements have not been properly defined and are
ambiguous, it is possible that the negotiation will end in conflict, deteriorating the initial
expectations of collaboration.

When negotiating projects, negotiations are often experienced in a similar way to the
prisoner's dilemma: doubts will arise in both teams as to whether it is in their interest to
cooperate or to pursue their own interests. This will be a difficult decision if they do not know
each other's intentions. These interrelated alternative strategies are known as the
negotiation matrix of alternatives.

ALTERNATIVES NEGOTIATION MATRIX

Project Team

Compete Coopera

Compete Fighting. Demand.

Business team
Coopera Impose. Collaborate.

Table 2. Alternative negotiation matrix.

• In impose or demand strategies, one of the groups seeks its own interest,
IMPORTANT
without considering the other party's. If one of the parties succeeds in forcing a
solution in its favor, the other party will counterattack in the next round of
negotiations. If one party succeeds in forcing a solution in its favor, the other
party will counterattack in the next round of negotiation. If this continues, it is
likely that one of the parties will no longer trust the other, and a strategy of
fighting will ensue.

• Any strategy other than collaboration will lead to the ill will of one of the
parties (or both), which may result in the stoppage of the work, which is not in
the interest of either party.

REPRESENTATION OF GAMES

NORMAL FORM OF A GAME

The representation of the sets, in its normal form, is done through a matrix of
payments, showing players, strategies and rewards.

Let's see this representation for the prisoner's dilemma. One player will be represented in a
row (suspect 1) and the other in a column (suspect 2). Each player will have two strategies
(to betray the opponent or to deny him, in our example), which will be represented by the row
number and the column number, specifying the rewards inside them. In each quadrant the
first number corresponds to the reward received by the row player (suspect 1) and the
second to the reward received by the column player (suspect 2).

17
Continuing with the example of the prisoner's dilemma, if suspect 1 chooses to inform on the
counterpart and suspect 2 chooses to inform on the counterpart, their rewards will be -6 and -
6. Continuing with each pair of strategies, we would obtain the following matrix:

Suspect 2 gives away Suspect 2 denies it

Suspect 1 gives away -6, -6 0, -10

Suspect 1 denies -10, 0 -1,-1

Table 3. Representation of the normal form of a game.

Whenever a game is represented in its normal form, it is assumed that all players choose
strategy at the same time or, at least, choose without knowing each other's choice.
Otherwise, if the players do know some information about the choice of other players, the
game will be represented in its extensive form, which we will see below.

EXTENSIVE FORM OF A GAME

The extensive form of game representation is used when there is an order that must be
respected. This type of game is represented by "trees". In them, the players are symbolized
by a number next to the nodes of the tree. These, in turn, indicate moments in which that player
must make a decision, symbolized by the "branches" coming out of these nodes. The rewards that
each player receives are specified in the "leaves" of the tree. Let's look at an example:
2
F U
2 2

A R A R

5,5 0,0 5,5 0,0

Figure 1. Representation of the extensive form of a game.

In the game depicted above there are two players: 1 and 2. Player 1 moves first; he can
choose between F and U. Player 2, who moves next, has seen Player 1's move, and
chooses in turn between two options: A or R.

Thus, for example, if player 1 chooses U and player 2 (having seen player 1's move) chooses
A, player 1 gets a reward of 8 and player 2 a reward of 3.

IMPORTANT The normal form allows a simple modeling for the study of equilibrium
problems, because it neglects the question of how the strategies are
computed; that is, how the game is actually played. The appropriate
modeling to address these questions (how the game is actually played)
most important for combinatorial game theory is the extensive form of
the game.

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Business strategy

VALIDITY OF GAME THEORY

Nalebuff and Brandenburger (1997) used the conclusions developed by Von Neumann in
game theory to apply them to the field of business. These authors coined the term
coopetition, which is nothing more than the union of two concepts: cooperation and com-
petition.

What they intended to convey with this new term is that business is not, as traditionally
thought, a war in which there are winners and losers (zero-sum game), but neither is it
peace, as was later believed. Business is both war and peace; there is competition and
cooperation at the same time, hence the term coopetition.

It is for this reason that game theory is fully in force in the world of business strategies, since
it allows us to go beyond the simple ideas of competition and coopetition, generating the
composite idea of coopetition, thus enabling companies to make better decisions in order to
better respond to current opportunities.

1.4. WHY ARE SOME COMPANIES MORE PROFITABLE

THAN OTHERS? STRATEGIC ANALYSIS TOOLS

1.4.1. PORTER'S FIVE FORCES

Porter's five forces are part of a competitive analysis model created by Michael E. Porter in
1979, in the Harvard Business Review, which consists of considering five "forces" that can
determine the position of any company in its respective market. Porter, in his book Being
Competitive (2017), states that "the fundamental job of the strategist is to understand and
deal with the competition".

IMPORTANT
Porter argues that competition goes far beyond established rivals and is
also affected by other competing forces: customers, suppliers, potential
challengers and substitute products.

This extension of rivalry to five forces defines the structure of an industry and the nature of
competitive interaction within it, marking its profitability in the medium and long t e r m . I n
t h i s sense, if the competitive forces defined by Porter are intense (as may be the case in
industries such as aviation, textiles or hotels), virtually no company will make a profit on the
investment. However, if the forces are benign (as is the case in the software or soft drinks
industries), many companies will be profitable.

20
 Threats to new
applicants

Rivalry
Bargaining power of among Bargaining power of
suppliers existing buyers
competitors

Threat of substitute
products or services

Figure 2. The five forces that shape competition in an industry.

Each of these forces, as defined by Porter, will be described below:

1. Rivalry between existing competitors. Rivalry between competitors is the common

form of competition that managers have conceived. It is present in any sector and is visible
in advertising campaigns, in price discounts or in the improvements that some
competitors offer on their products compared to those of their competitors.

Depending on the intensity with which the companies compete for part of the sector, this
rivalry will be greater or lesser.

2. Threat of new entrants. When new entrants appear on the market, prices and costs will
be affected by the increase in competition, and the investment required to compete will
also increase.

If these challengers come from different sectors and want to diversify their products, they
can influence cash flows to spur competition in the market, as well as their capacity.
Examples of this can be found when Pepsi entered the bottled water industry, when
Microsoft started offering inter-net browsers and when Apple entered the music
distribution business.

3. Threat of substitute products or services. A substitute product or service may satisfy

a customer's needs in the same or a similar way to another, albeit in a different way.
Thus, a videoconference may replace a business trip needed for a meeting, or an e-mail
may replace the function of a traditional express mail.

These substitute products or services are always present, but may go unnoticed because
they may appear to be very different from the other product in the sector.

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Business strategy

4. Bargaining power of suppliers. The influence of the most powerful suppliers can be
decisive, since they can raise the prices of the raw materials or labor they offer, or lower
the quality of the products they supply. In this way, they maximize their profitability vis-à-
vis an industry that cannot afford to pass on this cost increase to the end consumer for
fear of losing it. An example of this can be found in Microsoft, which caused a decrease
in the profitability of computers by raising the prices of operating systems.

5. Bargaining power of buyers. Similarly, influential customers can accrue more value for
themselves by forcing prices down, or by demanding better quality or more features, all
at the expense of an industry's profitability.

This influence that buyers have can apply equally to individual consumers as to large
B2B customers. Individual consumers, like industrialists, will be less willing to pay higher
prices for a product if they do not clearly perceive the difference with respect to the
competition, if the services offered do not fully satisfy their needs (difficult to quantify in
the case of individual consumers as they are more intangible than in the case of
industrialists), or if they perceive them as expensive in relation to their income.

CITA

"The essence of formulating a competitive strategy is to relate a

company to its environment." Michael Porter.

PORTER'S FIVE FORCES FOR COCA-COLA VS. PEPSI

Let's analyze Porter's five forces for Coca-Cola vs. Pepsi:

1. Rivalry among existing competitors. The carbonated beverage sector is almost

monopolized by two large companies: Coca-Cola and Pepsi. The rest of the
competitors, of very unequal size, share smaller shares in local markets.

These two large companies have not established a price war between them: they
compete mainly through advertising campaigns and differentiation (mainly in flavor).
Coca-Cola invests in advertising campaigns focused on the happiness of its customers,
who do not do without their favorite brand and flavor. It claims to be the best-known
brand in the world.

Both Coca-Cola and Pepsi compete globally, the rest of the smaller competitors
compete in small local markets. Coca-Cola is in approximately 200 countries, so it is
impossible for smaller companies to compete with that.

2. Threat of new entrants. It is not easy to enter the carbonated soft drink market. A large
amount of money needs to be invested in advertising and marketing (as is already
done by the two large established players, Coca-Cola and Pepsi), which is very difficult
for small competitors to enter.

22
 In addition, Coca-Cola has a level of customer loyalty that is difficult to break: consumers
of its products prefer its flavor and will not easily switch to other products, even if they are
much cheaper.

Likewise, Coca-Cola is strong in the retail distribution of its products, offering its retail
distributors wide profit margins, which makes it very difficult for them to try other
competing or substitute products.

Entering a market where there are two strong companies, such as Coca-Cola and Pepsi, is
very difficult: it could lead to an impossible price war with new entrants who do not yet have
a sufficient market share, or to the creation of new product lines by established
companies that can invest in them.

3. Threat of substitute products. The threat of substitute products to carbonated

beverages, such as bottled water, juices, energy drinks, coffee or tea, is great in this
market: consumers are increasingly concerned about consuming healthy beverages or
at lower prices. Price and flavor wars have become a trend. Companies such as
Starbucks offer numerous ways to indulge in coffee, with a very wide range of sizes and
prices.

4. Bargaining power of suppliers. The inputs (raw materials such as coffee, sugar,
flavorings, colorings or packaging) from which Coca-Cola products are made are basic
and easy to find. What matters is the master formula (kept secret for decades), and
even the form of its packaging (but not its material): this is what consumers recognize
and value.

Coca-Cola chooses its suppliers: it is the one with the power, based on quality criteria
that are not easy to meet. This company has high food safety standards (GFSI), as
well as a very restrictive environmental impact minimization policy, which it
implements through its own quality system (KORE).

5. Buyers' bargaining power. Their bargaining power is very varied, depending on their
profitability. Coca-Cola products are normally sold in: service stores (with little bargaining
power), vending machines (with great power to stimulate customer consumption, due to
the wide range of places where they can be found), food stores (where price is a
determining factor) or shopping centers (which use vending machines that offer the
product for free as a customer loyalty lure).

BARRIERS TO STRATEGY IMPLEMENTATION

Michael Porter talks about entry and exit barriers that can prevent us from moving forward
when executing the strategic business plan. These barriers are obstacles or circumstances
that make it difficult to enter or exit a specific business project.

In this sense, a person may want to open his or her own veterinary practice, but without
medical knowledge, health license, premises, agreements with suppliers, etc., little can be
achieved.

Entry and exit barriers are neither bad nor good, they simply exist and we must be aware of
them when analyzing our proposal because they are an essential element of business
viability.

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Business strategy

f. Barriers to entry. Barriers to entry are the restrictions that a sector or industry has for a
new competitor to enter it. They may derive from the sector in which the company wishes
to operate or from market circumstances, regardless of the sector in question.

– Start-up costs.

– Economy of scale.

– Access to suppliers.

– Good positioning of the competition.

– Inexperience in the sector.

– Legal obstacles.

g. Exit barriers. Exit barriers make it difficult to abandon a project or business when it is no
longer profitable for the operator. These barriers reduce the entrepreneur's flexibility in
managing his business.

– High capital investment.

– Workforce.

– Other legal obstacles.

1.4.2. SWOT ANALYSIS: DAFO ANALYSIS

WHAT IS THE DAFO MATRIX?
The SWOT (Strengths, Weaknesses, Opportunities and Threats) matrix is a strategic
analysis tool, whose name is the acronym of the initials of the terms that comprise it:
Strengths, Weaknesses, Opportunities and Threats.

IMPORTANT • The main objective of the SWOT matrix is to offer a diagnosis of

the reality of the company, brand or product that will allow us to make
the strategic decisions necessary to improve our company in the
future.

• This matrix identifies the opportunities and threats offered by the

market (external factors), as well as the strengths and weaknesses
of our company (internal factors).

24
 Internal analysis External analysis

WEAKNESSES THREATS
Negatives

STRENGTHS OPPORTUNITIES
Positives

Table 4. SWOT Matrix.

EXTERNAL ANALYSIS: THREATS AND OPPORTUNITIES

Both threats and opportunities belong to the world outside the company: they cannot be
controlled by it, but have a direct influence on its development. They must be taken into
account either to overcome them in the case of threats, or to take advantage of the
opportunities offered by the external market.

This external analysis identifies those key factors that may interfere in the development of
our business, either directly or indirectly; for example: the target public for which the products
or services are intended, new customer behavior, competitors, their pricing policies,
distribution channels, market changes, socioeconomic, geopolitical, environmental or
technological factors, etc.

In this external analysis that we carry out in the SWOT matrix, we distinguish between:

• Opportunities. These are positive external factors that can improve the company. We
must ask ourselves questions to be able to identify them, such as: What new trends are
there in the market that could have a beneficial effect on my company? Are there
technological, social, legal or political changes that could influence my company?

• Threats. These are negative external factors that pose a risk to the company's survival
or may have a negative impact on its market share. We must identify threats sufficiently
in advance to be able to avoid them, take them on or even turn them into opportunities
for our company. To identify these threats, we need to ask ourselves questions such as:
What trends are the competition following that could affect my company? What other
obstacles could we encounter?

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Business strategy

INTERNAL ANALYSIS: STRENGTHS AND WEAKNESSES

The internal analysis of the company identifies the key factors for its development; for
example: production capacity, production costs, financial ratios and any tangible or intangible
asset that can be valued economically, the company's indebtedness, the positioning of
products and services in the market, promotion and distribution channels, the organization
chart and corporate culture, etc. We must carry out a self-assessment of our company,
identifying its strengths (strengths) and weaknesses (weaknesses).

In this internal analysis that we carry out in the SWOT matrix, we distinguish between:

• Strengths. These are those capabilities or resources that the company has to achieve
competitive advantages over the competition. We must ask ourselves questions to
identify them, such as:

– Do we have advantages over our competitors?

– What are these advantages?

– What are the strengths of my products or services compared to those of my competitors?

– Do I have low-cost resources available that I can use to differentiate myself?

• Weaknesses. These are those capabilities or resources that the company needs to
improve or enhance, or that the company does not have. We must identify weaknesses
by asking ourselves questions such as:

– How can my company improve?

– What are our weak points that customers perceive as weaknesses in our products or
services?

HOW TO MAKE A DAFO MATRIX?

For our SWOT analysis to be effective, it is very important to make an analysis:

1. Impartial. Companies are prone to minimize the weaknesses and threats that affect the
business, and to maximize the strengths and opportunities, which will result in taking
unnecessary risks or making decisions without sufficient guarantees of success.

2. Compared. We should also perform a SWOT analysis of our competitors, if we want to

have a more defined image of the business. This can help us, for example, to discover
which strengths we thought we had are not, because if our competitors also have them,
they do not differentiate us.

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SWOT ANALYSIS FOR COCA-COLA AND PEPSI

SWOT COCA-COLA

Internal analysis External analysis

Weaknesses Threats
• High concentration in the production • Market saturated with carbonated
of carbonated beverages. beverages.
• Little product diversification. • Competition from other brands, such
Negatives

• Acquisition of brands that do not as Pepsi.

provide sustainable income. • Change in consumption habits
towards healthier beverages.
• Non-beneficial obligation to label
products with information on their
composition.
• Water scarcity.

Strengths Opportunities
• Most famous brand. • Increased consumption of bottled
• World's largest share of the soft drinks water.
market. • Growth in demand for healthy foods
• Huge marketing and advertising and beverages.
Positives

campaigns. • Growth in non-alcoholic beverage

• Largest beverage distribution chain. consumption in emerging markets.

• Loyal customers. • Expansion through acquisitions.

• Power to negotiate prices with • Affiliations to create products and

suppliers. unique services.

• Strong corporate social

responsibility.

Table 5. Coca-Cola SWOT analysis.

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Business strategy

SWOT PEPSI

Internal analysis External analysis

Weaknesses Threats
• It does not have much domestic • Entry of new competitors to this
production and distribution market.
infrastructure.
• New laws in the sector and taxes to
• Lower sales volume compared to protect health.
Negatives

competitor #1.
• Entry of new international beverage
• Little international presence. companies.
• A large percentage of the population • Changes in people's eating habits.
prefers the Coca-Cola beverage for its
• Low international presence that
taste.
lowers participation.
• Worldwide competition.

Strengths Opportunities
• Best prices. • Expand further in the world.
• Innovative packaging and • In the national territory to have
presentation. greater coverage.
• Large investments in advertising that • Broader corporate social
have formed a good position. responsibility (CSR).
Positives

• Product and brand quality. • To have strategic alliances with more

partners.
• Adequate geographical location.
• More specialized training for your
• Experienced international brand.
personnel.
• Create more technological activities
to interact more with your customers.
• Broader technology for the
innovation of new channels of inte-
raction

Table 6. SWOT analysis Pepsi.

28
In summary, comparing both matrices, we can deduce:

Weaknesses Threats

• Consumption dependence: • Water scarcity: a drawback for

Coca-Cola is more dependent both companies.
on the consumption of
carbonated beverages because Cocacola:
it has a lower product diversity Pepsi:
than Pep- si (beverages and
snacks).
Cocacola: • Legal requirements on labels:
this is detrimental to both brands,
Pepsi: as they have to provide
• Branding: not all Pepsi products information on the nutritional
carry its brand, as opposed to value of their products.
Coca-Cola, which places its
brand on all its products. Coca-Cola:
Pepsi:
Coca-Cola:
Pepsi:

Strengths Opportunities

• Size: Coca-Cola is the world's • Price of raw materials: by

largest carbonated beverage focusing solely on carbonated
company. beverages, Coca-Cola has a
better cost of raw materials than
Cocacola: Pepsi (which also produces
Pepsi: snacks).

• Product diversity: Pepsi has Cocacola:

been able to diversify its produc- Pepsi:
tives (beverages and snacks),
which Coca-Cola has not. • Emergence of isotonic
beverages on the market: Pepsi
Coca-Cola: has been able to take better
Pepsi: advantage of this new market
niche than Coca-Cola.

Coca-Cola:
Pepsi:

SWOT analysis Coca-Cola vs. Pepsi.

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Business strategy

1.4.3. PORTER'S FIVE FORCES VS. SWOT ANALYSIS: WHAT IS THE

DIFFERENCE?
Porter's five forces and the SWOT or SWOT analysis are two tools frequently used by
companies to analyze and make strategic decisions, seeking to define the company's
position in the market.

Their main difference is that Porter's five forces analyze the competitive environment
within an industry or sector, often focusing on external forces, while a SWOT analysis also
analyzes the company's internal potential. By comparison, we could consider Porter's five
forces a micro tool and SWOT analysis a macro (as well as a micro) tool.

But we can also find a relationship between both models if iteration is used in the analysis.
Initially, a SWOT analysis of the company is carried out to identify the elements on which
action must be taken.

1.5. THE BCG MATRIX (GROWTH-

PARTICIPATION MATRIX)
The BCG matrix, also called the growth-share matrix, is a fundamental strategic marketing
tool for companies. It assists companies in analyzing their product portfolio, determining
which products are the most profitable, helping to choose the best sales strategy in each
case.

This business matrix, named after the company that developed it (Boston Consulting Group),
was first published in 1973.

Two variables are used to create this matrix:

• Market share (quotient between the company's sales and the total sales of the product
in the market), which is represented on the horizontal axis.

• The market growth rate (or demand for a product), represented on the vertical axis.

These axes delimit a 2 x 2 quadrant. In each of these quadrants, a product is represented

using a figure: a star, a cow, a pig or a question mark, depending on the value taken by the
two reference variables for these products. For each of the products (figures) a different
strategy is recommended, since some are more profitable to invest in and others are not, and
may even need to be withdrawn from the market.

30
 Hig
h
Market growth rate

Und
er

High Low
Market growth rate

Figure 3. BCG matrix.

MEANING OF EACH ELEMENT OF THE MATRIX BCG

1. Star product. Star products are those with a high growth rate and a high market share. It is
necessary to pay close attention to them because, although they generate high liquidity, they
need constant investment to maintain their position and evolve into a cow product. They run
the risk of becoming a dog product if the market in which they are located requires major
investments in technology and if there are already well-positioned competitors who can
exert pressure to push them out of the market.

2. Cow products. Cow products, with a high market share coupled with a low growth rate,
are mature and consolidated products in their sector. They are a source of income with
low investment.

3. Dog product. Dog products generate little revenue, as they have a low market share
coupled with a low growth rate. They are products with high fixed costs, so it is advisable
to reduce them as much as possible, thus trying to maximize revenues. If this is not
possible, another solution is to eliminate them from the market.

4. Questionable product. These products offer a high growth prospect, but their market
share is still low. They usually require high investments as they have a high growth rate,
but still generate little revenue as they have a low market share. They are a question
mark; they may evolve into a star or become a dog, so it is recommended to re-evaluate
the strategy to be followed.

WHAT IS THE BCG MATRIX FOR?

In a way, the BCG matrix represents the life cycle of a product: introduction, growth,
maturity and decline. A product that has just entered the market will be a question mark; it is
not yet known how it will evolve. If it evolves favorably into a star product, it may end up
consolidating into a cow product; but if it does not, it could end up as a dog product, and may
even disappear from the market.

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 Operations management
Business strategy

Introduction Growth Maturity Decline

SALES

TIME

Figure 4. Life Cycle Analogy - BCG Matrix.

Since, a priori, we do not know how the product will evolve, an analysis of the BCG matrix
will recommend different strategies depending on the position of our product in it. Thus, the
company will be able to:

• Build: investing resources to increase sales and thus market share.

• Harvesting: minimizing expenses, thus maximizing profitability.

• Eliminate: if the product does not offer a route or does not evolve.

HOW TO ELABORATE A BCG MATRIX?

To elaborate a BCG matrix we must follow the following process:

Choose the products or

services to be analyzed.

Calculate, for each product,

its market share and growth
rate.

Generate and
analyze the
BCG matrix.

Decide on the strategy to

follow based on the analysis
made.

Figure 5. BCG matrix generation and analysis process.

32
 ADVANTAGES AND DISADVANTAGES OF THE BCG MATRIX

ADVANTAGES DISADVANTAGES

Simple to generate and use. Very basic analysis, studying only two
market variables.

Provides an overview of the company's Not all products can be assigned to a

products and their current status. specific quadrant (they can be in between,
or even in the middle).

Advises investment in the most suitable It does not take into account product
products synergies. It is possible that a dog product,
efficient. although not profitable, represents a
differentiating competitive advantage for
the company and it is advisable to
maintain it.
Advantages and disadvantages of the BCG matrix.

BCG COCA-COLA MATRIX

To conduct the analysis of Coca-Cola, we chose four of its main products: Co- ca-Cola
Original, Coca-Cola Zero, Diet Coke, and Coca-Cola Zero sugar and Zero caffeine.

• Cow product. Coca-Cola Original is undoubtedly its cow product. It is a mature and
consolidated product, with a large market share. The company achieves high profits with
little need for new investments. It is its main source of income.

• Star product. There is also no room for hesitation when it comes to choosing its flagship
product, Coca-Cola Zero. This product has a very fast growth rate, so the company
needs constant investment to evolve it into a cow product and consolidate it in the
market.

• Question mark product. Among the selected products, Coca-Cola Zero sugar and
Zero caffeine is a question mark product, since, for the time being, it has a high growth
rate but still has a low market share, so it will require intense monitoring, so that it grows
and evolves into a star product and does not decline and become a dog product.

• Dog product. Coca-Cola Light is the dog product. Although it is consumed by

customers who take care of their bodies, it is rapidly being replaced by Coca-Cola Zero,
since this product, even without sugar, maintains the original taste of the beverage. It has
a low market share, so it would not be surprising if the company were to withdraw it from
the market in the next few years.

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Business strategy

1.6. BLUE OCEAN STRATEGY

Currently, one of the main problems faced by companies is to find markets in which the
rivalry to win them is lower. For this reason, we are going to analyze the Blue Ocean Strategy
(Cham Kim and Mauborgne, 2005), which helps to discover new opportunities for the
business, broadening market horizons and generating value through innovation.

Theoretically, this strategy holds that market boundaries and industry structure, called red
oceans, can be transformed. It serves as a formula that can be applied by organizations
whose products or services are similar to others and which offer them in the same market.

How could the brand address this problem?

To reach these blue oceans, the best tool is innovation. In these environments, the classic
representation system of development strategy can be redefined to describe how an
organization can distance itself from its competition and thus continue on the path of
evolution and transformation.

What is the difference between blue ocean and red ocean strategy?

RED OCEAN BLUE OCEAN

Competition in an existing market. Creation of a new market.

Advance based on pre-established industry Challenging the established to create new

rules. paradigms of use and consumption.

Exploitation of demand. Demand generation and capture.

While the red oceans represent all existing business areas, the blue oceans represent
business ideas that have not yet been explored.

In red oceans, since the rules of the game of supply and demand are already pre-
established, it is taken for granted that the boundaries of sectors and industries are
immovable. In blue oceans, on the other hand, what is sought is the creation of those markets
in areas that are new opportunities for long-term sustainable growth and profitability.

The authors of this theory argue that "market boundaries and industry structure are not a given
and can be reconstructed by the actions and beliefs of industry players". In order to implement it
and, consequently, to get out of the red ocean, they propose the following steps:

• Create an irrefutable market space: i.e., do not cut costs or adjust the product, but
change the value proposition.

• Make competition irrelevant: when the market is saturated and it is difficult to break
through, the only way to survive is to innovate with value, through product differentiation
and cost leadership.

34
 • Create and attract new demand: analyze who is in the chain of consumers and users of
the brand and decide whether the strategy should be reoriented.

• Differentiate at a reasonable price: a company may have the option of creating more
value for customers, but at a higher cost, or reasonable value at a lower cost. The
objective of this strategy is to achieve differentiation at low cost.

• Align the company's activities to achieve differentiation and low cost: the focus is on
providing value to the end customer and the company, so its culture is characterized by
creativity and the shift is towards the emotional.

1.7. INTERNATIONAL STRATEGY: TOWARDS

BUSINESS SUCCESS
WHAT IS THE INTERNATIONALIZATION OF A COMPANY?
The internationalization strategy is used to produce or market a company's products in
one or more countries in the world other than its own. In this way, the company will be able to
obtain a differentiating competitive advantage over its competitors by expanding its
presence in the international market. To do so, it will be necessary to seek new markets and
increase the number of customers, sales and profits.

There are different internationalization strategies, so each company will choose the one that
suits it best based on the studies and analyses that have been carried out in a previous
stage of internationalization. It will have to know the type of market, the possibilities of the
brand, competitors, prices or tax regulations, etc.

WHAT ARE THE STAGES OF INTERNATIONALIZATION?

This internationalization of the company must be prepared and go through a series of stages
for it to really work and be sustainable over time:

1. We will start with an occasional export, exporting surplus production, or exporting

occasionally, using local intermediaries. It does not yet control the marketing strategies,
which will be in the hands of local intermediaries.

2. If the first phase has been successful, we will move on to the second phase:
experimental export. You will look for new markets through import agents. You will not
yet control the selling price, but you will control production and distribution costs.

3. When the company already has a stable set of customers, it will be able to operate in
various markets or work with exclusive distributors. It will open offices abroad, creating
exclusive departments for these sales. Finally, it will control all variables, from marketing
to the final sales price.

4. When the company consolidates abroad, it establishes sales subsidiaries,

investing in human and material resources, and already assuming the commercial functions.

5. The final step will be to establish production subsidiaries as well. In this way, the
company becomes multinational, avoiding tariffs and export restrictions.

35
 Operations management
Business strategy

TYPES OF INTERNATIONALIZATION STRATEGIES

The main types of internationalization strategies used by companies are as follows:

• Multinational strategy.

It will be applied by multinational companies that have been created and legally
registered in a country of origin but have diversified markets by creating subsidiaries in
other countries of the world.

This will require these companies to have assets and production facilities in those
countries, although important decisions will continue to come from the parent company
located in the country of origin.

Normally, this type of internationalization strategy favors the development of the

countries where it is established, by generating a greater production of goods and
services there, and creating job opportunities for their inhabitants.

Examples of these multinational companies are Coca-Cola, Toyota, Microsoft, IBM or Nokia.

• Transnational strategy.

This strategy is applied by those companies that have a parent company, from which
they have been expanding other subsidiaries to other countries. In this way, they can
produce or commercialize their products in other markets, achieving greater efficiency by
competing in any nation in the world. They are applied by transnational companies.

In fact, the flow of capabilities and skills takes place from the country of origin to the
country where it is located and, reciprocally, from the international subsidiary to the country
of origin, achieving effective communication and feedback to and from the country of origin.

By running production processes in many countries, they can perform both import and
export activities.

Examples of transnational companies are Apple, Samsung, General Electric, Walmart or

Exxon-Mobil.

• Global strategy.

The global strategy considers each country in which the company operates as a segment
of the global market, standardizing the production of products at an international level
(adapted to each market), which is a significant competitive advantage.

This type of strategy is used by global companies: such companies need a high level of
coordination and centralization of decisions from the parent company to maximize
competitive and strategic advantages.

In short, the use of internationalization strategies allows companies to increase their level
of competitiveness, expanding their growth, lowering costs and consolidating their
products and brands. But this is not an easy process, due to the legal, economic and
cultural differences between countries.

36
WHAT TO DO TO INTERNATIONALIZE A BRAND?

If we want to internationalize our brand, we must first take the following steps:

• Identify barriers.

We must know what is preventing us from growing. In this way, we can address risks,
correct deviations and prepare ourselves to meet the demands of the new market.

• Recognize the product.

We must evaluate the product we want to offer to the new market, to know the real
chances of success. To do this, we can compare with other products of the same sector
already stable in the new country.

• Differentiate ourselves from the competition.

We must clearly differentiate ourselves from the competition, for which we must analyze
the sector and the country in order to know where we can innovate.

• Elaborate guides.

We will need to establish the route to follow through business and internationalization
plans.

• Be clear about the investment.

We must be clear that it will be an investment that will yield benefits (if any) in the long
term. We must not forget to work with a certain margin that will allow us to face
unforeseen failures or problems.

37
 Operations management
Business strategy

KEY IDEAS
• There are different types of business strategy: corporate (related to the image with
which the company wants to present itself and be known within the sector or target
market), competitive or business (focused on aspects related to the way in which the
company wants to market itself) and cooperative or functional (in charge of establishing
the organizational scheme).

• Games theory, also known as interactive decision theory or social situation theory, is one
of the main basic innovations of twentieth century economic thought. The two different
approaches for which Von Neumann and Morgenstern investigated this theory are: the
strategic or non-cooperative approach (consisting of a game with two players with
opposing interests who separately seek an optimal strategy for their own interests) and
the coalitional or cooperative approach (describing optimal behavior in games with a
large number of players).

• Some of the main strategic analysis tools are:

– Porter's Five Forces: are part of a competitive analysis model created by Michael E.
Porter in 1979, which consists of considering five "forces" that can determine the
position of any company in its respective market (rivalry among existing competitors,
threat of new entrants, bargaining power of suppliers, bargaining power of buyers and
threat of substitute products or services).

– SWOT matrix: also known as SWOT matrix or SWOT analysis, it is a simple strategic
analysis tool widely used in decision making in all types of organizations and
companies. It identifies the opportunities and threats offered by the market (external
factors), as well as the strengths and weaknesses of our company (internal factors).

– BCG Matrix: also called growth-share matrix, it is a fundamental strategic marketing

tool for companies. It helps companies to analyze their product portfolio, determining
which products are the most profitable, in order to propose the most advisable sales
strategy to implement.

• The international strategy is used to produce or market a company's products in one or

more countries of the world other than its own. In this way, the company can obtain a
differentiating competitive advantage over its competitors by expanding its presence in
the international market.

38
GLOSSARY
— Customer. A person who buys in a store or uses the services of a professional or
company.

— Competition. The situation of companies that compete in a market by offering or

providing the same product or service.

— Cooperate. To work together with another or others for the attainment of a common end.

— Strategic. Of decisive importance for the development of something.

— Loyalty. To achieve, in different ways, that the employees and customers of a company are
the company.
loyal to
to remain faithful to it.

— Incentive. An incentive offered to a person, group or sector of the economy for the purpose of
to increase production and improve yields.

— Market. Set of consumers capable of buying a product or service.

— Monopoly. Market situation in which the supply of a product is reduced to a single

seller.

— Supplier. Said of a person or a company, which provides or supplies everything from

necessary for a purpose to large groups, associations, communities, etc.

— Substitute. Said of a thing, which can replace another in use.

39
BIBLIOGRAPHY .
Andrews, K. R. (1980). The concept of business strategy. University of Virginia.

Ansoff, H. I. (1965). Corporate Strategy. McGraw-Hill.

Ansoff, I. (1980). Strategic management journal, 1(2), 131-148.

Binmore, K. (1994). Game Theory. McGraw-Hill/Interamérica de España, S. A. Spain.

Castro Monge, E. Competitive strategies and their importance in the good management of
the firm. Ciencias Económicas, 28(1), 247-276.

Chandler, A. (1962). Strategy and structure, chapters in the history of the industrial enterprise.
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Hamel, G. (1996). Strategy as Revolution. Harvard Business Review, July-August 1996.

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Michaelson, G. A. (2006). Sun Tzu. The art of war for managers. Management 2000.

Miles, R. and Snow, C. (1978). Organizational strategy, structure and process. McGraw-Hill.

Miller, D. (1987). The Structural and Environmental Correlates of Business Strategy.

Strategic Management Journal, 8(1).

Mintzberg, J. (1990). The strategic process. Prentice Hall Hispanoamericana.

Nalebuff, B. J. and Brandenburger, A. (1997). Coopetition. Ediciones Diaz de Santos, S.A.

Porter, M. (1979) How competitive forces shape strategy. Harvard Business Review, March
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Porter, M. (1980). Competitive strategy. Techniques for analyzing industries and competitors.
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Porter, M. (2017). Being competitive. Updated and augmented edition. Harvard Business
Press. Editorial Deusto.

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Von Neumann, J. and Morgenstern, O. (1944). Theory of Games and Economic Behavior.
Prin- ceton University Press.

42
TOPIC 2
Operations management
 Operations management
Topic 2. Operations Management

OBJECTIVES
• To learn what operations management consists of, explaining the reasons for its
importance in the company.

• Understand that the success of operations management lies in a three-pronged methodology:

planning, execution and control.

• To know the figure of the operations manager, identifying the professional competencies
required by the position and the functions performed within the company.

• Recognize the elements of an operations system: inputs, processes and outputs.

• To know the fundamental variables of an operations system: demand, process,

capacity, flow and human resources and their organization.

• Understand Porter's value chain model.

• Identify the objectives of operations management: optimal costs with an efficient and
sustainable service level.

• To know the origin and historical evolution of the concept of operations management.

• Understand the competitive advantage of operations management, based on cost-effectiveness.

tes and/or in differentiation.

• Identify competitive strategies of real companies.

44
2.1. OPERATIONS MANAGEMENT
Let's imagine a movie theater with four theaters. It is 7:30 in the evening. There are many
people buying tickets and lining up to buy popcorn. At 8 o'clock two big productions are
premiering, and due to the large amount of demand, the premieres will be shown in double
session at the same time. The few cinema employees are very stressed because they have to
attend to the peak of work during that half hour. The ticket queue is the same as the popcorn
queue. Nervousness is palpable in the atmosphere. Customers do not understand why it takes
so long to buy the ticket and the soft drink with the popcorn.

This is a real situation that we can find in many business examples. There can be as many
solutions to problems as there are problems. In our imaginary case of the cinema, strategic
planning is apparently conspicuous by its absence. Perhaps each premiere could have been
scheduled at different times, or the flow of queues could simply have been managed
differently. These issues have to do with what are called business operations.

What would happen if instead of one queue we designed two? For example, one queue for
tickets, and another for popcorn. Probably the flow of customers would be streamlined.
However, for our particular case, the bottleneck will be in the popcorn queue. The same
worker who is at the cash register taking orders is the same worker who collects and
prepares those orders.

Solving this problem will make a difference in the service and, therefore, in the customer's
experience and satisfaction. Adapting to the needs of today's market is essential to be more
competitive and generate value to the product or service.

Now let's take the case of a beach bar. Let's imagine a beach crowded with bathers. The
heat is on and the crowds flock to the bar for a refreshing drink. The customer service system
developed by the beach bar is very simple: anyone who orders along the bar must be served,
without any order or priority of arrival. In addition, the three people who attend the bar do the
same thing (charge and prepare the drink).

Logically, this assumption raises another strategic planning problem that generates an
obvious bottleneck in product delivery. Customers complain because ordering a drink takes an
average of 7 minutes in the whole process. A process that could be shortened in time if the
procedure were optimized by designing, for example, two queues, and altering the roles of the
people in charge of serving customers. One of them could go alone to collect the money, while
the other two would prepare the drinks: one would put the ice cubes (he may even leave a stack
of glasses already prepared) and the other would just pour the liquid of the drink into the
glass with ice cubes. With this operational movement of function distribution, the time from the
time the customer orders and pays for the drink until it is served could be reduced to three
minutes.

The transformation of resources according to market demands will increase the added value
of the product or service in order to meet the needs of customers, who will provide feedback
on them. This information is essential for organizations to achieve higher quality in their
product or service.

Another fictitious scenario could be that of a school that has to serve 200 students at
lunchtime. The management of the institution has long maintained this system of canteen
management. All students enter for lunch at the same time. The queues are unmanageable
and the teachers have to control their group of students for a long time.

45
 Operations management
Topic 2. Operations Management

Why not establish four different schedules for students to access the dining room without
waiting so long? In this way, four reduced groups of students are created and a more agile
flow of the process is generated.
One of the functional areas of any company is undoubtedly operation management, which
leads to a continuous transformation of the company in order to maintain the balance between
product/service, cost and quality, making digital transformation a necessity.
Any manager must be aware of its relevance, as it will be a determining factor in the direction
his or her business will take. Managing operations is fundamental to satisfying customer
needs (and thus staying in business for the long term), and is an opportunity to secure the
company's competitive advantage.
Companies such as Zara or Amazon probably owe their success more to the way they
operate than to the products they sell, thanks to efficient operations management, which has
positioned them as market leaders.

2.1.1. WHAT IS OPERATIONS MANAGEMENT?

DEFINITION Operations management is the set of procedures, techniques,

methods and processes that make it possible to obtain products and/or
A-Z services; in other words, it is responsible for implementing the
company's strategic objectives, managing the resources necessary to
develop, produce and distribute those products or services that satisfy
customer needs.

Every product or service we use on a daily basis is the result of operations management
(successful or not), whether it is the clothes we wear, the food we eat in a restaurant or the
garage we take our car to when it needs a repair.
Let's see it with the example of a shirt:
1. It begins its operations management in the field, where the raw material from which it is
made, cotton, was harvested.
2. This raw material had to be transported (perhaps through customs) to its place of
transformation.
3. The cotton was treated into fabric, which was then dyed to the desired color.
4. The tailors, who had designed patterns from which they cut the fabric, made the shirt.
5. The shirt was transported to the store, where it was sold to the customer. In that store,
the merchant also managed operations such as inventory control, shelf organization and
employee shift planning.
6. Once the customer bought the shirt, he took it home, where he found a place for it in the
armory, wore it to the events he decided to wear it to, and washed it whenever necessary.
When he no longer needs it, he will donate it or take it to a recycling point, where he will start
a new system of operations to obtain new raw materials or manage waste.

46
THE SUCCESS OF OPERATIONS MANAGEMENT: PLANNING, EXECUTING
AND CONTROLLING
Successful operations management requires three fundamental strategies: planning,
executing and controlling operations within a company.
An example of effective operations management in the logistics area could be studied
through the delivery routes of goods. These routes must be planned to achieve the best
possible sequence of stops, executed by making deliveries and controlled through the
analysis of key performance indicators (KPIs). In this way, the following is achieved:
• Lower fuel consumption, leading to reduced operating costs.
• A reduction in delivery times, which improves the quality of service.
• Increased productivity, resulting in an increase in the number of daily deliveries.
All of this will have an impact on consumer satisfaction rates, which will benefit from a more
agile and better quality service.
This is what happens with Amazon's last mile team, which distributes products from its logistics
centers to the customer's doorstep. They deliver packages (and even groceries) to homes,
businesses, Amazon lockers or even cars, if required by the customer, all over the world, having a
direct tangible effect on customer satisfaction.
The Amazon network, made up of thousands of small businesses and carriers, is growing
exponentially every day. Thanks to the technological innovations developed by the
company, this network is scalable. These innovations include planning and routing
algorithms, internal maps and navigation platforms, and customer experiences transmitted
through mobile devices.
Similarly, Amazon optimizes processes by reducing errors, thanks to its Kaizen ("change for
the better" in Japanese) quality system: through small work teams, employees themselves
identify areas for improvement and propose solutions.

2.2. THE OPERATIONS MANAGER: REQUIRED

PROFESSIONAL COMPETENCIES AND DUTIES
Nowadays, companies are not only satisfied with improving efficiency in itself, but are also
looking for factors that differentiate them from other companies, such as the level of service
offered, adaptation to customer needs or innovation.

DEFINITION
The chief operating officer (also known as COO) is a professional who
is part of the chief operating officer (COO) team.
A-Z senior management positions. This is a key position in the company, since it
acts as a liaison between the different departments, its main function being
to coordinate all operations, optimizing the company's processes to
ensure maximum efficiency at minimum cost and customer
satisfaction, through innovative strategic initiatives.

47
 Operations management
Topic 2. Operations Management

WHAT PROFESSIONAL SKILLS DOES AN OPERATIONS MANAGER

REQUIRE?

The operations manager must have the following professional competencies:

• Strategic, to add value to the business through the search for innovative strategies,
anticipate problems and opportunities, and adapt to the demands of new markets.

• Analytical and resolutive, to solve problems and unforeseen events that may occur during the year.
I command quick and efficient decisions.

• Planning and organization, in order to set and organize short and long term objectives.
long-term in the design of processes.

• Leadership, which allows him/her to advise, guide, accompany and motivate workers in
each of the internal processes so that, together, they can achieve the objectives set.

• Communicative, necessary to empathize, listen and promote effective communication

with the team and with external people. He/she must not only communicate and give
instructions; he/she must also be a good listener and be receptive to the suggestions of
the people under his/her charge.

• Authority, to inspire confidence and authority, and to know how to perform in the
hierarchical relationships.

• Neutrality, in order to maintain a professional position, without granting preferences, as follows

how to remain calm in situations of disagreement, frustration or conflict.

WHAT ARE THE FUNCTIONS OF THE OPERATIONS MANAGER?

Normally, each company defines the functions of the COO uniquely, as this is a strategic
position. There may even be more than one operations manager, provided that the company
establishes very well differentiated and independent lines of business.

Nevertheless, it is possible to cite ten functions that every operations manager must fulfill:

1. Manage new market strategies. He is responsible for the design and creation of
strategies for the development of products or services in new markets for the company,
defining the necessary means, without ever losing sight of the company's general
objectives. To this end, he/she must establish strategic commercial alliances with market
players to ensure good planning and management of resources for the benefit of the
company.

2. Optimize operational processes by generating improvement proposals. Another

function of the COO is to analyze the effectiveness of the company's operations and business
strategies, based on the analysis of metrics and KPIs, in order to promote business growth
through continuous optimization of processes, both technological and organizational.

48
 3. Integrating the company's internal processes. The coordination of the actions of the
different departments, so that they all work in the same direction and join forces to
achieve the objectives that have been set, is also a task of the operations manager.

4. Manage the company's internal resources. He/she must ensure that the company has
the internal production, administrative and human resources necessary for the proper
development of its activity, in continuous coordination with the managers of the
respective departments.

5. Supervise the work team. The operations manager is responsible for the training,
education and professional development of employees, through promotions, to contribute
to a good working environment. He/she must direct, supervise and motivate the
operations staff to achieve the objectives set by the organization, encouraging maximum
performance and commitment from his/her team.

6. Manage the company's logistics. For the operations manager, logistics becomes
indispensable in order to optimally implement the strategies he has set out. He or she
must ensure perfect synchrony and fluidity in the processes to be carried out.

7. Managing financial resources. He/she is in charge of managing budgets, forecasts

and the allocation of resources of the operational areas in order to obtain the best
possible performance, but always within the agreed financial margins.

8. Reduce delivery times. It is the role of the operations manager not only to ensure that
promised delivery times to customers are met, but also to streamline transportation logistics
so that increasingly faster deliveries can be made.

9. Monitor the company's performance. You will create measurement tools that analyze
both internal and external processes of the company, keeping the CEO informed at all
times of your progress, through detailed reports of the company's operational status.

10. Act as a link between the CEO and the team. The COO is the link between the CEO
(chief executive officer) and the rest of the company, as he/she establishes two-way
internal communication and transmits achievements and problems.

2.3. THE IMPORTANCE OF OPERATIONS

MANAGEMENT IN THE ENTERPRISE
Until not too long ago, the important thing for a company was to produce at the lowest
possible cost in order to increase its profits. Today, however, a further step is required:
customer satisfaction. Operations management takes this step: it is not just a matter of
producing goods or services for the customer, but of adding value to our resources through
the production of those goods or services.

In addition, the activities of a company are interrelated, so coordination of the actions of the
different departments is necessary to achieve the objectives that have been set; this
coordination is carried out by the operations management.

49
 Operations management
Topic 2. Operations Management

Therefore, operations management provides an opportunity for companies to improve their

profitability and gain a competitive advantage over their rivals through differentiation,
thereby providing a service to society by delivering an excellent product or service at
competitive costs.

2.4. ELEMENTS OF AN OPERATING SYSTEM

An operations system is made up of three main elements: inputs, processes and outputs.

• Inputs. These are the resources that the company has to acquire or contract (labor, raw
materials, financial resources, information, time, etc.) in order to produce the goods or
services it will provide to its customers.

• Processes. They are a set of interrelated production activities through which inputs
(resources) are transformed to provide them with added value and generate outputs
(products or services) with the objective of satisfying customer needs.

• Outputs. They are the result of the transformation of inputs through processes. They can
be products (tangible) or services (intangible).

Inputs Processes Outputs

Transformation Products
activities
Resource
s Services
Added value

Feedback

Figure 1. Elements of an operating system.

The transformation of resources into products or services will increase the added value of these
resources in order to meet the needs of customers, who will provide feedback on them, with
which the transformation processes that have been carried out will be reviewed, in search of the
total quality of the product or service offered.

KEY VARIABLES OF THE OPERATING SYSTEM

There are five fundamental variables in operations management:

1. Demand. The quantity of products and/or services that the market is willing to purchase
to satisfy its specific needs or desires.

2. Processes of a system. These are the activities carried out by a company to transform
inputs into outputs, providing added value to satisfy customer needs.

3. Capacities of a system. Types and amounts of resources available to ensure that the system
processes the desired volume of items (products or services) per unit of time.

50
 4. Flows of a system. Time they take and place where they accumulate or wait.
items, necessary for proper planning and control of operations.

5. Human resources and their organization. People are a type of resource that are
structured in organizations and require special attention in the management of
operations (performance measurement, improvement systems or innovation).

PORTER'S VALUE CHAIN

DEFINITION Porter's value chain is a strategic tool for analyzing the internal
activities carried out in companies and the interrelationships that occur
A-Z between them in comparison with those of the competition, which
makes it possible to identify the competitive advantages of a business in
the market and to detect those that provide value directly to the
customer (primary activities) and those that help these activities to be
carried out, even though they do not provide value directly (support
activities). It is composed of a sequence of activities (processes) along
which value is added to the items.

A company's competitive advantage lies in the existence of one or more activities that it
performs exclusively and/or more efficiently than its competitors, and which are perceived as
important by customers. Therefore, in order to diagnose a company's competitive advantage,
it is necessary to define its value chain. To do this, it is necessary to identify the activities
performed by a company and the relationships between them.

COMPANY INFRASTRUCTURE
SUPPORT ACTIVITIES

MAR

HUMAN RESOURCE MANAGEMENT

GIN

RESEARCH, DEVELOPMENT AND TECHNOLOGICAL DESIGN

PROCUREMENT
PRODUCTION

MARKETING
LOGISTICS

CUSTOMER
OPERATIONS/
LOGISTICS

SERVICE
EXTERNA

GIN
INTERNA

SALES

MAR
AND

PRIMARY ACTIVITIES

Figure 2. Porter's value chain.

51
 Operations management
Topic 2. Operations Management

According to Michael E. Porter1:

• The margin is the difference between the total value and the total costs incurred by the
company in performing the value-generating activities.

• Value activities are those that a company performs to offer its products or services to
customers.

Porter divides value activities as follows:

• Primary activities. These are the activities that sustain the company's competitive
advantage by providing more value to customers than the rest of the competitors. They
are necessary for the physical development of the product or service (design and
manufacture), its sale and delivery to the customer, and also include after-sales
assistance.

• Support or secondary activities. These are activities that do not add value directly, but
support the primary activities and complement each other. They provide cross-cutting
support to the entire company. Their purpose is to increase the efficiency of the primary
activities in the process of adding value.

Let's take as an example the management of a restaurant located in the best area of the
city. Its primary activities could be:

• Internal logistics. Consisting of the acquisition of raw materials needed for the
preparation of meals.

• Operations/production. Employees transform the ingredients into the final dish.

• External logistics. As there is no take away service, this activity is not carried out; the
products are not distributed outside the restaurant, but must be delivered inside.

• Marketing. Consisting of advertising that the restaurant disseminates on social networks

to make itself known.

• Customer service. The main activity of the restaurant, since excellence in customer
service is its maxim.

Secondary activities include:

• Maintenance of the company's infrastructure, i.e. the premises where the restaurant
is located, in the best area of the city.

• Human resources management, which will be responsible for the selection and training
of the personnel that will work in the restaurant.

• Innovation, development and technological design, i.e., the machinery necessary to

be able to execute the dishes on the restaurant's menu.

• Procurement: purchase of other essential materials (not necessary for the preparation
of the dishes) such as beverages or cleaning materials.

1 PORTER, M. E. (1985). Competitive advantage: Creating and sustaining superior performance.

52
 Therefore, among the elements that can generate benefits for the restaurant and at the same
time allow it to differentiate itself from the competition (competitive advantage) are the
infrastructure, which stands out because of its privileged location, and the excellence of the
service provided by the employees to the diners.

OPERATIONS MANAGEMENT OBJECTIVES

Although the main objective of operations management was originally the improvement of
operational efficiency, which brought with it an increase in productivity and a significant
reduction in costs, today this objective is not enough (although it is necessary), since the
company does not achieve a significant competitive advantage over its rivals that can be
sustained over the long term.

The promise made to the customer must be fulfilled in an efficient and sustainable manner
over time in order to satisfy their specific needs or requirements; understanding the
promise as the value proposition offered to the customer through the company's products
or services, at a price and within a period of time, in order to differentiate the company from
the competition.

Therefore, an operations management understood as a source of competitive advantage for

the company must seek optimal costs with an efficient and sustainable level of service
over time.

Operations management must contribute to generate value for both parties:

• For the customer, in a way that meets their needs.

• For the company, with an efficient and sustainable level of service that will allow it to maintain
its competitive advantage, generating value for the company itself and its employees.

The evolution of operations management methodologies has taught us that the relationship
between customer and company must be win-win: doing well with the customer will cost the
company less.

EXAMPLE Imagine a parcel and courier business. If it improves its package

management processes, avoiding delays or losses in delivery, the
customer will be satisfied and will prolong its relationship with the
company (which, in turn, will maintain its competitive advantage over
the competition). Similarly, by improving management, the company will
avoid customer complaints and the search for lost packages, which will
result in cost savings for the company, as well as happier and more
productive employees, as they will not have to deal with customer
complaints.

In short, operations management must seek:

• In the short term, to meet the company's strategic objectives in order to improve the company's
efficiency and productivity, which will result in cost reductions.

• In the long term, to be a source of competitive advantage in order to achieve a level of service
efficient and sustainable over time.

53
 Operations management
Topic 2. Operations Management

ORIGIN AND EVOLUTION OF THE CONCEPT OF OPERATIONS MANAGEMENT

A BRIEF HISTORY OF OPERATIONS MANAGEMENT

Although it could be said that operations management has always existed (the Egyptian or
Roman cultures built their most significant works thanks to complex industrial organization
systems), the modern concept of operations management emerged thanks to the work of
Frederick Taylor at the beginning of the 20th century. Taylor applied scientific methods to
the improvement of operations management and developed specialization principles and
study methods that were quickly applied by industry.
A clear example of the application of these principles is Henry Ford, who combined them
with his mobile assembly line, which enabled the mass production of cars. This
revolutionized the market by considerably lowering the cost and production time of his
vehicles. Ford was also a pioneer in understanding the need to consider his employees as
potential buyers, which is why he paid them salaries well above the average for the time.
With the advent of World War II and the need to increase arms production and improve military
logistics, the United States led the way in operations management until the 1970s. Thanks to
the development of technology through computers, quantitative methods emerged in the field of
operations research and planning methods such as MRP (material requirements planning). The
objective of operations management was still to reduce costs in order to increase productivity.
Starting in the 1980s, it was the Japanese who took the lead in the field of operations
management. Toyota developed the just-in-time, Kanban and Kaisen concepts, whose
methodology quickly spread throughout the world thanks to lean management.
During the following years, revolutionary new methodologies were developed, such as
business process reengineering (BPR), enterprise resource planning (ERP), total quality
management (TQM) and theory of constraints (TOC).
In recent years, new information and communication technologies (ICT) have gained special
relevance by enabling business models different from the traditional ones, such as sales
through the Internet or virtual customer service, which has made digital training a necessity for
companies.

THEORETICAL APPROACHES USED IN OPERATIONS MANAGEMENT

M. Nieto Antolín2 , together with other authors, studied the evolution of the contents of operations
management (OM) in recent decades, based on the analysis of a sample of eighty-four manuals or
textbooks used in the teaching of the discipline. Following his analysis, he identified the four main
theoretical approaches or schemes used to articulate the content of operations management: the
systems approach, the strategic approach, the life-cycle approach and the value creation approach.
Let's see how he describes each of these approaches.

2 Arias Aranda, D., Minguela Rata, B., Nieto Antolín, M. and Rodríguez Duarte, A. (1998). The evolution of
operations di- rection: an analysis from the approaches and contents of its manuals. European Research in
Management and Business Economics, 4(1), pp. 81-100.

54
 • Systemic approach. The systemic approach has dominated teaching and has
structured the contents of OD manuals since the discipline emerged in the 1950s until
the early 1980s. This approach is based on the General Systems Theory and conceives
of the company's operations function as a system that transforms inputs - materials,
energy, labor, capital and information - into products and services (outputs).

This transformation process implies, in turn, the use of certain technological know-how
and leadership and management skills. [It is assumed that efficiency in operations is a
technical problem that can be solved without taking into account global strategic
considerations (Antolin et al., 1998).

• Strategic approach. Since the 1980s, with the consolidation of the strategic paradigm, the
contents of OD manuals have undergone certain changes. On the one hand, they reflect the
rapprochement between OD researchers and other academic communities in the field of
Business Management and, on the other hand, they show a progressive distancing from the
approaches of Operations Research. This change of orientation makes it possible to situate
OD as a specific area of Business Management and to investigate the relationships
between the operations function and the other functional areas of the company. [They
assume that the operations function can actively contribute to the achievement of the
company's strategic objectives (Antolin et al., 1998).

• Life-cycle approach. Some authors, such as Chase and Aquilano (1973, 1992)3 , have
used the life-cycle model to articulate decisions on operations. They draw an analogy
between the dynamics of life cycles and the evolution of operations systems. They
consider that this approach fits a production system from conception to completion at all
times. They represent the way in which a productive system is born, grows and orients
itself towards certain objectives following a sequence of decisions that passes through
different phases (Chase and Aquilano, 1973):

1. Birth of the system.

2. Product design and process selection.

3. System design.

4. Staffing the system.

5. System initiation.

6. System in stable situation.

7. System review.

8. Termination of the system (Antolin et al., 1998).

3 Chase, R. and Aquilano, N. (1992). Production and operations management: A life cycle approach. 6th ed. lrwin,
Inc.

55
 Operations management
Topic 2. Operations Management

1. Value creation approach. This approach, adopted by Melnyk and Denzler (1996)4 ,
is
based on the concept of value creation. OD decisions are represented on the
basis of the value creation process in the production activities. This makes it
possible to study the different activities of the operations function in terms of the
value they contribute and how and when they contribute it (Antolin et al., 1998).

OPERATIONS MANAGEMENT AS A COMPETITIVE ADVANTAGE

The case of the company Ryaniar is well known. Since it began operating, it has been
committed to a shuttle service, with frequent short-haul flights at low fares, using secondary
airports in large cities or airports in medium-sized cities close to large ones. In this way, it
was able to attract different customer profiles: families and students attracted by the low
fares and business travelers attracted by the frequency of its flights. In the absence of these
fares, these types of customers, especially students and families, would look for cheaper
alternatives to travel, even if it meant increasing travel time.

Ryanair optimized times by reducing lapses between flights at boarding gates to just 25
minutes. In this way, the company managed to keep its aircraft flying longer hours, and was
able to offer more frequent departures with fewer aircraft than its competitors. It also reduced
costs by not offering meals en route, not pre-assigning seats and not checking interline
baggage. In addition, it offered ticket sales at the gate, thus saving the intermediary costs of
travel agencies.

Why has Ryanair managed to maintain its competitive advantage for so long? On the routes
on which it operates, it remains the leader among its competitors, as none has been able to
offer a service so convenient and economical as to overshadow it. Is it not possible that other
companies will copy its strategy by imitating its methodology?

In fact, some have tried unsuccessfully. For example, British Airways sought to emulate
Ryanair on a number of shuttle routes while maintaining its position as a full-service airline.
As its competitor had done, it eliminated meals, lowered fares and increased departure
frequencies. So where was the problem? Why didn't it succeed as well? The problem lay in
the incompatibility of strategies; the trade-off didn't work: more of one thing meant less of
another.

When a company tries to be everything, it runs the risk of not being understood by its
customers. Complaints were multiplying daily because of delays and cancellations. The
company could not compete on price by maintaining travel agency commissions, but it could
also do without them. British Airways tried to compete in two different ways at the same time
and failed: the company lost hundreds of millions of euros.

As mentioned above, Michael E. Porter5 defined a company's competitive advantage as the

value it is capable of creating for its customers through the activities included in what he
called the "value chain".

4 Melnyk, S. A. and Denzler, D. R. (1996). Operations management: A value-driven approach. Irwin, Inc.
5 Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance.

56
There are two main strategies for creating and maintaining a competitive advantage: cost
reduction (by optimizing the operational management of activities) and differentiation (the
company is perceived by customers as better than the competition, so that they are willing to
pay more for its products or services). Choosing one or the other strategy has different
implications.
• Cost-based competitive advantage: reduced number of products subject to minimum
batches, centralized warehousing and low stock levels, transport service based on truck
or full container delivery.
• Competitive advantage based on differentiation: flexible production lines, safety
stocks, new distribution channels, up-to-date knowledge of customer expectations.
The traditional approach to operations management had the sole objective of reducing costs,
which led to an increase in company profits. Operations management was used as a tool to
improve operational efficiency by acting on the management of activities and optimizing
production factors. Total quality control programs, time-based competition and benchmarking
were used, which changed the way activities were carried out. However, this approach was
weak in the long term, mainly due to the lack of a sustainable competitive advantage.

IMPORTANT
Although continuous improvement in operational efficiency is necessary
to reduce costs, it is often not sufficient to compete with rivals. The
reason: the rapid spread of best practices among competitors.

This is what happened to Japanese companies in the 1980s: they positioned themselves so
far ahead of their competition that they could simultaneously offer a low price with superior
quality. A revolution in operational efficiency was triggered by the innovations of the Toyota
Production System and lean manufacturing, pioneers in quality management and continuous
improvement. Thus, most Japanese companies began to imitate each other, but as they
reached similar levels of operational efficiency, they realized that they had to develop their
own differentiation strategies.

IMPORTANT
A company will only be able to outperform its competitors if it
establishes a differentiation that it can maintain over time. It must be
able to provide greater value to customers, so that they choose it among
all its rivals.

From an operations point of view, the competitive variables for a company are
cost, quality, service, flexibility and innovation.

57
 KEY IDEAS
• Operation management is the set of procedures, techniques, methods and processes
that enable the production of products and/or services to satisfy customer needs.

• Successful operations management requires three fundamental strategies: planning, planning, and
nify, execute and control operations within a company.

• The chief operating officer (COO) serves as a liaison between the different departments
of a company, and his main function is to coordinate all operations, optimizing the
company's processes to ensure customer satisfaction through innovative strategic
initiatives.

• Porter's value chain is a strategic tool for analyzing the internal activities carried out in
companies and the relationships between them in comparison with those of the
competition.

• Operations management provides an opportunity for companies to improve their

profitability and gain a competitive advantage over their competitors through
differentiation. To this end, it aims to obtain optimal costs with an efficient and
sustainable level of service over time.

• From an operations point of view, the competitive variables for a company are cost,
quality, service, flexibility and innovation.

59
GLOSSARY
— Value activities. These are the different activities that a company performs to offer its
products or services to customers.

— Porter's value chain. It is a strategic tool for analyzing the internal activities carried
out in companies and the relationships that occur between these activities.

— Capacities of a system. Types and amounts of resources available to ensure that the
system processes the desired volume of items (products or services) per unit of time.

— Demand. The quantity of products and/or services that the market is willing to
purchase to satisfy its specific needs or desires.

— Operations management. It is the set of procedures, techniques, methods and

processes that allow the production of products and/or services to satisfy customer
needs.

— Chief Operating Officer (COO, CHIEF OPERATING OFFICER). This is a key

professional in the company, acting as a liaison between the different departments. His
main function is to coordinate all operations, optimizing the company's processes to
ensure customer satisfaction through innovative strategic initiatives.

— Inputs. These are the resources that the company has to acquire or contract (labor,
raw materials, financial resources, information, time, etc.) in order to produce the
goods or services it provides to its customers.

— Flows of a system. Time they take and place where they accumulate or wait.
items, necessary for proper planning and control of operations.

— Margin. The difference between the total value and the total costs incurred by the
company in performing value-generating activities.

— Processes. They are a set of interrelated production activities through which inputs
(resources) are transformed with added value to generate outputs (products or
services) with the objective of satisfying customer needs.

— Outputs. They are the result of the transformation of inputs through processes. They
can be products (tangible) or services (intangible).

— Competitive advantage of a company. It is the value that the company is able to

create for its customers, through the activities included in its value chain.

61
BIBLIOGRAPHY .
Arias Aranda, D., Miguela Rata, B., Nieto Antolín, M. and Rodríguez Duarte, A. (1998). The
evolution of operations management: an analysis from the approaches and contents of its
manuals. European Research in Management and Business Economics, 4(1), pp. 81-100.

Chase, R. B. and Aquilano, N. J. (2009). Operations management. 6th edition. McGraw-Hill.

Chopra, S. and Meindl, P. (2015). Supply chain management: Strategy, planning and operation.
6th edition. Pearson.

Heizer, R. and Render, B. (2001). Production management. Tactical decisions. 6th edition.
Prentice Hall.

Moscoso, P. and Lago, A. (2016). Operations management for managers. McGraw-Hill Education.

Porter, M. E. (1985). Competitive advantage: Creating and sustaining superior performance.

63
TOPIC 3
The demand
 Operations management
Topic 3. Demand

OBJECTIVES
• Know what demand planning is and understand the importance of demand planning.
has for companies.

• Differentiate the types of demand and production needs of a company.

• Identify the main advantages and disadvantages of demand planning.

has for companies.

• To understand what demand forecasting is, identifying the variables that can influence it,
as well as the most commonly used tools for its calculation and the possible strategies
for action.

• To learn the most commonly used quantitative and qualitative methods for the planning of
the lawsuit.

• To know what a company's sales plan is, how to prepare it and the elements it contains.

66
For several years now, the toy company PlayGames has had an agreement with the
multinational Disney to distribute Disney Princess collections throughout Spain. Every year
they face the challenge of planning the Christmas campaign, for which they must take into
account the seasonal demand of this period of high sales and the stock forecast based on,
among other variables, the new princess movies scheduled for next year.

This seasonality and the film forecast will have an impact on the logistics of the company,
which will have to organize production processes in advance in order to have the
merchandise available during the period of greatest demand, when it will not be able to make
mistakes in the preparation and distribution of orders.

To carry out all this planning, it is essential for PlayGames to analyze the results of the orders
placed in previous campaigns and to know the schedule of future Disney princess movies for
next year. In this way, they will be able to estimate the achievable sales of the new
campaign.

Demand planning allows the company to estimate its future sales, which condition production
processes (whether products or services), warehouse operations and budgets.

It is essential for the future survival of the company: the future of the company depends on this planning.
correct functioning of the entire supply chain.

The aim is to achieve a balance that allows stores to have inventories with as many products
as their customers demand, but not more than projected; in other words, to have sufficient
stock, but without reaching a surplus that is difficult and costly to store. For this reason, the
planning of demand in the warehouse will determine both the quantity of each product to be
stored and the space or workers needed to do so, without forgetting a safety stock to avoid
breaks in service.

In addition to the company's internal resources, we must take into account external
conditioning factors, such as raw material suppliers, which must be integrated with the
company's production process flows to avoid delays in the supply of products or services.

Going back to the PlayGames example, what happens if Disney mid-year announces that it
is not going to release the princess movie planned for that year? A critical external constraint
for PlayGames' annual planning. PlayGames will likely face its biggest change in strategy
since signing on with Disney. It will have to adjust production processes, logistics and
renegotiate contracts with distributors.

DEFINITION The concept of demand refers to the quantity of a product, the quantity of
the product, and the quantity of the product.
or a service that the customer is willing to buy. It will be conditioned
A-Z by the type of company and the sector in which it is engaged: demand will
influence
in the production chain in industrial companies, while in commercial and
service companies it will do so in distribution and sales.

67
 Operations management
Topic 3. Demand

With respect to the demand for a product, we will define it as the amount of purchases made by
customers at a given time and place. It is thus determined by three dimensions:

• Product: this may be a specific demand for a brand or the demand for a generic product
that will affect all companies in the same sector (global demand). In the case of
PlayGames, it is the distribution of Disney Princesses, its flagship product for the year.

• Time: short, medium or long term forecasts can be made. PlayGames makes medium
and long term forecasts to meet the peak demand that occurs during the Christmas
campaign.

• Size of the customer group: for a single buyer, for a segment or for a specific group.
PlayGames knows the sector very well and has very well established strategic points of
sale.

Depending on the product, time and number of participants, we can speak of one type of
demand or another.

Production processes are also related to demand, since demand affects the production
chain. Thus, we have:

• Production for the market or for the warehouse: the company will determine,
according to its demand calculations, the products to be manufactured, with certain
characteristics (quality, design, quantity) and in a given time. It can follow two different
strategies:

– Production for the general market: producing large quantities on a continuous

basis.

– Production for the mass market or batches: producing a limited edition of the
product. This production could be repeated, but surely with some variation, so that it
represents an alternative.

– Production to order: the company will manufacture a quantity of products of the

quality required by customers for a fixed delivery time, once it has received an order
and the quotation has been accepted.

Likewise, the type of demand is conditioned by the flow of time, being able to be:

• Continuous production: it will be carried out uninterruptedly. This may be due either to
the high economic cost of restarting the production machinery once it has been
interrupted or because it is an assembly line, the stoppage of which would break the flow
of the entire process.

• Intermittent production: in this case, the production process will adapt to demand and
may be interrupted.

The choice of one type of production process or another will depend on the flexibility and flexibility
possibilities of the production process.
adaptation to changes in the company, in relation to its business purpose.

The same type of demand may behave differently depending on the time elapsed, with
constant, seasonal, trending or even cyclical behavior.

68
 We can graphically represent demand behavior as follows:

Q Seasonal demand
Demand with
trend

Constant
demand

Figure 1. Graphical representation of demand.

The X-axis represents time, while the Y-axis represents the quantity of product.

• Constant demand. We can observe that in constant demand the same quantity of
product is always re- wanted over time.

For many multinationals such as Pepsico, acquiring a certain set of ingredients on a

consistent basis for their products is key. This is the case with paprika and Doritos, for
example. The paprika manufacturer can't go wrong. His customer requires exact
quantities of paprika to meet the expected annual production of Doritos.

• Trend demand. In trend demand there is a growth in the required quantity of product in
different time periods.

A very graphic example is the case of La Casa de las Carcasas, a Spanish company
founded in 2014 that sells cases and accessories mainly for cell phones. The business
model is in line with the new cell phone models of each brand and, therefore, it will
manufacture cases and accessories in accordance with that production.

• Seasonal demand. This is the demand required at a certain time. This is the case, for
example, with ice cream parlors, which sell a product that is consumed mainly in
summer. These businesses will produce more at a specific time of the year.

• Cyclic demand. Identical repetition occurs in different periods of time. This type of
demand is found in the automotive sector, and specifically with the sale and purchase of
cars. Production occurs in peak demand seasons: each year there is a pattern of sales.

69
 Operations management
Topic 3. Demand

TYPES OF DEMAND AND PRODUCTION NEEDS

We can initially classify the types of demand according to the quantity of products
included in the analysis. Thus, we will differentiate between:

• Aggregate demand: includes different types of products for calculation and analysis.

• Disaggregated demand: includes only products of a single type.

Added

Demand

Unaggregated

Types of demand according to the number of products analyzed.

On the other hand, depending on whether demand is influenced by the company's decisions
or whether, on the contrary, it is influenced by factors external to the company itself
(customers, both intermediaries and end customers), we can distinguish between dependent
demand or independent demand:

Constant
Independent
On trend
Demand
Casual
Dependent
Fixed

Figure 3. Types of demand according to the internal or external agent that influences it.

In the following, we will take a closer look at these two types of claims.

• Independent demand. This type of demand is motivated by decisions outside the

company: it is the customers (intermediaries or end users) or consumers who, through
their purchasing behavior, make the decisions that will affect demand. Although they can
be influenced by the company through communication campaigns, it is they who have
the final say. It is subject to market conditions, but is independent of the demand for
other items.

Demand is analyzed in terms of its behavior, seasonality, trend and variation. In this way,
it can have different behaviors:

– Constant: within it we can find simple, moving, weighted and exponential demand.

– With trend: within it we can find the demands with linear, exponential, logarithmic
(positive or negative) or polynomial trend.

70
 • Dependent demand. This type of demand can be controlled by the company and is
therefore independent of the customer. In its calculation, the company's policy in relation
to raw materials, final production or consumption forecasts will be taken into account. It is
not subject to market conditions, but is related to the demand for other higher-order items
that usually contain it.

Dependent demand can have a behavior:

– Casual: constant demand based on forecasts (forecasted demand, ahead of actual

results).

For example, if we take the case of ice cream mentioned above in the seasonal
demand, it is essential to analyze and anticipate summer weather conditions: whether
it will be very hot and at which points of sale.

– Fixed: constant demand based on calculations, not forecasts.

It is well understood with the example of paprika and Doritos described above when
studying constant demand. Pepsico's behavior in the production and distribution of
paprika is the same every year.

3.1. THE IMPORTANCE OF DEMAND PLANNING

Demand planning is of vital importance for an efficient supply chain. It serves two essential
functions:

• Avoid stock-outs, which would lead to stock-outs and dissatisfied customers.

• Prevent warehouses full of unused products.

In other words, the stock should be sufficient, but not excessive.

Thus, on the one hand, demand planning must ensure that retailers have the right amount of
inventory in the right place, so that they can meet their customers' needs and keep them satisfied,
protecting their sales. Protecting sales is necessary, but not sufficient. On the other hand, we
must avoid overstocks, which would lead to increased maintenance costs or other temporary
measures that we would need to take to reduce inventories, by selling this excess as soon as
possible.

Demand planning is a strategic business function that includes managing and gathering
future requirements for business products and/or services. Demand planners need to make
decisions based on near real-time market data, rather than relying solely on historical data,
although they will also rely on data from forecasting.

Today, demand planning and forecasting are more critical than ever, due to the continuous
changes in the consumer market or even changes due to external forces that affect it, such
as weather events or economic trends. It is imperative that companies are able to quickly
adjust their demand planning strategies, addressing potential risk factors encountered
through logistics plans.

71
 Operations management
Topic 3. Demand

3.2. ADVANTAGES OF DEMAND PLANNING

Thanks to demand planning, the company's purchasing department will calculate the
quantities of products it requires, both in terms of raw materials to ensure uninterrupted
supply to its production lines and the finished products the company needs to meet customer
demands.

DID YOU KNOW

THAT...? Amazon forecasts and stores the products that customers buy on a
regular basis using a predictive algorithm that analyzes the purchase
data history of its customers.

Knowing these product quantities will help us to:

• Improve the image of the company, which will enjoy satisfied customers. You will have a
optimal stock to meet customer needs at the right time.

• Provide for a reserve stock to help the company cope with changing market demand,
as well as to enable offers and promotions.

• Organize production. The amount of raw materials or packaging required by the

production lines can be anticipated in advance by estimating the number of products to
be sold.

• Optimum utilization of storage space. You will minimize costs and storage space by
stocking only the essential stock foreseen in your demand planning.

• Organize personnel. In a warehouse, it is necessary to organize workers and shifts to

deal with changes in demand. If the company has few workers when there is a high
demand for its products, there will be a decrease in orders completed per day, leading to
customer dissatisfaction by not fulfilling their orders on time.

• Minimize costs. By forecasting sales, the company will be able to control costs through
more accurate budgets.

• Reduce product obsolescence. By stocking only the products needed to meet demand,
you will avoid the possibility of your products becoming obsolete.

• Efficiently manage cash flow so that it can meet supplier payments. Similarly, the
company will be able to predict a shortfall in sales by accumulating cash or negotiating
loans in advance.

72
3.3. DRAWBACKS OF DEMAND PLANNING
Next, taking the toy company PlayGames as an example, we will look at the following
The following are some of the disadvantages that demand planning can present:

• Demand planning can be too complicated for many companies, especially the smaller
ones, as they do not have the skilled labor to do it or the time to do it. In the case of
PlayGames, as it plans every year, it will increase the number of workers to cover the
production forecast for the Christmas campaign.

• The company cannot know the future. At most, it can forecast different scenarios, but it
will never be totally sure that any of these scenarios will be the one that finally occurs.
With the new Disney Princess movie campaign, it may be delayed or cancelled.

• Cognitive biases can occur in the data due to overconfidence or conservatism on the
part of the forecaster, leading to inadequate demand forecasts. PlayGames projects its
demand by comparing previous years' campaigns with the release of new movies.

3.4. DEMAND PLANNING AND CONTROL METHODS

DEMAND FORECAST AND SALES PLAN

A company's demand will be established on the basis of its business policy or through the
analysis of customer or consumer behavior. It should be subject to pre-views of their
behavior, since it will have an impact on the company's production and manufacturing
processes (in industrial companies) or on the distribution and sales processes (in commercial
or service companies).

Because of this, companies must develop two documents: the demand forecast and the
sales plan. Although these documents are independent, they are related and complement
each other, helping the company to make strategic decisions.

Demand forecasting includes the activities, strategies and tools that the company will use in
its future sales forecast, based on data estimated f r o m real data, thus reducing costs by
reducing uncertainty in corporate management processes.

Although no method used can be 100% certain, estimates will become increasingly reliable
as new actual data become available and are incorporated into the demand forecasting
calculation.

The data produced by this forecast will be vital for the company and will form the basis for
the different departments to establish their action plans.

73
 Operations management
Topic 3. Demand

The demand forecast is included in the company's sales plan, which is based on financial
forecasts, purchasing, production, HR and other operational areas of the company. HH. and
other operational areas of the company. The sales plan will include the sales figures
foreseen for the company in a specific period of time. It will contain quantitative and
qualitative elements at a strategic level, which will define the line of action to be followed by
the company.

The sales plan contains the sales budget, which is the part that collects the numerical data
of the estimates.

IMPORTANT Demand forecasting assists in the further development of the

company's sales plan. It is subject to the actual and future behavior of
demand for a product, while the sales plan is based on strategic
decisions that the company will make to achieve its sales target. The
correct development of the sales plan makes the company take
advantage of its opportunities and prepare itself to face difficulties.

Demand forecasting and sales plans should be analyzed:

• Study variables to be taken into account for analysis and forecasting.

• Possible policies and strategies for action.

VARIABLES TO CONSIDER
There are several variables that the company must consider before drafting its plan.
sales, due to the possible influence of these:

• Market and competition: the company must know the market in which it wants to sell its
products, as well as the competition it will have to face.

• Product dimension: the sales forecast depends on whether it is calculated in terms of

global demand, company, product line or brand.

• Production process: it must know the product manufacturing process, costs, production
time and, above all, the reaction time to a change in market demand.

• Term: short, medium or long term.

• Aggregation of customers: individual buyer, segment or total.

In addition to all of the above, the company must know exactly these variables that depend
on it:

• Product: it must have a series of characteristics and qualities that provide customer
satisfaction.

• Price: should be set according to how the customer perceives the quality of the product.

• Distribution: it is essential for the product to be accessible to the customer for purchase.

• Communication: advertising, sales promotion, public relations, etc.

74
As we have just seen, the sales plan is not an isolated document, since, in addition to
depending on the demand forecast, it is closely linked to other plans that are also essential
for the company, such as the marketing plan. The latter develops concepts such as the type
of product, its price, distribution and advertising.

POSSIBLE POLICIES AND STRATEGIES FOR ACTION

Once the variables described above have been analyzed, the company must establish the
policies and strategies that will set the line of action in the sales process, defining its
objectives.

Among these policies and tools we have:

• Collection and filtering of information: both the estimates established in the demand
forecast and the actual historical data that the company has from previous sales
processes.

• Definition of objectives: objectives should be established on the basis of the above

data for a given period of time. These objectives should be SMART, i.e. specific,
measurable, achievable, relevant and timely.

• Establishment of strategies and planning: what, how and when they will be carried out.
The objectives set, describing the necessary activities, actions and deadlines.

• Organization: establishing the precise sales team for the previously planned strategies.

• Budget valuation: measuring the entire process in economic units.

Demand forecasting, which will lead to strategic decisions, will depend to a large extent
The time period set for the estimation of sales:

• Short-term operational decisions involve actions that the company takes on a regular
basis. They do not usually have a major impact, since the company will make them
almost automatically.

• Long-term strategic decisions require detailed foresight, since any mistake could lead
to major problems for the corporation.

Therefore, depending on the time frame, the demand forecast will be calculated using
different techniques.

The difference between sales forecasting and market research is as follows:

• The sales forecast is made in the short, medium or long term, and will help in making
both operational and strategic decisions. It will normally use data mining techniques,
obtaining secondary information based on the sales trajectory analyzed in the context
studied.

• Market research is carried out for large time frames, related to the company's strategic
planning. They will use very elaborate field work and techniques, based on primary
information, in the search for new markets for the company.

75
 Operations management
Topic 3. Demand

ACTIVITY AND COST FORECASTS

A reliable forecast will be fundamental for the company, since it will be the basis for the
estimation of the associated costs, as well as for strategies to increase productivity and
maximize profits. The following are some of the most commonly used techniques for
forecasting the activity associated with sales and their costs.

Forecasting tools are based on qualitative and quantitative techniques, which are
supported by spreadsheets for managing large amounts of data. In addition, the budget
helps to economically value the whole process, and the control charts will help us to
analyze whether the forecasts we have made are fulfilled or suffer some kind of deviation.

Tools

Forecasting
Spreadsheets Budget Control panels
technique
s

Figure 4. Activity and cost forecasting tools.

TECHNIQUES AND SPREADSHEETS: COMMON FORMULAS

There is currently a wide variety of techniques that help the company to forecast demand.
Each company, depending on the sector to which it belongs and the type of product it offers,
will choose one or the other according to its needs.

Forecasting
technique
s

Quantitative Qualitative

Market Consumer
analysis analysis

Historical data Sales team

analysis analysis

Expert
analysis

Figure 5. Classification of quantitative and qualitative techniques.

76
The forecasting techniques used for demand calculation are classified into quantitative and
qualitative. tative and qualitative.

• Quantitative techniques.

– Market analysis: using direct derivation methods on data obtained in the market
(purchasing habits, product characteristics, after-sales, etc.), the demand for a given
product in the market is analyzed, estimating sales.

– Historical data analysis: by analyzing actual historical data series, future demand
and sales forecasts are established.

• Qualitative techniques.

– Consumer analysis: with the help of surveys, data on customer preferences, desires
or needs are obtained.

– Sales force analysis: based on the experience of the sales force (salespeople,
traders, distributors, etc.) to estimate future sales of the product.

– Expert analysis: professional market and product experts anticipate demand and
sales forecasts.

Demand and sales forecast data obtained through quantitative or qualitative techniques are
entered into spreadsheets that display the data in the form of tables or graphs, following the
process detailed below:

1. We enter two data series, one time series and the other with the demand or sales values,
and select those we want to analyze.

2. In the Data tab, we select Forecast and, within it, Forecast Sheet, opening the window
for creating the forecast sheet, where we select the type of chart we want to display and
an end date for the forecast. Click on the Create button.

On the other hand, the most commonly used formulas in the Excel spreadsheet for
forecasting sales demand are as follows:

Calculates or predicts a future value based on

FORECAST.STD
existing (historical) values.

Returns a confidence interval for the expected value

FORECAST.ETS.CONFINT
at a specified future date.

It is used to calculate, or predict, a future value

FORECAST.LINEAR using existing values. The new value is predicted
using linear regression.

FORECAST.ETS. Returns a statistical value as a result of time series

STATISTICS forecasting.

Table 1. Most commonly used Excel formulas for demand forecast calculation.

77
 Operations management
Topic 3. Demand

CONTROL AND BUDGET TABLES: PREPARATION

The sales budget is a document that contains the sales forecasts that a company expects to
obtain in a given period of time, and must be reviewed periodically to detect deviations.

Before preparing the budget, a series of variables must be analyzed, among which the
following stand out:

• Product: its evolution, demand and the market in which it is marketed.

• Objectives: two objectives should be taken into account, a long-term one that will help
us to optimize the budget, and a more realistic short-term one.

• Preparation period: monthly, quarterly, half-yearly, annual or annual. We must detect

whether seasonal sales changes must also be taken into account.

Once we have defined whether the budget will be short, medium or long term, we must list
the income, fixed expenses and variable expenses, and define the cash flow (difference
between income and expenses), for which it is very important to know when the income is
received and when the expenses are incurred. We must know the timing of financial
obligations, in order to be able to meet the necessary disbursements.

The budget will be monitored and controlled in order to be able to follow the evolution of these
parameters over time, scheduling periodic reviews to study possible budgetary deviations that
may occur. It will be verified whether or not the budgeted data are close to the actual data,
making the appropriate corrections if this is not the case.

One of the tools used in budgetary control is the control chart, which contains the following
information for each of the budget items:

• First column: budgeted and estimated data.

• Second column: actual data.

• Third column: Variance data (budgeted quantity minus actual quantity), comparing the
two previous columns.

The deviations we obtain can be:

• Positive: actual value < budgeted value

• Negative: actual value > budgeted value

DEMAND PLANNING TECHNOLOGY

The way in which companies have forecasted demand has evolved over the years. Initially,
companies made estimates of the products they would need to meet customer demand
based on their own knowledge and experience, which could be somewhat risky.

78
With the development of computers, some companies began to estimate their sales using
spreadsheets, such as Microsoft Excel, which is still widely used today, especially in small
and medium-sized companies. These programs were also used for warehouse inventories.

Although spreadsheets can be useful for both forecasting demand and managing a
warehouse, given their limited capacity, specialized tools should ideally be used for this
purpose.

For this reason, the demand planner will need specific demand planning software, which
will be based on information gathering (ERP) and warehouse management (WMS) software.
With their help, the demand planning software will be able to calculate a sales estimate with
which to organize warehouse operations, for example.

THE FUTURE OF DEMAND PLANNING

The future of demand planning is digital. As supply chain management becomes more
complicated, due to ongoing advances in machine learning, companies will need to receive
accurate, near real-time forecasts, getting closer to the ideal of demand planning: stocking
enough (and tightly) to meet customer demand, coping with seasonal variations efficiently
and cost-effectively, leading to increased profits.

79
KEY IDEAS
• Demand planning allows the company to estimate its future sales, which determine
production processes (whether products or services), warehouse operations and
budgets.

• Demand planning is of vital importance for an efficient supply chain. It serves two
essential functions: to avoid stock-outs (which would lead to stock-outs and dissatisfied
customers) and to prevent warehouses full of unused products. In other words, sufficient,
but not excessive, stock must be held.

• The concept of demand refers to the quantity of a product or service that the customer is
willing to buy. It will be conditioned by the type of company and the sector in which it
operates: demand will influence the production chain in industrial companies, while in
commercial and service companies it will influence distribution and sales. With respect to
the demand for a product, we define it as the amount of purchases made by customers
at a given time and place.

• Depending on whether demand is influenced by the company's decisions or whether, on

the contrary, it is influenced by factors external to the company itself (customers, both
intermediaries and end customers), we can distinguish between dependent demand or
independent demand.

• Demand forecasting includes the activities, strategies and tools that the company will use
in its future sales forecast, based on data estimated from real data, thus reducing costs
by reducing uncertainty in corporate management processes.

• The sales plan will include the sales figures expected for the company in a specific period
of time. It will contain quantitative and qualitative elements at the strategic level, which will
define the line of action to be followed by the company. The sales plan contains the sales
budget, which is the part that contains the numerical data of the estimates.

• Forecasting tools are based on qualitative and quantitative techniques, supported by

spreadsheets for managing large amounts of data. In addition, the budget helps to
economically value the whole process, and the control charts will help us to analyze
whether the forecasts we have made are being met or suffer some kind of deviation.

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GLOSSARY
— Profit. Economic gain obtained from a business, investment or other commercial
activity.

— Certainty. Sure and clear knowledge of something.

— Cognitive. Pertaining or relating to knowledge.

— Quality. Quality, condition or nature of something or someone.

— Distribution. Delivery of a product to the premises where it is to be marketed.

— Obsolete. Outdated or inappropriate to current circumstances, fashions or needs.

— Term. Term or time set for something.

— Price. The pecuniary value at which something is estimated.

— Budget. An advance estimate of the cost of a work or of the expenses and income of
a corporation.

— Forecast. The action of making arrangements to meet foreseeable contingencies or

needs.

— Bias. Systematic error that can be incurred when, when sampling or testing, some
responses are selected or favored over others.

83
BIBLIOGRAPHY .
Cerdá Suárez, L. M. (2012). Business management of demand. A process approach.
Editorial Economista.

Graves, S. C., Rinnooy A. H. and Zipkin P. H. (1993). Logistics and Production. North Holland.

Hillier, F. S. and Lieberman G. J. (2010). Introduction to Operations Research. McGraw-Hill.

Kauffmann A. (1972). Methods and Models of Operations Research. Editorial CECSA. Lloyd

Enrick, N. (1981). Stock Management. Editorial Deusto.

López Barra, S. and Ruiz Otero, E. (2010). Gestión administrativa de compraventa. McGraw-Hill.

Ortiz Ramírez, M. G. and Olivares Taipe, P. C. (2021). Operations research: heuristic models
and simulation. Editorial Macro.

Prawda, J. (2002). Methods and models of operations research I and II. Editorial Limusa.

85
TOPIC 4
Product development
 Operations management
Theme 4. Product development

OBJECTIVES
• To understand what product design and development is and the competitive advantage
that this process means for the company.

• Describe the process of identifying market opportunities.

• Understand the relationship of marketing to the product design and development process.

• Identify and distinguish the essential phases of product design and development.

• Understand the importance of prototyping in product design and development.

• To understand the concept of intellectual property.

• To know what is involved in the preparation of patent applications, as well as their processing.

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4.1. PRODUCT DESIGN AND DEVELOPMENT
Perhaps the success of almost all companies lies in being able to identify market and
customer needs and transform them into products that satisfy them, all at a cost that can
produce profits. This is not an easy goal to achieve: it will depend not only on the design or
manufacture of the product, but also on its marketing. Developing a product involves all three
functions.

WHAT IS A PRODUCT?

"At its most basic level, a product is a solution that is sold to satisfy a need.
Dave Franchino, president of Delve, a product design and innovation agency, says.

With the concept of product we refer to those material objects (such as a chair or a bicycle,
which we can buy in stores) or immaterial objects (such as a service, software or even
information that we could obtain in an educational workshop), whose goal is to satisfy the
needs of the end users.

WHAT IS PRODUCT DESIGN AND DEVELOPMENT?

The design process of a product must unify two interests: the objectives of the users and the
commercial objectives of the company. The closer the product is to the customer's needs, the
more successful it will be, which will lead to greater profitability for the company.

Through this process, the company will achieve an image of the product it wants to create,
design and build prototypes for which it will test their effectiveness, repeating this operation until
the product is perfect, at which point it will be ready for its end user, the customer. This is
achieved thanks to a mix of research, knowledge and creative capacity of the designers.

Thus, product development will be the set of activities that begins with the identification of a
market opportunity (covering one or more customer needs) and ends in the production, sale
and delivery of a product.

Product design and development will therefore involve close collaboration between the
company and the target market to ensure that the purpose of the product is, at all times, to
meet the needs of customers, thereby obtaining business benefits.

PRODUCT DESIGN VS. UX EXPERIENCE DESIGN

Everything is constantly changing, including professions: Is a product designer the same as a

user experience (UX) designer?

Although both concepts (product design and UX design) are similar, they are not identical. Both
require the process of Design Thinking, a method for generating innovative ideas that focuses
on discovering and defining a user need, designing a solution that satisfies it.

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Theme 4. Product development

However, the differentiating nuance is that a product designer pursues the objectives and
needs of the business, as well as those of the users, when developing solutions: he is
concerned with the design process, the business, the brand and the cost; he is not only
oriented to the user, but also to the company's strategy and the organization. In contrast, the
UX experience designer is concerned exclusively with the user experience, the usability of
the product.

THE COMPETITIVE ADVANTAGE OF PRODUCT DESIGN AND DEVELOPMENT

For companies that sell products, it is essential to have qualified personnel in the design and
development of these products. This personnel, together with the marketing staff, will achieve
an increase in the quality of the product obtained, which will be perceived by the end
consumer, who will improve his experience, increasing sales and facilitating the expansion of
the brand.

With good, innovative and quality products that users can distinguish when comparing them
with those of the competition, the brand's image will improve, achieving a superior position
in the market and a closer approach to its target public. Sales and demand for the products
will increase, leading the company towards the achievement of its commercial objectives and
success in the market.

Thus, a company cannot avoid having personnel trained in product design and development,
who can achieve good strategies by analyzing the market, in order to meet the needs of
customers with products that are well received by consumers.

CHARACTERISTICS OF SUCCESSFUL PRODUCT DEVELOPMENT

A successful product will be one that can be produced and sold profitably. But,
what makes this possible? Karl T. Ulrich (2013), in his book Product Design and
Development, sets out five specific utility-related dimensions that are used to evaluate
product development:

1. Product quality. If the product satisfies the customer's needs, it will be reflected in the
market share it obtains, as well as in the price customers are willing to pay for it.

2. Cost of the product. Depending on this cost and the utility of the product for
The volume to be produced and its selling price will be set.

3. Development time. This determines the company's response time with respect to its
competitors, which will also determine the speed with which the company receives the
economic returns from the product.

4. Development cost. This is an important part of the initial investment required.

5. Development capacity. This is a competitive advantage that the company can use to
effective development of future products.

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OUTSTANDING EXAMPLES OF SUCCESSFUL PRODUCT DESIGN

In order to better understand the importance of good product design in the marketplace, we
will now show two examples of successful products that have clearly differentiated the
companies that manufactured them from their competitors.

Undoubtedly, the design of the classic Coca Cola bottle, coupled with an extraordinary
advertising campaign, became an icon of the brand. Everyone recognizes the shape and
details of this bottle.

It is the same with the design of Apple's Macs, which became pioneers of this aesthetic
envied by the rest. It was so much in demand by consumers that it practically forced all other
companies to invest in attractive designs in order to compete in this market.

4.2. OPPORTUNITY IDENTIFICATION

WHAT IS AN OPPORTUNITY?

An opportunity, when we talk about product design and development, consists of a possible
way to create value for the company through a new product idea, to satisfy in a more
efficient way already known customer needs or new needs detected after a market analysis,
or to take advantage of new technologies that have emerged.

TYPES OF OPPORTUNITIES

Ulrich (2013) uses two dimensions to categorize opportunities: the degree of knowledge of
the solution and the degree of awareness of the need. In the case of technology-based
products, the two dimensions we can consider are:

• Knowledge of technology.

• Market knowledge.

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Since the risk of failure increases as opportunities become more distant from solutions or needs
that the team knows well, he divides the categories into "horizons" of uncertainty facing the
team. Thus, he differentiates opportunities into three types of horizons:
require
ment

HORIZON 3
New
Knowledge of the need
Existing
unmet
need

HORIZON 2
need met

HORIZON 1
Existing

Solution Unapplie New Knowledge of the solution

in d solution solutio
progress n

Figure 1. Types of opportunities1.

• Horizon 1. They will be improvements, extensions, variants or cost reductions of existing

products on the market. They will therefore have a relatively low risk.

• Horizon 2. We will be in a less known zone of solution and/or need.

• Horizon 3. These will be opportunities that exploit new needs and/or new solutions, with
a high level of uncertainty.

THE OPPORTUNITY IDENTIFICATION PROCESS

Companies create new products to obtain sales from them and/or enhance reputation
of its brand. But what strategy does each company follow for the creation of these products?

• Some manufacture their own version of products already on the market, offered by
competitors.

• Others complement existing products with improvements or variants, giving users a wider
range of options to choose from.

• But there are also those that create under their own criteria, based on a market study
that detects new consumer needs.

1 Terwiesch, Christian and Karl T. Ulrich (2009). Innovation Tournaments: Creating and Identifying Exceptional
Opportunities. Harvard Business Press.

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WHAT IS THE BEST OPTION? WHAT DO CUSTOMERS WANT?

As we have seen, the value of opportunities is highly variable, as is the uncertainty they
pose. Companies need to identify a set of opportunities, from which they will then choose a
much better subset with the best ideas, which will be the ones they develop. This filtering,
this process of identifying the best opportunities, needs to be done before the product
development process, to ensure that these opportunities become the best possible product.

What can companies do to generate opportunities, which can then be converted into
successful products? Let's look at three possibilities:

1. Generate a large number of opportunities. The more opportunities you generate, the
more likely it is that among them we will find some exceptional ones.

2. Identify opportunities always with a high quality. So that we can choose among
generated opportunities always exploring the best sources.

3. Create highly variable opportunities. If we generate a large number of opportunities, all of

high quality, the more varied they are, the more likely it is that there will be some exceptional
ones among them. We must look for different ideas, even if some of them may seem crazy
or reckless. This is how we will be able to find exceptional opportunities.

Therefore, the process of identifying opportunities should generate many and varied
quality opportunities, which will be filtered, selecting the exceptional ones, which will then be
developed into products, always reflecting on the results throughout the process.

ANALYSIS, OPPORTUNITY AND DESIGN. HOW TO KNOW IF IT IS VIABLE TO

CREATE A PRODUCT?
Companies must perform an analysis of opportunities that can then be designed and
developed into products. How to perform this analysis?

• They should carry out a study of the current situation, identifying, through studies of
market and users a problem, a need to be covered.

– Market research. Establishing research strategies.

– User research. By means of interviews or questionnaires to the target public, related

to the detected problem.

• They will then develop a detailed summary that identifies all of the parameters
of the problem. It should contain:

– Expected result: product, target audience and requirements.

– Constraints: legislation, safety, environmental, etc.

– Expected commercial scale.

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• With all this, design specifications will be defined (according to the requirements
detected after the market and user study): aesthetics, size, ergonomics, environmental,
safety, performance, materials, quantity and/or any other specification that may pertain to
the project.

– They should be feasible, quantifiable and measurable, balancing the quantitative

and qualitative.

– They will identify the tests required to measure the specifications.

4.3. THE NEW PRODUCT DESIGN AND DEVELOPMENT

PROCESS AND ITS RELATIONSHIP WITH MARKETING
There is a direct relationship between marketing, industrial design and engineering, without
which the creation of new products that meet the needs of customers, bringing benefits to
companies, would not be possible. Marketing is responsible for the company's relationship
with customers, providing a study of the current market situation and requirements,
identifying the segments of that market (the target public) to which to direct products,
establishing the company's communication and launching the product. For its part, industrial
design will create a product following the requirements defined by marketing, meeting the
needs of customers. Finally, engineering will be in charge of providing mechanical and/or
technological support to the different phases of the production process, responding to the
way in which the product will be manufactured, distributed and installed.

Opportunity generation is the search for ideas for new products, not by chance, but
systematically, for example, through market research or surveys. The sources of these ideas
can b e : internal research departments, customers or consumers, competitors, distributors
and/or suppliers.

Subsequently, a purification of opportunities will be made, reducing the ideas generated to

those that are feasible to become profitable products, either because they provide value for
the user, because they are better than those of its competitors, or because they respond to
the company's interests.

Once filtered, the ideas are transformed into product concepts, generating a product image.
The theoretical concept of the product will be developed, focused on the consumer, which will
be presented to the client to determine how he/she perceives it and its sales possibilities.

Once you have the image of the product, marketing strategies will be used to introduce the
product in the market, defining the sales objectives, market share, costs and price of the
product in the short, medium and long term.

If the product is considered viable, the next step is product development, where it is very
important that the solutions provided by industrial design and engineering remain within the
investment costs estimated by marketing. This is the moment to create prototypes,
repeating the process until the best results are achieved in the tests of use (functional and
consumer).

Finally, the marketing of the product will take place, where it is necessary to decide how,
when and where to launch the product.

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4.4. DESIGN AND DEVELOPMENT OF PRODUCTS
AND SERVICES: ISO 9001:2015
For ISO 9001:2015 the process of design and development of products and services
represents one of the keys to innovation, constituting a competitive advantage of the
company over its competitors, whose products will set trends in the target market sector.

We detail below the sections of chapter 8.3 of ISO 9001:2015: "Design and Development
of products and services" and their implications in the process.

PLANNING OF THE PRODUCT DESIGN AND DEVELOPMENT PROCESS

The standard establishes that the company must plan and control the design and
development of the product, determining the nature, duration and complexity of the design
and development activities; performing controls through review, verification and validation
appropriate to each stage of design and development; and defining the necessary
responsibilities and permissions.

It should ensure effective communication between the different people involved in the
process and assign responsibilities to them.

PRODUCT DESIGN AND DEVELOPMENT PROCESS INPUTS

At this stage it is vital that the company assesses the risks, the necessary implications for
customer satisfaction and/or the problems it may face in case of not considering complete
and relevant inputs. A record shall be made to ensure traceability of inputs related to product
requirements, which shall include functional and performance requirements, as well as legal
and regulatory requirements.

PRODUCT DESIGN AND DEVELOPMENT PROCESS CONTROLS

The company will select those controls necessary to ensure that the results meet the input
requirements and are in line with what was established in the planning stage. Some of the
most common controls are:

• Review. Determines whether the suitability, adequacy or effectiveness of a product

achieves the established objectives, ensuring compliance with the product development
plan or confirming the level of progress of the project.

• Verification. Checks the quality requirements of the product specified in the inputs,
through tests that verify its conformity.

• Validation. Determines whether the product fulfills its purpose, meeting the requirements
for the intended use or application. In a real environment, a sample is evaluated to see if
it works or not, asking customers to use the product, checking if the benefits and
experience were appropriate.

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OUTPUTS OF THE PRODUCT DESIGN AND DEVELOPMENT PROCESS

The outputs obtained from the design and development process must demonstrate, once the
controls have been carried out, that the product complies with the established requirements
and that its manufacture is feasible.

CHANGES IN THE PRODUCT DESIGN AND DEVELOPMENT PROCESS

If the company is to make changes to the product design and development process, it shall
require a new validation of those changes and ensure that there are protocols for
communicating the changes. It should assess whether additional functional or consumer
testing is necessary to verify requirements and their approval, and the levels of authority
should these change.

4.5. PRODUCT DESIGN AND DEVELOPMENT PHASES

Already in its early days, the world-renowned company Uber detected an untapped business
opportunity in the cab sector: to create a customer assistance process that would allow
customers to hire rides through a simplified payment process at the click of a button from
their cell phone or cell phone. In this iterative process of searching for the perfect product,
Uber continued to innovate in the service offered to consumers, offering transfers ranging
from the most economical to the most luxurious, to accommodate all the needs of the sector.
The product design and development process ranges from idea generation (opportunities)
to product launch (marketing). Although no process is the same as any other, we can
define six generic stages to carry it out:
1. Opportunity generation (and debugging). Through brainstorming, based on market
research and customer needs, opportunities will be generated, which will then be filtered,
choosing the most likely to become successful products. To this end, the target market,
competitors' products and their functionality must be taken into account, checking
whether they satisfy the needs detected in the users.
2. Creation of the product image. After debugging ideas, the product image or concept
will be defined, describing its value proposition, metrics to evaluate and measure
success, and marketing strategies.
3. Prototyping. A detailed business plan will then be developed, investigating risks and
defining the product strategy and its viability, resulting in the minimum viable product
(MVP), i.e., the product that meets the minimum requirements to be launched to the
market.
4. Initial design. A realistic digital model (mockup) of the product will be produced based
on the MVP prototype that will require, possibly, several iterations until it is achieved.
5. Review, validation and verification. After the initial development, functional tests, user
tests (front-end) and marketing tests will be performed to check the functionality of the
product and detect possible errors.

6. Commercialization. The last stage will consist of launching the product to the market.
and measuring results with the success metrics defined above.

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 Generation of Product Prototyping
opportunities image (MVP)

Review,
Marketing assessment Initial design
and verification

Figure 2. Phases of product design and development.

Let's take Uber as an example of this process. Uber saw an untapped opportunity in the cab
industry: to create a customer support process that would allow customers to book rides
through a simplified payment process. In this iterated process of searching for the perfect
product, they continued to innovate in the level of service offered to consumers, offering
transfers from the most economical to the most luxurious, to accommodate all the needs of
the sector.

4.6. PROTOTYPING
Cherry Coke is the example that shows that what is successful in one country is not always
easy to introduce in others. This well-known cherry-flavored soft drink from Coca-Cola
arrived in Spain in the mid-1990s. And it did so in a provocative way, with an imposing
advertising campaign focused on the young public. In the USA and certain European
countries it worked very well and even varieties such as Cherry Coke Light and Cherry Coke
Zero were introduced over the years. But the truth is that, if this soft drink was a success in
other countries, in Spain its peculiar flavor did not end up fitting in with consumers and was
no longer marketed.

The failure of this soft drink in Spain was due to several factors. An important one is that it
was launched as a product focused on the American public without adapting to local tastes.
In Spain, soft drink consumers are very conservative and do not usually like the introduction
of new flavors or mixtures of unfamiliar flavors.

It should also be noted that the marketing campaign itself was not successful, as it had many
American touches and styles: the Cherokee theme was far removed from Spanish culture.

How is it possible for a multinational like Coca-Cola to have these failures? What was the
strategic error in this case?

WHAT IS A PROTOTYPE?

We can define the prototype of a product as a limited representation of the product design,
which allows us to experiment its use. It is a great advantage in the initial phases of product
design and development, especially during the conceptual design or product image phase,
allowing us to evaluate, at a low cost, the different alternatives that satisfy the user's
requirements.

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TYPES OF PRODUCT PROTOTYPES

We can define three types of prototypes, depending on the situation in which we find ourselves:

• Iterative prototyping. Designers show a prototype to a group of users to test its usability
and functionality. The development team then reviews and evaluates the results. This
process is repeated on the same prototype until it is deemed to satisfy all requirements.

• Parallel prototypes. Designers develop different product concepts and then work together
to choose the best of each, which will be used to build the prototype.

• Rapid prototyping. Combines the characteristics of iterative prototyping with the use of
technology. This technique uses 3D design software coupled with 3D printing for
prototyping. With them, usability and functionality tests can be developed quickly,
effectively and economically, thanks to the ease of data transfer between the computer
and the 3D printer.

PRODUCT PROTOTYPE CATEGORIES

Depending on their purpose, we can classify three categories of prototypes:

1. Visual prototype. The purpose of which is to show the public the aesthetic proportions
of the product, in terms of size, dimensions and weight.

2. Proof of concept. Its purpose is to demonstrate the viability and functionality of the
product. Taking the case of Cherry Coke mentioned above, the Spanish market should
have been tested on a small scale to evaluate the success of the soft drink before the
final launch.

3. Presentation prototype. Its purpose is to show potential investors and customers the
final appearance of the product and its functionality.

4. Pre-production prototype. Its purpose is to be a reference of how the product should

be produced on a large scale, using production-ready materials and techniques for its
construction.

PRODUCT PROTOTYPE VS. MINIMUM VIABLE PRODUCT

We must not confuse the concepts of product prototype and minimum viable product (MVP):

• A product prototype is a proof of concept that analyzes the feasibility of the solution. It
answers the question: can we build it?

• A minimum viable product (MVP) is the materialization of the value proposition with the
minimum possible functionality or resources. It answers the question: is it worth investing
in developing a product for this niche?

Once the Cherry Coke proposal had been tested in the Spanish market, and with the
data obtained, they had to consider whether the product could be considered viable with
the specific adjustments to the initial proposal.

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4.7. PATENTS AND INTELLECTUAL PROPERTY
WHAT IS INTELLECTUAL PROPERTY?

The term intellectual property (in the context of product design and development) "refers to
ideas, concepts, names, designs and processes that are legally protected and associated
with a newly created product", defining four types, all of which are relevant to the design and
development of a product (Ulrich and Eppinger, 2013):

• Patent. Temporary monopoly granted by the competent public administration to exclude

others from using or selling an invention.

• Trademark. Exclusive right granted by the competent public administration.

The use of a specific name or symbol for a class of products is not allowed.

• Trade secret. Information kept hidden, which offers its owner a competitive advantage
over its competitors.

• Copyright. The exclusive right, granted by a government, to copy and distribute an

original work of expression, whether literary, graphic, musical, artistic, entertainment or
software.

In short, the patent is an exclusive right enjoyed by the author of the invention to exploit it
and prevent others from using it without his consent. It is also a temporary right that, in
general and depending on the legislation of each region, is maintained for a certain period of
time, after which the information is public and anyone could use it freely. For example, in the
case of Spain, the time granted is twenty years from the date of filing in the case of patents
and ten years for utility models.

In the remainder of this section, we will refer to patents as they relate to the product design
and development process.

PATENT LEGAL REQUIREMENTS

To be patentable, an invention must meet several requirements:

• Novelty (absolute or universal). Not publicly known prior to filing the application, i.e., not
contained in existing products, publications or prior patents.

• Utility. It shall perform the specified functions or achieve some bene- ficial result.

• Non-obviousness (non-obviousness). It is not obvious to a person skilled in the art

that he is facing the same problem as the inventor.

The patent system represents an instrument to promote innovation and scientific,

technological and economic development. For this reason, an additional requirement is that
the invention must have an industrial application.

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TYPE OF PATENT APPLICATION

• National filings: priority applications. Usually, clients ask the agent to first file an
application in the country where the inventor is located, which will establish the priority date:
if clients want to file applications in other countries at a later date, they can invoke the benefit
of the priority date of the local filing under the Paris Convention, which will be discussed
below.

• Filing applications in other countries. The filing of international patents is costly and
somewhat complex, since patent law varies somewhat from country to country, so it is
advisable to consult a patent professional about the international strategy to follow.

The Paris Convention (2009, signed by 173 countries) establishes a right of priority for
patent applications: a patent applicant in one member country may use its first filing date
in one country as the effective filing date of an application filed in another member
country, provided it does so within 12 months of the first filing date.

It may also be necessary to file a certified copy of the initial application in each country in
which priority is claimed. The PCT (Patent Cooperation Treaty) is a special agreement
under the Paris Convention - administered by the World Intellectual Property
Organization (WIPO) - that allows protection for an invention to be sought in each of the
party states by means of a single international application.

However, the European Community acts as a single entity with respect to the filing of a
patent, through a direct European patent application (processed by the European Patent
Office), mentioned to those European states in which protection is sought, provided that
they are members of the European Patent Convention.

4.8. TRENDS IN PRODUCT DESIGN AND

DEVELOPMENT BASED ON THE HUMAN
FACTOR
SOCIAL RESPONSIBILITY IN THE PROCESS OF PRODUCT DESIGN AND
DEVELOPMENT
We can define social responsibility as the ability to make decisions based on behavioral
ethics.

This issue has been considered of vital importance and is included in the international
standard ISO 26000:2010, which provides guidance and recommendations in this regard, but
not requirements; therefore, it does not use the word "must" (which in ISO language indicates
a requirement), but the word "should" (which in ISO language is used for recommendations).

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According to ISO 26000:2010, the principles governing social responsibility are (from a
corporate point of view):

1. Accountability for the impact on society and the environment.

2. Transparency of the organization.

3. Ethical behavior.

4. Regarding the interests of stakeholders, not only of the company, which will affect
decision making.

5. Respect for the principle of legality and respect for international standards of behavior.

6. Respect for human rights.

SOCIAL RESPONSIBILITY AND TRENDS IN PRODUCT DESIGN AND

DEVELOPMENT
García-Acosta et al. (2011), establish seven trends in the design and development of
products taking into account the human factor. Let us see what they are and the principles of
social responsibility that govern them:

1. Collaborative design. Respect for the interests of stakeholders, respect for international
standards and the ethical principle of protecting people and the environment.

2. User-centered design. Principle of accountability for the impacts of its products on

users (responsibility to involve users in the early stages of design, ethical handling of
user feedback, and accountability that design requirements have incorporated user
needs).

3. Customer-centered design (or market-centered design). Principle of ethical behavior

(applying the values of honesty, fairness and integrity; i.e., dealing with customers as
people and not merely as consumers).

4. Usability. Principle of legality (every product must not only provide safe conditions for its
use, but also make it easy to interact with).

5. Universal design (solving problems for the adaptation and inclusion of all people,
regardless of their abilities or limitations). Ethical behavior (value of equity) and respect
for human rights.

6. Design based on experience. Ethical behavior (based on honest, fair and upright
values).

7. Cross-cultural design. Comply with legislation in force between and within countries (no
benefiting from the legislation of countries that are more favorable to the process).

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4.9. THE IMPORTANCE OF OPTIMIZING THE DESIGN

AND DEVELOPMENT PROCESS
The product design and development process involves a high degree of responsibility, since
the success or failure of the products, as well as the investment required for their
development, depends to a large extent on it. Therefore, it is necessary for companies to
invest resources to professionalize the process.

Prototyping is an essential part of the product development process; however, it has often
been a bottleneck. Product designers and engineers used to create makeshift proof-of-
concept models using basic tools, but creating functional prototypes and quality parts often
required the same processes as final products. Traditional manufacturing processes, such as
injection molding, require expensive tooling and setups, which implies a pro- hibitive cost for
low-volume, custom prototyping.

Nowadays there are a multitude of techniques that can be used in the process of product
design and development, among which we can highlight:

• Simultaneous engineering. It consists of starting all the activities of the process as

soon as possible, for which it is necessary to count on the collaboration of all the
departments involved in them.

• Design for Excellence (DFE). It encompasses a series of design techniques aimed at

managing the quality, cost and delivery time of new products.

• Quality Function Deployment (QFD). It aims to create products that adapt to the user's
tastes and needs.

• Computer-aided design, manufacturing and engineering software. Software tools that

greatly facilitate the design of a product.

• Rapid Prototyping. This includes Stereolithography (SLA), Selective Laser Sintering

(SLS), Fused Deposition Modeling (FDM), Multijet Fusion (MFJ) and 3D Printing
Systems, among others.

• FEA (Failure Mode and Effect Analysis) design tools. They allow describing possible
failures in products, processes and systems, evaluating and classifying in an objective
way their effects, causes and identification elements.

RAPID PROTOTYPING

Rapid prototyping is the set of techniques used to rapidly design and manufacture a scale
model of a physical part or set of parts from three-dimensional computer-aided design (CAD)
data. These parts are usually built using additive manufacturing techniques, rather than
subtractive tra- ditional methods, so rapid prototyping encompasses Stereolithography (SLA),
Selective Laser Sintering (SLS), Fused Deposition Modeling (FDM), Multijet Fusion (MFJ)
and 3D printing systems, among others.

102
Rapid prototyping helps companies turn their ideas into real proof-of-concepts, transforming
these concepts into high-fidelity prototypes just like the final products. This product then goes
through a series of validation stages all the way to production line production.

With this innovative technique, designers and engineers will be able to create prototypes
directly from CAD data faster than ever before, and carry out frequent design revisions based
on concrete testing and feedback.

Space Exploration Technologies Corp. known as SpaceX, is an aerospace manufacturing

and space transportation services company based in Hawthorne, California (USA). It was
founded in 2002 by Elon Musk with the goal of reducing the costs of space travel to facilitate
the colonization of Mars.

"You want to wake up in the morning and think the future is going to be great and that's what
it's all about: being a spacefaring civilization. It's about believing in the future and thinking
that the future is going to be better than the past. And I can't think of anything more exciting
than going out and being among the stars" - Elon Musk.

SpaceX is known worldwide for a number of historic milestones. It is the only private company
capable of returning a spacecraft from low-Earth orbit, and in 2012 its Dragon spacecraft
became the first commercial spacecraft to deliver cargo to the International Space Station.
And in 2020 it was the first private company to carry humans there as well.

103
KEY IDEAS
• The concept of product refers to those tangible or intangible objects that are
that aim to satisfy the needs of end users.

• The product design and development process ranges from idea generation
(opportunities) to product launch (commercialization).

• The generic stages for carrying out a product design and development process are:
opportunity generation (and debugging); product image creation; prototyping; initial design;
review, validation and verification; and finally, commercialization.

• Thanks to good, innovative products with a quality that users can distinguish when
comparing them with those of the competition, the brand's image will improve, achieving
a superior position in the market and a closer approach to its target audience.

• A patent is a temporary monopoly granted by the government to exclude others from

using or selling an invention.

105
GLOSSARY
— Desing Thinking. A method for generating innovative ideas that focuses on discovering
and define a user need, designing a solution that satisfies it.

— Opportunity. It consists of a possible way of creating value for the company through a
new product idea, to satisfy in a more efficient way already known customer needs or
new needs detected after a market analysis, or to take advantage of new technologies
that have arisen.

— Patent. A temporary monopoly granted by the government to exclude others from

using or selling an invention.

— Product. A solution sold to satisfy a need.

— Minimum Viable Product (MVP). That product that meets the minimum requirements
to be launched to the market. Materialization of the value proposition with the minimum
possible functionalities.

— Prototype of a product. Limited representation of the product design, which allows us

to experience its use.

— Social responsibility. Ability to make decisions based on ethical behavior.

— Review. Determines whether the suitability, adequacy or effectiveness of a product

achieves the established objectives, ensuring compliance with the product
development plan or confirming the level of progress of the project.

— Validation. Determines whether the product fulfills its purpose or purpose, meeting the
requirements for the intended use or application. In a real environment, a sample is
evaluated to see if it works or not, asking customers to use the product, checking if the
benefits and experience were appropriate.

— Verification. Checks the quality requirements of the product specified in the inputs,
through tests that verify its conformity.

107
BIBLIOGRAPHY .
Clausing, D. (1994). Total Quality Development. ASME Press, New York.

García-Acosta, G., Lange Morales, K., Puentes, D. and Ruiz, R. (2011). Addressing Human
Fac- tors and Ergonomics in Design Process, Product Life Cycle and Innovation: Trends in
Consu- mer Product Design. Taylor & Francis.

Nalebuff, B. and Ayres, I. (2003). Why Not? How to Use Everyday Ingenuity to Solve
Problems Big and Small. Harvard Business Press.

Papaneck, V. (1971). Design for the real world. Human Ecology and Social Change. Thames
& Hudson.

Pressman, D. (2006). Patent It Yourself. Nolo Press.

Schrage, M. (2000). Serious Play: How the World's Best Companies Simulate to Innovate.
Harvard Business School Press.

Stim, R. (2006). Patent, Copyright & Trademark: An Intellectual Property Desk Reference.
Nolo Press.

Terwiesch, C. and Ulrich, K. T. (2009). Innovation Tournaments: Creating and Identifying

Exceptional Opportunities. Harvard Business Press.

Thomke, S. H. (2003). Experimentation Matters: Unlocking the Potential of New

Technologies for Innovation. Harvard Business School Press.

Ulrich, K. T. and Eppinger, S. D. (2013). Product design and development. Mc Graw-Hill

Education. Wheelwright, S. C. and Clark, K. B. (1992). Revolutionizing Product Development:

Quantum Le-
aps in Speed, Efficiency, and Quality. The Free Press.

109
TOPIC 5
Operating systems
 Operations management
Topic 5. Operating systems

OBJECTIVES
• Describe what is the capacity of an operating system.

• Calculate the capacity of an operations system, identifying the bottleneck.

• Identify the aspects that affect the capacity of a system and explain how the manager
can act on them.

• To understand the theory of constraints (ToC) as a methodology to increase the capacity

of a system.

• Understand the concepts of flow time, cycle time (CT), takt time (TT) and lead time (LT).

• Understand the concept of work in progress (WIP).

112
5.1. PRODUCTION RATE (THROUGHPUT)
ELEMENTS THAT MAKE UP AN OPERATING SYSTEM

An operations system is made up of three main elements: inputs, processes and outputs.

• Inputs (inputs or items): are the resources that the company has to purchase or contract
(raw materials, financial resources, information, time, etc.) in order to produce the goods
or services it will provide to its customers.

• Processes: set of interrelated production activities through which inputs (resources) are
transformed, giving them added value, generating outputs (products or services), with
the objective of satisfying customer needs.

– Activities: these are the basic units through which inputs are transformed or
processed. Each input has a series of activities associated with it in the process
through which value is added.

– Processors: these are the elements of the operating system capable of performing
the activities on the inputs (labor, machines, equipment, etc.).

• Outputs: are the result of the transformation of inputs through processes. They can be
products (tangible) or services (intangible).

DEFINITION We call the time required by the activities the time consumption of the
processors.
A-Z
To the working times of the processors available to process
inputs we call availabilities.

The transformation of resources into products or services will increase the added value of these
resources in order to meet the needs of customers, who will provide feedback on them. With
this feedback, the transformation processes that have been carried out will be reviewed, in
search of the total quality of the product or service offered.

Inputs Processes Outputs

Transformation Products
activities
Resource
s Services
Added value

Feedback

Figure 1. Elements of an operating system.

113
 Operations management
Topic 5. Operating systems

PRODUCTION RATE AND CAPACITY OF AN OPERATING SYSTEM

DEFINITION Production rate: quantity of outputs per unit of time that the system
processes. For example, in a factory, units of finished product per day that
A-Z are transferred to the warehouse; in a call center, number of calls handled
per hour.

Capacity: The maximum production rate that a system could achieve,

expressed in outputs per unit of time. For example, a health center can
serve 600 patients per day.

If we use outputs per unit of time as the unit of measurement for capacity, the capacity will
depend on the type of outputs; that is, if the outputs change, so will the capacity. Thus, if the
patients attended by a health center require more time (in the case, for example, of an
epidemic, in which security measures must be maintained), the number of patients that the
center can attend in a day will decrease.

For this reason, some authors propose calculating the capacity of the processor based on
the working time available to that worker. In the case of the medical center, the daily capacity
will be the number of hours worked per day by the number of physicians. For example, if the
health center has ten doctors, whose working day is 8 hours, the daily capacity of the center
will be 80 hours.

A processor will reach its maximum production rate (capacity) if it processes inputs without
interruption; that is, if it uses all its availability productively, without interruptions (due to lack
of arrival of inputs or repairs, for example).

The capacity of a processor can be obtained by performing the following calculations:

INPUT CONSUMPTION AVAILABILITY OF THE CAPACITY BY

PROCESSORS PROCESSOR TYPE

Type of input (or mix of Time available for each Total availability of the
inputs). processor per reference processors (h/day).
period.
Time consumption by type Input consumption per pro-
of input and processor. Number of processors per cesser (h/input).
type of input.

Table 1. Calculation of the capacity of a processor.

114
5.2. MAXIMUM PRODUCTION RATE: CAPACITY
(CAPACITY) AND BOTTLENECK (BOTTLENECK)
5.2.1. CAPACITY OF A SINGLE-PRODUCT SYSTEM

SINGLE-PRODUCT SEQUENTIAL SYSTEMS WITH THE SAME

AVAILABILITY

Let's imagine a factory that produces a single type of chair. The manufacturing process of a
chair consists of three sequential activities: cutting, assembly and varnishing. It has three
processors with an availability of 8 h/day each.

The consumption times for each activity required to process a chair are:

Cut Assembly Varnishing

12 24 6 minutes/chair
minutes/chair minutes/chair (0.1 h/seat)
(0.2 h/seat) (0.4 h/seat)

CONSUMPTIO INDIVIDUAL
PROCESA- AVAILABILITY
ACTIVITIES N TIMES CAPACITY OCCUPATION
DOR (H/DAY)
(H/SEAT) (CHAIRS/DA
Y)
1 Cut 0.2 8 40 50 %

2 Assembly 0.4 8 20 100 %

3 Varnishing 0.1 8 80 25 %

Table 2. Calculation of capacity in single-product sequential systems with the same availability.

What is the capacity of the system?

If each processor were to work at its maximum individual production rate, the individual
capacity of each processor would be:

• Processor 1: 40 chairs/day.

• Processor 2: 20 chairs/day.

• Processor 3: 80 chairs/day.

Processor 1 cuts faster than processor 2 assembles, so the pieces cut from the chairs will
accumulate in processor 2 at the rate of 20 chairs/day (the difference between the individual
capacity of processor 1 and the individual capacity of processor 2).

115
 Operations management
Topic 5. Operating systems

This will also influence processor 3, which will not be able to varnish at its maximum individual
capacity of 80 chairs/day, as processor 2 will only supply it with 20 chairs assembled and
ready for varnishing. Thus, processor 2 sets the capacity of the system, being the processor with
the lowest individual capacity, which generates a bottleneck, which will be 20 chairs/day.

DEFINITION
Bottleneck: lower maximum individual production rate (bottleneck): lower
maximum individual production rate (bottleneck): lower maximum individual
production rate (bottleneck): lower maximum production rate (bottleneck)
A-Z dual (individual capacity) of a processor, which determines the capacity
of that system.

As we can see, the capability analysis focuses only on how much it can process.
a system at most, but not on how inputs flow over time in the system. Non-bottleneck

processors will have unused capacity.

DID YOU KNOW

THAT...? The percentage actually used of a processor's individual capacity over a
period of time is known as processor occupancy or utilization.

SINGLE-PRODUCT SEQUENTIAL SYSTEMS WITH DIFFERENT

AVAILABILITY

What would happen if we increase the number of processors of some activity?

Let's assume that the manager of the chair factory decides to put two more processors in the
assembly area to try to end the bottleneck.

CONSUMPTIO INDIVIDUAL
PROCESA- AVAILABILITY
ACTIVITIES N TIMES CAPACITY OCCUPATION
DOR (H/DAY)
(H/SEAT) (CHAIRS/DA
Y)
1 Cut 0.2 8 40 100 %

2, 4 y 5 Assembly 0.4 8*3 = 24 20*3 = 60 66.67 %

3 Varnishing 0.1 8 80 50 %

Calculation of capacity in single-product sequential systems with different availability.

Will we have finished with the bottleneck? No, we will have increased the capacity of the
system, which is now 40 chairs/day cutting processor 1, which will become the new
bottleneck. By tripling the assembly capacity we have only doubled the capacity of the
system.

116
 IMPORTANT • We cannot make decisions about the capacity of a system based on
a single processor, but must consider the system as a whole.

• An increase in bottleneck capacity will always lead to an increase in

system capacity, but not necessarily in the same proportion.

• By increasing the capacity of the original bottleneck, we are likely to

create a new bottleneck in another processor or activity.

• Increasing the capacity of non-bottleneck processors will not lead to

an increase in system capacity.

NON SEQUENTIAL SINGLE-PRODUCT SYSTEMS WITH THE SAME

AVAILABILITY

Let us now assume that processor 1 of the chair factory performs the cutting and varnishing
activities, and processor 2 performs the assembly activities.

Cut

12 Assembly
minutes/chair
(0.2 h/seat) 24
minutes/chair
Varnishing (0.4 h/seat)

6
minutes/chair
(0.1 h/seat)

Processor 1 Processor 2

CONSUMPTIO INDIVIDUAL
AVAILABILITY
PROCESSOR ACTIVITIES N TIMES CAPACITY OCCUPATION
(H/DAY)
(H/SEAT) (CHAIRS/DA
Y)
Barni-cutting 0.2 + 0.1 =
1 8 26.67 75 %
0.3

2 Assembly 0.4 8 20 100 %

Calculation of capacity in non-sequential single-product systems with the same availability.

Processor 1 would take 0.3 h to cut and varnish a chair (for the capacity calculation it does
not matter how it d o e s it, but how long it takes), so its individual capacity would be
26.67 chairs/day. The individual capacity of processor 2 will be 20 chairs/day, which will follow
being a bottleneck.

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 Operations management
Topic 5. Operating systems

SINGLE-PRODUCT NON-SEQUENTIAL SYSTEMS WITH DIFFERENT

AVAILABILITY

If the manager now places one more processor in for the assembly activity (current
bottleneck):

CONSUMPTIO INDIVIDUAL
AVAILABILITY
PROCESSOR ACTIVITIES N TIMES CAPACITY OCCUPATION
(H/DAY)
(H/SEAT) (CHAIRS/DA
Y)
Barni- zed 0.2 + 0.1 =
1 8 26.67 100 %
cutting 0.3

2y3 Assembly 0.4 8 * 2 = 16 20 * 2 = 40 66.67 %

Calculation of capacity in non-sequential single-product systems with different availability.

The system capacity will increase from 20 chairs/day to 26.67 chairs/day, creating a new
bottleneck on processor 1. The third processor, which was supposed to double the capacity
of the previous bottleneck, will only have increased the system capacity by 6.67 chairs/day.

NON SEQUENTIAL SINGLE-PRODUCT SYSTEMS WITH PROCESSORS

MULTITAREA

Let's imagine now that we have multitasking workers in the factory, capable of doing any of
the cutting, assembly and painting activities:

Cut Assembly Varnishing

12 24 6 minutes/chair
minutes/chair minutes/chair (0.1 h/seat)
(0.2 h/seat) (0.4 h/seat)

Processor 1, 2 or 3

CONSUMPTIO INDIVIDUAL
AVAILABILITY
PROCESSOR ACTIVITIES N TIMES CAPACITY OCCUPATION
(H/DAY)
(H/SEAT) (CHAIRS/DA
Y)
Cutting
0.2 + 0.4 +
1, 2 y 3 En- 8 * 3 = 24 34.29 100 %
0.1 = 0.7
sambla-
gement
Varnishin
g

Calculation of capacity in non-sequential single-product systems with multitask processors.

This training of the processors is a very important advantage for the factory manager, who
will be able to place each worker where needed to eliminate bottlenecks. In this way, the
118
capacity of the system will be 34.29 chairs/day with three workers, the highest value obtained
so far, which will achieve 100% occupancy of all processors.

119
 Operations management
Topic 5. Operating systems

5.2.2. CAPACITY OF A MULTI-PRODUCT SYSTEM

When a system can produce different types of outputs (products or services), the individual
capacity of each processor, and therefore the capacity of the system, will depend on the mix
of outputs to be produced.

Suppose now that the factory produces chairs and tables, with the following consumption times:

Cut Assembly Varnishing

CHAIR CHAIR CHAIR:

: :
12 24 6 minutes/chair
minutes/chair minutes/chair (0.1 h/seat)
(0.2 h/seat) (0.4 h/seat)
TABLE TABLE TABLE:
: :
30 minutes/table 18 minutes/table 6 minutes/table
(0.5 h/table) (0.3 h/table) (0.1 h/table)

We still have three processors, with an availability of 8 h/day each. If only chairs were to be
processed (single-product system), we saw that the bottleneck would be in processor 2,
which is in charge of assembly. Similarly, if only tables were manufactured, we would have
the bottleneck in processor 1, which is in charge of cutting, since it takes the longest time per
table.

CONSUMPTIO INDIVIDUAL
N TIMES AVAILABILITY CAPACITY
OUTPUT PROCESSOR ACTIVITIES OCCUPATION
(H/CHAIR OR (H/DAY) (CHAIRS OR
TABLE) TABLES/DAY)

1 Cut 0.2 8 40 50 %

CHAIR 2 Assembly 0.4 8 20 100 %

3 Varnishing 0.1 8 80 25 %

1 Cut 0.5 8 16 100 %

MESA 2 Assembly 0.3 8 26.67 60 %

3 Varnishing 0.1 8 80 20 %

Table 7A. Calculation of capacity in single-product sequential systems with the same availability.

Let us now assume a mix of outputs of four chairs for each table, to sell a complete set. This
will be our unit of production.

120
We will see that, for this production unit, the bottleneck occurs in processor 2, which is in
charge of assembly, with a system capacity of 4.21 production units (four chairs and one
table) per day.

More chairs and tables are produced if we produce per production unit (batch) than separately:

• Per lot (set of 4 chairs and 1 table): 4.21 lots/day corresponds to 4.21 * 5 = 21.05 chairs
and tables/day.

• Chairs only: 20 chairs/day

• Tables only: 16 tables/day

This is because the production of chairs and tables separately saturates different processors:
chairs saturate processor 2 (assembly) and tables saturate processor 1 (cutting).

CONSUMPTI INDIVIDUAL
PROCESA- AVAILABILITY
MIX ACTIVITIES ON TIMES CAPACITY OCCUPATIO
DOR (H/DAY)
(H/MIX) (MIX/DAY) N

0.2 * 4 +
1 Cut 8 6.15 68.46 %
0.5 = 1.3

4 CHAIRS 0.4 * 4 +
2 Assembly 8 4.21 100 %
+ 1 TABLE 0.3 = 1.9

0.1 * 4 +
3 Varnishing 8 16 26,31 %
0.1 = 0.5

Table 7B. Calculation of capacity in sequential multiproduct systems with the same availability.

IMPORTANT • The manager must influence the mix of outputs to be produced, take advantage of the
the occupancy deficits of the processors.

• If the processors are multitasking, the allocation of inputs to a route

does not have to be fixed.

CONSUMPTI INDIVIDUAL
PROCESA- AVAILABILITY
MIX ACTIVITIES ON TIMES CAPACITY OCCUPATION
DOR (H/DAY)
(H/MIX) (MIX/DAY)

Cutting
4 CHAIRS 1.3 + 1.9 +
1, 2 y 3 Assembly 8 * 3 = 24 6.49 100 %
+ 1 TABLE 0.5 = 3.7
Varnishing

Table 7C. Capacity calculation in non-sequential multiproduct systems with multitasking processors.

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 Operations management
Topic 5. Operating systems

5.2.3. SETUP TIMES IN BATCH PROCESSES

When different outputs are produced, preparation time is usually necessary for some of the
activities. We will see below through a practical case that, in these cases, what is of interest
is to make long runs of the same product and some activities to do them in batches.
Let us now assume that the setup time for the factory cutting machines to adjust the machine
to the profile of the chair is 45 minutes (0.75 h), and to adjust it back to the profile of the table
is another 45 minutes (0.75 h). These cutting times must be added to the consumption times
of each activity.

Cutting
ASSEMBLY Varnished CHAIR
CHAIR CHAIR
0.1 h/chair
0.2h/seat + 0.4 h/chair
0.75h/replacem
ent
Cutting MESA
MESA Assembly Varnishing MESA
0.5 h/table +
0.3 h/table 0.1 h/table
0.75 h/spare

Let's imagine two options:

• OPTION A: all processors will work in batches of 4 chairs and 1 table (1 set); that is, they
will produce four chairs, change the cutting profile to table, produce a table, change the
cutting profile to chair, then produce again four chairs followed by a table, (with their
respective changeover times), and so on.
• OPTION B: Cutting operators will work in batches of 40 chairs and 10 tables
(corresponding to 10 sets), while assembly and varnishing processors will work in
batches of 4 chairs and 1 table (1 set).

CONSUMPTION TIMES
AVAILAB INDIVIDUAL
PROCE- (H/BATCH) OCCUP
ACTIVITY ILITY CAPACITY
SADOR ATION
(H/DAY) (BATCH/DA
4 CHAIRS 1 TABLE TOTAL Y)
0.75 + 0.75 +
1 Cut 0.2 * 4 = 0.5 * 1 = 2.8 8 2.86 100 %
1.55 1.25

0.4 * 4 = 0.3 * 1 =
2 Assembly 1.9 8 4.21 67.93 %
1.6 0.3

0.1 * 4 = 0.1 * 1 =
3 Varnishing 0.5 8 16 17.88 %
0.4 0.1

Lot (for any activity): 4 chairs and 1 table

Table 8A. Calculation of capacity in sequential multiproduct systems with the same availability and setup times
(option 1).

122
In option 1, the system capacity is set by processor 1 (cutoff), which is the
bottle, being 2.86 lots of 4 chairs and 1 table (2.86 sets).

CONSUMPTION TIMES AVAILA

(H/BATCH) INDIVIDUAL
PROCE- BILI- TY OCCUP
ACTIVITY CAPACITY
SADOR (H/DAY) ATION
(BATCH/DA
4 CHAIRS 1 TABLE TOTAL Y)
0.75
0.75 + 0.55 lots
+ 0.5
1 Cut 0.2 * 40 14.5 8 cutoff = 5.5 76.55 %
* 10 =
= 8.75 sets
5.75
4.21
0.4 * 4 = 0.3 * 1 assembly
2 Assembly 1.9 8 100 %
1.6 = 0.3 batches =
4.21
conjun
c- tions
16 lots bar-
0.1 * 4 = 0.1 * 1
3 Varnishing 0.5 8 nized = 16 26.31 %
0.4 = 0.1
sets

Lot (cut): 40 chairs and 10 tables

Lot (assembly and varnishing): 4 chairs and 1 table

Table 8B. Calculation of capacity in sequential multiproduct systems with the same availability and setup times
(option 2).

For option 2, the system capacity is set by processor 2 (assembly), which is the bottle neck,
being 4.21 lots of 4 chairs and 1 table (4.21 sets).

IMPORTANT

The larger the batch, the greater the processor capacity that requires
waiting times.

5.2.4. CAPACITY REDUCTION DUE TO QUALITY PROBLEMS

Quality controls make it necessary to discard batches, which affect bottlenecks, due to the
need to produce new batches to replace those discarded.

Let us suppose that, after performing quality controls in the manufacture of chairs, 8% are
found to be defective and have to be discarded.

How many chairs will we have to produce to get 100 correct chairs that pass quality control?

To obtain 100 correct chairs, 109 chairs have to be produced (since 92 % of 100 is 108.7,
rounded to 109 units).

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 Operations management
Topic 5. Operating systems

5.3. METHODOLOGIES FOR THE

IMPROVEMENT OF A SYSTEM CAPACITY
Eliyahu M. Goldratt (1984)1 , in his book The Goal: A Process of Continuous Improvement,
lays the foundations of the Theory of Constraints (ToC). This theory proposes four steps to
focus the efforts to improve the capability of a system, which are shown in the following table2:

Conduct a physical inspection to detect those processors where

IDENTIFY products are piling up or there are backlogs.
BOTTLENECK
S Cross-check the inspection with a numerical analysis of the system
capacity, based on the chosen product mix.

Protect the bottleneck with buffers (stock cushions) in front of the

EXPLOIT bottlenecks, to ensure work at the bottlenecks.
BOTTLENECKS
TO THE MAXIMUM Reduce downtime: by reducing set-up times, helping us with
preventive maintenance, or doing quality checks before the
bottleneck.

Subordinate non-critical processors to the neck-of-the-neck processor.

SUBORDINATE
bottle through synchronization and planning mechanisms.
THE PROCESS
TO THE
Establish optimal batch sizes for the bottleneck, or re- duce batch
BOTTLENECK
sizes for the rest.

INCREASE Improve the distribution of workloads among processors.

THE
CAPACITY
OF THE Investing in new machinery or hiring personnel.
BOTTLENEC
K
Methodology to increase the capacity of a system.

IMPORTANT • The theory of constraints led to a significant improvement in the

production process thanks to the elimination of bottlenecks in the
production of goods or services.

• By eliminating these restrictions, the main business objective, which is

to generate value for the company through sales, can be achieved.

1 Goldratt, E. (1984). La Meta: un proceso de mejora continua. Diaz de Santos.

124
2 Lago, A. and Moscoso, P. (2016) Operations management for managers. McGraw-Hill Education.

125
 Operations management
Topic 5. Operating systems

5.4. FLOW TIME, CYCLE TIME (CT), TAKT TIME

(TT) AND LEAD TIME (LT)
We already know that the capacity of a system (or of a process) is its maximum production rate;
that is, the number of units that the system is capable of producing in a time interval.

Let us now look at another concept related to time:

DEFINITION

Flow time: production time, i.e. minimum total time

A-Z that a unit takes to complete the process.

Let's go back to the example of chair manufacturing with a single-product sequential system, with
a capacity of 20 chairs/day, for 8 processors with an availability of 8 h/day.

Cut Assembly Varnishing

12 24 6 minutes/chair
minutes/chair minutes/chair (0.1 h/seat)
(0.2 h/seat) (0.4 h/seat)

The flow time will be: 12 + 24 + 6 = 42 minutes, or in other words, 0.7 h.

One of the main objectives of the industry must be to optimize the workflow. To this end, it is
essential to know the duration of the different activities that make up the process, in order to
be able to take measures based on the results.

There are three time measurement systems widely used in the industry, related to each
other, but measuring different concepts:

DEFINITION
Cycle time (CT): time that elapses from the time we start working on
A-Z one product until we are ready to start on the next.

This time is measured for each individual activity, so there are different TC within a production
process (as many as there are activities). The processes with the longest cycle times will
condition the operation of the process, becoming the bottlenecks of the system.

DEFINITION

Takt time: time it takes for the process to deliver a finished product.
A-Z complete to meet the customer's demand.

126
Let's go back to the previous case where we have a single-product sequential system with one
capacity of 20 chairs/day, served by 3 processors with an availability of 8 h/day.
If the customer demands 150 units of chairs and gives us a deadline of one week, with our
current capacity we will not be able to assume it, since our system would produce 20
chairs/day * 1 week * 5 days/week = 100 units of chairs in one week, assuming weeks with 5
working days of work.
Our system would require 150 chairs * 1 day/20 chairs = 7.5 working days, i.e. one week.
and a half of work.

DEFINITION
Lead time: time from the time an order is generated to the time an order is
placed.
A-Z The supplier's goods are delivered to the customer (it can be a private
individual or a store).

5.5. WORK IN PROGRESS (WIP)

DEFINITION Work in progress (WIP): also called processable i n v e n t o r y ,
refers to those partially finished products (raw materials, labor or
A-Z overhead generated by the products during the unfinished process),
which are waiting to be fully completed.

The WIP is part of the inventory asset account in the balance sheet, and will be transferred first
to the finished goods account upon completion, and subsequently to cost of sales.
Let us continue with our example of chair manufacturing. Initially, wood is transferred to
production as raw material. Next, we will have labor expenses (processors) needed to perform
the activities of the production process. As long as the chairs are not finished, these
expenses will be allocated to WIP. Once finished, the expenses will be transferred from WIP
to finished goods. Both accounts are part of inventory. When the chairs are sold, the costs
will be moved from inventory to cost of goods sold (COGS).

To calculate WIP, most companies use the percentage of total raw materials, labor and
overhead already generated, thus determining the number of partially completed units.

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KEY IDEAS
• The production rate is the amount of outputs per unit of time that the system processes.

• The capacity of a system is the maximum production rate that a system could achieve. It
is determined by its bottleneck, which is the lowest individual maximum production rate
(individual capacity) of a processor.

– We cannot make decisions about the capacity of a system based on a single

processor, but must consider the system as a whole.

– An increase in bottleneck capacity will always lead to an increase in system capacity,

but not necessarily in the same proportion.

– By increasing the capacity of the original bottleneck, we will probably create a new
bottleneck in another processor or activity.

– Increasing the capacity of non-bottleneck processors will not lead to an increase in

system capacity.

– The manager must influence the mix of outputs to be produced, taking advantage of the shortfalls of
occupancy of the processors.

– If the processors are multitasking, the assignment of inputs to a path does not have to be fixed.

– The larger the batch, the greater the processor capacity that requires waiting times.

• The theory of constraints (ToC) seeks the elimination of bottlenecks, thanks to which the
main business objective, which is to generate value for the company through sales, can
be achieved.

• The flow time is the production time, i.e., the minimum total time a plant has to be in production, i.e., the
minimum total time a plant has to be in production.
unit takes time to complete the process.

• Cycle time (CT) is the time that elapses from the time we start working on one product
until we are ready to start on the next.

• The takt time is the time it takes for the process to deliver a finished, complete product to
meet customer demand.

• Lead time is the time from receipt of the work order from the customer until the order is
charged upon delivery.

• Work in progress (WIP), also called processable inventory, refers to those partially
completed products that are waiting to be fully completed.

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GLOSSARY
— Total quality. Application of the principles of quality management to all the activities
and people of the organization, not only to the realization of the product or service
delivered to the customer.

— Inventory of a company's stock. Inventory where materials are recorded

The company offers raw materials, intermediate goods and final goods to its customers.

— Inventory of raw materials. Accounting for a company's inputs that will later go
through the production process.

— Work in process inventory. Inventory that includes those products that are not
finished for sale to the customer or consumer.

— Finished goods inventory. Inventory that considers all goods ready for delivery to the
customer.

— Inventory. A record of the assets belonging to a natural or legal person. Thus, there is
a record of a series of assets or objects.

— Processor. Person who submits a raw material to a processing or transformation

process.

— Set-up time. Period of time that elapses between the output of the last unit produced
from one batch and the first unit produced from another batch (Miranda, 2005). This
preparation time can, in turn, be broken down into two times (Machu- ca, 1998):
waiting time between one process and another and transport time.

— Value added. Also known as added value, it is the additional utility that a good or
service has as a consequence of having undergone a transformation process.

129
BIBLIOGRAPHY .
Chase, R. B., Jacobs, F. R., & Aquilano, N. J. (2009). Operations management. McGraw-Hill
Education.

Goldratt, E. (1984). La Meta: un proceso de mejora continua. Diaz de Santos.

Hopp, W. J. and Spearman, M. L. (2008). Factory Physic. McGraw-Hill Education.

Muñoz-Seca, B. and Riverola, J. (2003). Del buen pensar y mejor hacer. McGraw-Hill Education.

Lago, A. and Moscoso, P. (2016) Operations management for managers. McGraw-Hill Education.

131
TOPIC 6
Process planning and management
 Operations management
Process planning and management

OBJECTIVES
• To understand the structure of a process-based management system and how to
implement it in an organization according to the ISO 9000 family of standards and the
EFQM model.

• Identify the elements of a process-based management system through practical

examples.

• To understand the concept of logistics marketing and its importance in today's market.

• To learn about successful examples of logistics marketing in real companies.

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6.1. ORGANIZATION AND MANAGEMENT BY PROCESSES
6.1.1. MANAGEMENT MODELS AND THE PROCESS-BASED APPROACH
Today's competitive and globalized markets force companies, in order to succeed or at least survive,
to develop management systems that establish the methodologies, responsibilities, resources
and programs that will enable them to achieve the established objectives.

For this reason, many companies use recognized reference standards to implement
management systems. Some of them (such as the ISO 9000 family of standards or the
European EFQM model) propose the implementation of a process-based management
system, in order to obtain results that achieve the objectives of satisfying customer needs.

Process-
Objective based Results
s management
system

• Methodologies (how)
• What is intended • What you get
• Responsibilities
(who)

• Resources (with what)

• Programs (when)

• Added value

Figure 1. The process-based management system.

THE PROCESS-BASED APPROACH IN ISO 9001

The ISO 9000 family of standards promotes the adoption of a process-based approach in
the management system to achieve results aimed at satisfying customer needs. It is
composed of the following standards:

• ISO 9000 Quality management systems. Principles and vocabulary.

• ISO 9001 Quality management systems. Requirements.

• ISO 9004 Management for sustained organizational success. Quality management

approach.

DEFINITION
Process: set of mutually related or integrating activities.
A-Z (ISO 9000).

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Process planning and management

Principles of quality management: (ISO 9001)

1. Customer focus.

2. Leadership.

3. Staff participation.

4. Process-based approach.

5. System approach to management.

6. Continuous improvement.

7. Fact-based approach to decision making.

8. Mutually beneficial supplier relationships.

Of these principles, we will highlight two, which we will develop in this topic:

IMPORTANT
(ISO 9001)

• Process-based approach: Identifying, understanding and

managing interrelated processes as a system contributes to the
effectiveness and efficiency of an organization in achieving its
objectives.

• Continuous improvement: Continuous improvement of the

organization's overall performance should be a permanent objective
of the organization.

This type of process management used for the development, implementation and
improvement of the effectiveness of a quality management system (QMS), leads the
company to a series of actions, such as:

1. Identify, understand and meet customer requirements in each process.

2. Plan processes with the intention of providing value for customers.

3. Measure and control the performance and effectiveness of processes.

4. Establish a continuous improvement of the processes based on the results obtained in

the previous control.

Process-based management systems orient the processes to the satisfaction of customer

needs. Companies must have sufficient structural flexibility to adapt to market changes by
measuring and controlling their processes and implementing continuous improvements
based on the results obtained.

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THE PROCESS-BASED APPROACH IN THE EFQM MODEL

DEFINITION
Process. Sequence of activities that add value while producing a
certain product or service, based on certain inputs". a certain product or service is
produced, based on certain inputs". (EFQM Model, European Foundation for Quality
Management).

Fundamental principles of excellence (EFQM model):

1. Results orientation.

2. Customer orientation.

3. Leadership and consistency.

4. Management by processes and facts.

5. Development and involvement of people.

6. Continuous process of learning, innovation and improvement.

7. Development of alliances.

8. Social responsibility of the organization.

Of these principles, we will highlight two, which we will develop in this topic:

IMPORTANT (EFQM MODEL)

• Management by processes and facts. The company manages
activities in terms of processes; this makes sense if it can satisfy the
needs of its customers with its products or services.
• Continuous process of learning, innovation and improvement.
There must be an appropriate management of knowledge,
experiences, creativity and innovation. All the company's activities
must be subject to improvement.

6.1.2. STEPS FOR SETTING UP A PROCESS-BASED MANAGEMENT

SYSTEM
The steps to be followed by an organization wishing to implement a process-based
management system (whether it follows the model proposed by ISO 9000 or the EFQM model)
are as follows:

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 Operations management
Process planning and management

1 Identification and sequencing of processes.

2 Description of each process.
3 Follow-up and measurement of the results obtained.
4 Continuous process improvement.

Figure 2. Steps to establish a process-based management system.

1. IDENTIFICATION AND SEQUENCING OF PROCESSES: PROCESS MAPPING

The first step in adopting a process-based management system will always be to identify the
processes that will make up the organization's system. But neither the ISO 9000 standard
nor the EFQM model defines what these processes should be.

The organization, which will already have processes in place, shall identify those significant
enough to remain part of the system, classifying their importance and sequence. To this end, it
shall take into account the influence of each process on customer satisfaction and the effects
they have on product quality, the legal or regulatory requirements that condition them, the
economic risks they entail and the degree of compliance with business objectives.

Once the organization has identified and sequenced the processes that will be part of its
management system, it is useful to represent them in a process map.

DID YOU KNOW The graphical, ordered and sequential representation of all the activities
THAT...? or groups of activities (processes) that comprise the management
system is called process map. Its objective is for companies to have a
clear focus on the activities or processes that add value to the product or
service offered to the customer to satisfy their needs.

There are numerous classifications of processes, but one of the most widely used is the following:

Processes Processes carried out by the organization's managers to guide and

strategic maintain operational and support processes.

Processes
Processes necessary for the realization of the product or service.
operatives

Processes of
Processes necessary to support operational processes.
support

Table 1. Classification of processes.

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 Strategic processes
CLIENT

CLIENT
Operational
processes

Support processes

Figure 3. Types of processes.

EXAMPLE OF A HOTEL PROCESS MAP

Strategic processes:
• Strategic planning.
• Communication.
• Quality management.

Operational
processes:
• Customer service:
– Reservations.
– Public relations.
• Services:
CLIENT
CLIENT

– Restaurant.
– Spa.
• Lodging:
– Reception.
– Floor control.

Support processes:
• Security.
• Supply.
• Technical services.
• Accounting and finance.
• HR.

Figure 4. Example of a hotel process map.

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Process planning and management

2. DESCRIPTION OF EACH PROCESS

Thanks to the process map, we know the processes that make up a system and their
relationship. But we do not know how they are carried out, how inputs are transformed into
outputs, adding value to achieve customer satisfaction.

This is done in the next step, the description of the processes, where the different
activities that make up each process, as well as the characteristics that enable their control
and management, will be referred to. The outline for carrying out the description of a process
is as follows:

CLIENT
CLIENT

PROCESS

PROCESS DIAGRAM: PROCESS SHEET:

activities characteristics

What activities How is the process

Who performs What is its purpose?

them
How it relates to the
How they are
rest
made
What are your inputs
and outputs

Figure 5. Schematic description of a process.

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FLOW DIAGRAM

The description of the activities of a process is made by means of a diagram, where it will be
indicated which activities have to be carried out in the process, who will carry them out and
how they have to be carried out. The most commonly used symbols in this type of diagrams
are:

Start (input) or end of the process (output).

Activity (or set of activities).

Decision (will involve at least two options).

Flow (order in which activities are executed).

Document (to accompany the process).

Database (data must be entered into a database).

Table 2. Most commonly used symbols in process diagrams.

Process sheet

A process card is an information support that gathers the most important characteristics for
the control and management of the process. It will contain information about:

Mission Purpose of the process.

Owner Responsible for the process.
Marked by the inputs and outputs of the process, conditioned by both
Limits
suppliers and customers.
Scope Extension of the process, marked by the first and the last activity of the process.
Indicators They allow the monitoring and control of the process.
Control They can be modified by the owner of the process, depending on his or her
variables evolution.
Inspections Intermediate and final, for monitoring and control of the process.
Documents
Documents or records related to the process.
and/or
records
Resources Human resources or infrastructure necessary to carry out the process.

Table 3. Elements that a process card should contain.

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Process planning and management

PROCESS ≠ PROCEDURE

PROCESS PROCEDURE

A set of mutually interrelated or Specified way to c a r r y out an activity

interacting activities that transform or process.
inputs into outputs.

• Transforming inputs into outputs, • Succession of steps to execute a task.

adding value.
• They are used to complete a task.
• They are used to achieve certain
• Its objective is compliance with standards.
objectives.
• Its goal is customer satisfaction.

Difference between process and procedure.

3. MONITORING AND MEASUREMENT OF THE RESULTS OBTAINED

Indicators

To monitor and control the processes, previously defined indicators will be used, whose
values and their evolution will allow the organization to take measures if necessary,
especially in the control variables.

Main management indicators

Management indicators can be both quantitative and qualitative. They must be described
by at least the following parameters:

• Definition. Description of the activity they measure.

• Ratio or way of calculating it. Formula or equation used to calculate the data.

• Units. Standardized quantity of the quantity.

• Periodicity. How often it should be measured.

• Process. Activity or process to which it relates.

• Instruments. For measurement.

• Responsibility. Who is responsible for its measurement and control.

The most commonly used indicators in industrial management are:

Utilization indicators Capacity used / Capacity available.

Performance indicators Actual production level / Expected production level.

Productivity indicators (Actual production value / (expected production value) * 100.

Table 5. Main management indicators.

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4. CONTINUOUS IMPROVEMENT OF THE PROCESSES, BASED ON THE
MONITORING AND CONTROL PERFORMED

There are several methodologies for process improvement:

• Continuous improvement of processes. Optimization of existing processes,

eliminating activities that do not add value and reducing process errors.

• Total Quality Management (TQM). Reduction of errors, customer satisfaction and con-
qualified talent.

• Process reengineering. Completely change the process, creating a new one without
respecting the existing one.

• Process redesign. Resolve how to improve existing processes.

• Six Sigma. Reducing variability to mitigate or eliminate defects in product or service

delivery.

CONTINUOUS PROCESS IMPROVEMENT

The data collected through the monitoring and measurement of the processes will be
analyzed by the organization, in order to know the evolution of each of the processes, thus
discovering:

• If a process does not achieve its intended objectives, in which case it should be implemented.
corrective actions to achieve it.

• The organization may identify an opportunity for improvement, even if the process
has achieved its intended objectives, that may have an impact or relevance to the overall
improvement of the company.

IMPORTANT
The objective of process improvement is to increase the effectiveness
and efficiency of a process. This is achieved by following the steps
defined in Deming's classic continuous improvement cycle or
PDCA cycle (Plan, Do, Check, Act).

A (Act) P (Plan)
Act Plan

C (Check) D (C)
Check Execute

Figure 6. Deming's continuous improvement cycle or PDCA cycle.

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 Operations management
Process planning and management

Let us describe the four steps of this cycle:

1. Planning (Plan). Identify the requirements requested by the customer to define the
objectives to be achieved, providing added value to the inputs, and plan the actions to
achieve them. Define the quality indicators.

2. Execute (Do). To implement the planned actions to meet the needs of

customers.

3. Verify (Check). Check the implementation of actions, measuring their effectiveness.

to achieve the proposed objectives, through the indicators defined for this purpose.

4. Act. Compare planned results with actual results. If the expected results do not
correspond to those achieved, make the necessary corrections (adjustments). If
opportunities for improvement have been identified, systematize the solution (update).

TOTAL QUALITY MANAGEMENT (TQM)

Total Quality Management (TQM) is the management framework for improving the customer
experience and the value proposition of the product or service through complete company
commitment and streamlined organizational process.

The objective of this methodology is to create a corporate environment, where everything

works in the best way. Transactions will be perfectly understood and carried out correctly,
and stakeholders will have a successful relationship with each other.

Management must come from the management and team leaders who oversee the process,
identifying errors that will need to be corrected to improve efficiency. Quality is part of the
overall objective of TQM: an increase in the quality of the product or service and the value it
can provide to customers.

The concept of total quality describes the entire process: it involves all members of the
organization, from order fulfillment to marketing, sales and after-sales. Cohesively they work
towards the same goal and are accountable for the results.

The concept of total quality is based on three fundamental pillars:

• Work philosophy.

• Action strategies or policies.

• Work tools.

PROCESS REENGINEERING
Process reengineering will occur when new processes are redesigned without starting from
the previous ones. For this, it will be necessary:

1. Develop process improvements.

2. Eliminate quality and reliability problems detected.

3. Eliminate obsolete processes.

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Process reengineering aims to design an "ideal" process, thanks in large part to more
modern technologies or mechanization. It will produce more successful processes, if
successful, but it is the most risky technique, as it consumes more money and time.

PROCESS REDESIGN
The main objective of process redesign is to improve end-to-end business processes,
bringing benefits such as cost reduction, reduced production cycle time and improved quality.

"What used to work is no longer good enough."

Process redesign is the answer to this dilemma, because it analyzes in detail the processes
and evaluates what is useful and what is unnecessary. It consists of redesigning the current
defective process. The new process project is implemented to meet the new goals and
strategies of the organization.

The concepts of "reengineering" and "redesign" are often confused and even used as
synonyms, but in reality they are not. Process redesign is not as extreme as reengineering; it
can be applied to a part of the company's process and aims to improve the level of
competitiveness through process optimization.

FEATURE REENGINEERING REDESIGN

Approach New process. Restructuring.

Starting point Existing process. Existing process.

Objective of the Radical change, customer Redesign of a part of the process.

change satisfaction.
Exchange rate Radical. Structural.

Periodicity of
Discontinued. Intermediate intervals.
change

Differences between Process Reengineering and Process Redesign:

SIGMA SIGMA

The objective of Six Sigma is to try to detect 3.4 defects per million. That is, any defect in the
product or service that fails to meet the established standards.

Sigma (σ) is a Greek letter that is understood as a statistical unit of mediation. It is used to
specify the standard deviation of a population. This deviation indicates how dispersed the
data are with respect to the mean. The greater the standard deviation, the greater the
dispersion of the data.

The sigma level pertains to how many standard deviations fit between the process
specification limits. For example, let's imagine that we have to manufacture a nut with a
diameter of 16 +/- 1mm. To determine whether or not it meets the customer's requirements,
we will have to set a specific limit below 15mm and above 17mm, with the goal of reaching
16 +/- 1mm diameter.

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 Operations management
Process planning and management

It should be noted that most companies are at a 3 sigma level. This means that they usually
have 6.37% of defects in their processes. The aim of this methodology is to work with 6
sigma, so that defects are reduced to 3.4 %.

The smaller the process variation, the smaller the standard deviation and the higher the sigma level.
LEI = 14 mm Lens = 15 mm LES = 16 mm LEI = 14 mm Lens = 15 mm LES = 16 mm

1σ 2σ 3σ 1σ 2σ 3σ 4σ 5σ 6σ

Sigma level = 3 Sigma level = 6

Figure 7. Source: http://leansolutions.co/que-es-six-sigma/

How to go from 3 sigma to 6 sigma?

Six Sigma comes with an instruction manual called the DMAIC cycle (Define, Measure,
Analyze, Improve and Control).

DMAIC is a systematic, fact-based improvement process. This closed process eliminates

unproductive steps.

• Define: specify the objective of the defect and validate it, at the same time as the definition of the
equipment.

• Measure: understand the current performance of the defect.

• Analyze: find the real causes that have produced the defect.

• Improve: determine improvements while minimizing investment.

• Control: take the necessary measures to ensure the continuity of the improvement and
value both financially and in terms of customer satisfaction.

6.2. QUALITY MANAGEMENT

6.2.1. INTRODUCTION TO THE CONCEPT OF QUALITY
The concept of quality has evolved throughout history as manufacturing methodology,
product distribution and customer needs have changed. Thus, quality has improved from a
simple inspection of the handcrafted final product to the total quality that is pursued today.

We can distinguish four major stages in the evolution of the concept of quality:

146
 Total quality
Quality
Control of assurance
quality
Inspection

Figure 8. Evolution of the concept of quality.

• Inspection: In this phase, quality was controlled through the inspection of the
manufactured products. To this end, they were selected, classified and defective units
were eliminated, with the help of corrective measures. It began to be implemented in
American companies such as Bell System, a telephone company that based its quality
on the inspection of its products, thus avoiding the release of damaged products onto the
market. However, companies soon realized that, in this way, they could not guarantee
the satisfaction of changing customer needs or the profitability of their products, and so
the concept of quality had to evolve.

• Quality control: operational techniques and activities were developed to guarantee

product quality. Processes began to be controlled, eliminating or modifying those that
generated failures. Inspection was only one part of quality control; it was planned through
quality manuals, data were collected for statistical analysis, and raw materials, processes
and finished products were analyzed and tested. However, as time went by, it became
clear again that neither customer satisfaction nor product profitability could be guaranteed
through quality control, so quality continued to evolve.

• Quality assurance: systematic actions were then planned to ensure adequate

confidence that the product or service would meet the established requirements. The
approach to quality changed: inspection and quality control were no longer sufficient;
quality was planned to ensure the achievement of results. More comprehensible quality
manuals, statistical controls, non-production operations and cause-effect studies were
developed. However, the evolution of the quality concept again became necessary, as the
guarantee of satisfying changing customer needs and economic profitability was still not
fully achieved.

• Total quality: Total quality management (TQM) considers the customer as the most
important human resource of the company. The concepts of inspection, quality control and
quality assurance are combined with the involvement of suppliers and consumers. The
objective is to satisfy the needs of customers, both internal and external, involving
management in the achievement of these objectives. Continuous improvement is sought
in each and every one of the processes involved in the manufacture of products, and
innovative techniques such as reengineering are used.

Companies such as Toyota seek to obtain high quality products at moderate prices,
eliminating activities that do not add value to the product, such as inventories, waiting
times or overloading workers.

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 Operations management
Process planning and management

Management Measurement
Involvement and analysis
of
improvement

Customer needs IMPROVE Customer

CONTINUA satisfaction

Adding
Waste
value to
managem
the
ent
product

Figure 9. Quality management system.

6.2.2. LOGISTICS KPIS

One of the fundamental phases in any quality management system is evaluation. This is
carried out through planned and systematic analyses that enable the company to identify the
strengths and weaknesses of its manufacturing and product distribution process.
Measurements are taken and then analyzed on the basis of the requirements set, issuing a
value judgment that reflects the degree of satisfaction of customer needs.

In the following, we will differentiate between three concepts that are usually confused:

• Qualification: result of a test that assesses performance.

• Measurement: comparison of the value obtained in the appraisal with the reference value that
is used as a standard.

• Evaluation: analysis of the results that allows the improvement of the process based on
the measurement.

Companies use management or performance indicators called KPIs (Key Performance

Indicators), which are defined in the preparation of the company's strategic plan, so that they
are in line with the company's objectives. Indicators can be established for everything that is
measurable over a period of time and under established units of measurement.

Logistic indicators can be qualitative (opinions or perceptions) or qualitative (opinions or perceptions).

quantitative (measurements or numbers). In all of them, the following parameters must be defined:

• Definition.

• Calculation.

• Unit of measurement.

• Periodicity.

148
 • Process.

• Instruments.

• Responsibility.

• Interest group.

• Addressee.

Logistics indicators can be classified as follows:

USAGE INDICATOR Utilization = capacity used / available capacity.

Yield = actual production level / expected production

PERFORMANCE INDICATOR
level.

Production = (actual value of production / expected

PRODUCTION INDICATOR
value of production) * 100.

Table 7. Logistic KPIs for utilization, performance and production.

Another way to classify logistics KPIs is according to the process they measure:

PROCESS EXAMPLE

Supply indicators Supplier fulfillment level = (orders received out of time /

total orders received) * 100.

Merchandise life index = Final inventory / Average sales.

Inventory indicators

Storage indicators Cost of storage per unit = Cost of storage / Total no. of
units stored.

Truck utilization level = Actual capacity utilization

Transportation indicators
/ Actual truck capacity

Customer service Customer delivery fulfillment level = Total orders delivered

indicators on time / Total orders delivered
customer
Logistics costs = Total logistics costs / Total sales of the
Financial indicators
company

Table 8. Classification of logistics KPIs according to the process they measure.

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Process planning and management

6.3. LOGISTICS MARKETING

WHAT IS LOGISTICS MARKETING?

Logistics marketing arises to meet the specific needs identified in customers. This does not
mean that customers are becoming more and more selective, but that they are looking to
obtain a product or service in the personalized way they want.

DEFINITION Philip Kotler, the father of modern marketing, defined the concept of
logistics marketing as "the set of tasks of planning, executing and
A-Z controlling the physical flow of goods and services from the point of
origin to the place of consumption, with the ultimate goal of meeting
consumer demands and making a profit.

From a business management point of view, logistics marketing involves making the right
product, at the right time and in the right place, available to the right consumer.

Imagine, for example, that a company that manufactures sunscreens sells its products in the
middle of the summer season instead of at the beginning. It would be clear that, in this case,
logistics and marketing would not be well synchronized. The product may be right for the
consumer, but the timing is not.

Logistics marketing tries to interconnect three key areas, known as the basic ecosystem of
logistics marketing: the market, the supply chain and the delivery of value to customers,
which determine the perfect linkage and synchronization between logistics and marketing.

• Market. A set of exchanges of goods or services between individuals or associations of

individuals. Today's market is characterized by constant change, so companies must be
flexible enough to adapt to them, responding to new demands quickly.

• Supply chain. A set of actions that enable the needs of consumers to be met, making the
goods or services offered by the company available in the quantity, place and time
desired by the users.

• Delivery of value to customers. The set of all parties involved, directly or indirectly, in
satisfying customer needs. The objective of companies is to give value to their products;
value that cannot be limited only t o price and quality, but must solve an unsatisfied
customer need.

The information from the analysis of this ecosystem will enable the company to plan a
strategy that will enable it to make its products or services available to customers at the right
time and in the right place. These strategies are present in all links of the chain, with the aim
of achieving competitive advantages in the face of increasingly insatiable competition.

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EXAMPLES

• Inditex: up-to-the-minute stock. Logistics marketing helped Inditex to achieve success

by detecting a market need not yet covered by the competition, creating a new concept
called fast fashion. The customers of this textile giant are people who follow the trends in
the fashion world and seek to be constantly updated at affordable prices. And this is what
Inditex offered them: the possibility of having garments that change almost every week at
a low cost, giving them a great competitive advantage over their competitors.

• Amazon: the user chooses everything. The online market place that began with the sale
of books has today become one of the largest online sales companies, thanks to the perfect
synchronization of marketing and logistics. Through its website, the customer can purchase
an almost unlimited variety of products, with just a few clicks, and receive them wherever
he chooses in record time. This ease of purchase and impressive variety of offerings,
coupled with the attention it pays to its customers (using the information gathered from
their search and purchase processes to recommend new products and facilitate the
process) has made Amazon a leader in its sector.

• Mercadona: the customer, the absolute protagonist. The Spanish company

Mercadona has been able to present itself as a supermarket that listens to its customers,
offering them the products they demand the most, with a quality and price that are hard
to beat, thanks to the development of its own brand. It places the customer as the
absolute protagonist, whose preferences and needs it knows perfectly.

THE IMPORTANCE OF LOGISTICS MARKETING

Today, two unquestionable trends make it necessary to integrate and synchronize marketing
and logistics:

1. Customers have at their disposal tools where they can easily consult opinions and
alternatives that will help them decide between one company's product or service and
another.

2. The offer of products or services to which the customer is subjected today is wide. The
only way for the customer to choose a company is for it to invest efforts and resources to
differentiate itself from its competitors.

A company cannot afford to exclusively distribute its products; it must know its customers'
needs and predict their tastes in order to be able to offer them the best product or service. It
is essential to take care of important aspects such as packaging, quality, delivery time or
after-sales services. Logistics and marketing must go hand in hand.

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 Operations management
Process planning and management

IMPORTANT
Marketing and logistics complement each other: while the former will
enable companies to listen to the customer, take trends into account
and streamline communication, the latter will enable them to match this
planning with the available structural reality.

THE 4 P'S OF LOGISTICS MARKETING

Product

Promotion Price
MARKET
(price)

Distribution
(place)

Figure 10. The 4 P's of Logistics Marketing.

• Product. It encompasses both the set of tangible (goods or objects) and intangible
(services) attributes offered in the market to satisfy certain needs in an identifiable way.
Logistics marketing allows the company to identify the characteristics of the customer
and the needs he needs to satisfy, in order to define the product or service to offer him.

Example. One of the best known and groundbreaking product marketing strategies,
based precisely on the "p" of product, happened with the appearance of the first Apple
iPhone with touch screen, in 2007, which revolutionized the cell phone industry.

• Price: represents the total cost of the product to the customer. The company must
analyze both internal factors (production costs) and external factors (competitor prices) to
set the price of its products. Logistics marketing can certainly help the company to
understand how these factors affect customers' decisions.

Example. In 1953, McDonald's proposed a very competitive strategy, based on the "p" of
price, thanks to the chain production of its franchises, which made the products cheaper.

152
• Distribution, place: all the locations through which a created product passes until it is
received by the customer; it includes distribution, intermediaries, warehouses, receiving
and delivery of orders. The location of the factory, warehouse or stores can affect the
marketing logistics process, increasing or reducing costs. It will also affect the business
model chosen: physical store distribution and e-commerce.

Example. An example of a revolutionary point-of-sale "p" strategy in logistics marketing

was the creation of Amazon. Thanks to the emergence of this platform, the point of sale
ceased to be a physical place and became virtual.

• Promotion: is the set of communication tools used by companies to relate to their

markets, according to their own objectives. Product promotion includes all the means,
distribution channels and techniques used by the company to maximize sales.

Example. Undoubtedly one of the most successful marketing strategies, based on the
"p" of promotion, of recent times was the one carried out in the last decade of the 20th
century by the advertising studio Goodby Silverstein & Partners for the California Milk
Pro- cessor Board group, in which many well-known celebrity faces were shown with
milk-stained mustaches, under a slogan that said "Got milk?

Figure 11. Source: https://www.huffpost.com/entry/carlos-vives-got-milk_n_3672892.

153
KEY IDEAS
• Many companies use recognized reference standards to implement management
systems. Some of them (such as the ISO 9000 family or the European EFQM model)
promote the adoption of a process-based management system, in order to obtain
results that achieve the objectives of satisfying customer needs.

• This type of process management used for the development, implementation and
improvement of the effectiveness of a Quality Management System (QMS), leads the
company to a series of actions, such as:

– Understanding and meeting customer requirements for each process.

– The need to consider and plan processes in terms that add value.

– Monitoring, measuring and obtaining results of the performance and effectiveness of

processes.

– Continuous improvement of processes based on objective measurements.

• The steps to be followed by an organization wishing to implement a process-based

management system (whether it follows the model proposed by ISO 9000 or the EFQM
model) are as follows:

1. Identification and sequencing of processes.

2. Description of each process.

3. Follow-up and measurement of the results obtained.

4. Continuous process improvement.

• From a business management point of view, logistics marketing involves making the right
product, at the right time and place, available to the right consumer.

• Logistics marketing tries to interconnect three key areas, known as the basic ecosystem
of logistics marketing: the market, the supply chain and the delivery of value to
customers, which determine the perfect linkage and synchronization between logistics
and marketing.

• Marketing mix strategy, also known as the 4P strategy: price, product, place and
promotion. Its objective is to understand the company's situation in order to develop a
specific positioning strategy at a later stage.

155
GLOSSARY
— Process diagram. Description of the activities of a process, where it will be indicated
which activities are to be performed in the process, who will perform them and how
they are to be performed.

— Process card. Information support that gathers the most important characteristics for
the control and management of the process.

— Management indicators. They can be both quantitative and qualitative. They serve as
reference values for process monitoring and control.

— Process map. Graphical, ordered and sequential representation of all the activities or
groups of activities (processes) that make up the management system. It serves to
have a clear vision of the activities that contribute value to the product/service finally
received by the client.

— Logistics marketing. "The set of tasks of planning, executing and controlling the
physical flow of goods and services from the point of origin to the place of
consumption, with the ultimate goal of meeting consumer demands while making a
profit" (Philip Kotler).

— Continuous process improvement. A tool that optimizes existing processes,

eliminating activities that do not add value and reducing process errors.

— Procedure. A specified way to carry out an activity or process.

— Process. "Set of mutually related or interacting activities that transform inputs into
outputs" (ISO 9000).

— Process. "Sequence of activities that add value while producing a certain product or
service, based on certain inputs" (EFQM Model, European Foundation for Quality
Management).

— Support processes. They are those essential (by providing support) for the operational processes.

— Strategic processes. These are all activities carried out by managers to maintain
support and operational processes.

— Operational processes. These are those directly related to the performance of the
product and/or service.

— Process reengineering. Tool that completely changes the process, creating a new
one without respecting the existing one.

157
BIBLIOGRAPHY .
Amorrazarain, M. (1999). Management by processes. Editorial Mondragón Corporación
Corpo- rativa, Spain.

Beltrán Sanz J. et al (2009). Guide for a project-based management. IAT.

Hammer, M. and Champy, J. (1994). Reingeniería de la empresa. Parramón Ediciones, Barcelona.

Hoyle, D. and Thompson, J. (2002). From quality assurance to quality management: the
process-based approach. Madrid, AENOR.

ISO 9001:2015 (2015). Quality management systems. Fundamentals and vocabulary. Ver-
sion in Spanish. AENOR.

Kotler, T. and Keller, K. (2016). Marketing management: analysis, planning and control.
Pearson. 15th edition.

Morris, D. and Brandon, J. (1993). Reengineering. How to apply it successfully in business. Ed.
McGraw-Hill. Santafé de Bogotá.

Roure, J., Moñino, M. and Rodríguez, M. (1997). Management by processes. IESE Library.
Folio. Barcelona.

Trischler, W. E. (1998). Mejora del valor añadido en los procesos. Ediciones Gestión 2000
S.A., Barcelona.

159
TOPIC 7
Operational planning
 Operations management
Operational planning

OBJECTIVES
• Understand the importance of a good planning and control approach.

• Differentiate between short-, medium- and long-term planning.

• To understand the operation and logic of the main planning systems.

operational: MRP, JIT and TOC.

• To understand how to design a planning and control system that is appropriate to the reality of the
own company.

• Identify the planning system that best suits the needs of each company.

162
7.1. THE SYSTEM OF PLANNING AND CONTROL OF
OPERATIONS (SPCO)
Componentes IMAC was a company that since its inception had always been working
against stock, selling products from a catalog that had remained unchanged since its
inception. In 2022, in order to face fierce price competition from technological products
coming from the Asian market, the strategic management decided to work against orders,
significantly expanding the product catalog. However, the factory manager decided to keep
the same equipment and the same way of working as before. This situation led to failure, and
consequently to dismissal.

When the new manager analyzed the situation, he found that planning and control had been
flawed. On the one hand, workers were being paid too much overtime, due to peaks and
valleys in their workload that had not been contemplated or regulated. On the other hand,
there was an unsuccessful attempt to meet customer demand, with frequent failure to meet
order delivery deadlines.

Why was this happening? Orders came in very irregularly and the sales department,
pressured by the need to increase sales, accepted them as they arrived, without taking into
account the factory's capacity.

The problem was that, when the work system was changed, the operations planning and
control system should have been updated, which was not done. Producing to order forced
the factory into a flexibility for which it was not prepared; hence its failure.

DEFINITION
Systems for planning and control of operations (SPCO) are
those tools and methods that assist the company in managing
A-Z of the processes, allocating the necessary resources to them according to
the
operations, to meet customer needs.

By planning and controlling operations, the company seeks to satisfy the needs of its
customers using the resources at its disposal, i.e., it defines how to produce the products
or services demanded by its customers in a sustained manner over time. It must determine
labor requirements, production rates or inventories, among other aspects, in order to
maximize profits while minimizing risks, and always providing optimum customer service.

To do this, the company must know exactly what its customers demand, what resources it
has and what their costs are, as well as the time involved in each process. This can be
achieved by answering three fundamental questions:

163
 Operations management
Operational planning

DEMAND
What is it and how to SPCO
manage it?
How to design
An SPCO that
harmonizes demand
and resources, that is
flexible to market
RESOURCES needs and sustainable
over time?
What are they and how to
manage them efficiently?

Figure 1. The operations planning and control system.

PLANNING, PROGRAMMING AND CONTROL

The terms planning, programming and controlling are often confused and considered
synonyms when they are not. Let's see what each one consists of.

From the point of view of the activities that make up a process:

PLANNING is to define the activities that make up the processes,

by allocating the necessary resources to them.

PROGRAMMING is sequencing and timing the activities to be carried

out.
processes.

TO CONTROL is to verify the execution, in accordance with

objectives, of
activities that make up the resources.

Figure 2. Differences between planning, programming and control.

If the focus is on resources, it is possible to define these concepts as follows:

• Planning determines the resources that need to be acquired (if they are not available),
expanded (if they are insufficient), terminated (if they are no longer sufficient) or limited (if
they are too costly or difficult to obtain) throughout the process. In the case of IMAC
Components, the new manager will have to adapt the factory's capacity to the new

164
business model. Working to order significantly alters processes.

165
 Operations management
Operational planning

• Scheduling determines what, when, in what order and for how long each resource is
used in the process. For the IMAC Components factory, it is key to establish a new
schedule that adjusts to the flexibility demanded by working to order.

• Control determines which resources have been used efficiently throughout the process
and which have not. To adjust the production process to the needs of the market,
Componentes IMAC must thoroughly review the efficiency of resources.

7.2. PLANNING HORIZON: SHORT, MEDIUM AND LONG

TERM
DID YOU KNOW
THAT...? The planning horizon is the amount of time in the future over which the
organization decides to plan its objectives and make the decisions that
will lead to their achievement.

Four major time levels can be distinguished in which planning will take place:

PLANNING TYPE OF
CHARACTERISTICS EXAMPLES
HORIZON PLANNING
Long term Strategic Design long-term • Location of the
(at least 3-5 years) planning. resources and plants.
processes • Work against
term depending on stock or
the company's against order.
strategy
• Purchase
of
machinery.
Medium-long term Planning Design the necessary • Staffing, shifts
(12-18 month added. resources according to and overtime.
fortnights) the foreseen • Men- sual
medium/long-term production of a
demand. factory.
Medium term Operational Design resources or • Bi-weekly orders
(weeks to months) planning. inputs needed for to suppliers.
specific products or • Weekly
services. production for
each type of
product.
Short term Programming and Define specific tasks
control. and the order of their
(days to weeks).
execution, as well as
their supervision.

166
Table 1. Types of planning according to their time horizon.

167
 Operations management
Operational planning

HORIZON TYPE OF RESOURCES/ FLOWS DEMANDS

TEMPORAR PLANNING CAPABILITIES
Y
Types of Types of
Long term Target
Strategic resources processe custome
and s rs
location
Planning
Medium/ Added Forecasts
Planning added
long on-demand
deadline of resources

Master Demand
Medium Operation Planning of
production management
term s capabilities
plan

Sequencing Deliveries
Short term Programming (planned vs.
and control and
verificatio actual)
n

Figure 3. Characteristics of the types of planning.

7.3. OPERATIONAL PLANNING (MEDIUM TERM)

DEFINITION Operational planning (medium term) defines the resources or inputs
required for a specific product or service demand from customers.
A-Z
The master production schedule (PMP), master production schedule
(PMS) or master plan is a detailed plan that establishes which products
will be produced, in what quantity (how many) and in what periods of
time (when); that is, from the orders that have already been confirmed, it
decides which will be served from stock, which will be produced
immediately and which will be produced at a later date.

Operational planning is that which serves as a link between long-term planning (whose
objective is to define the resources required for the expected demand) and short-term planning
(whose objective is to define the scheduling and control of production), in which the master
production plan (MTP) is defined, i.e., the products or services to be produced and the
deadlines within which they will be carried out. This planning is the one that requires the
greatest effort on the part of the operations manager, and is also called production planning.

The time horizon of this planning is medium term (between one week and six months),
with a weekly or biweekly review period.

There are three main operational planning models:

• MRP (material requirements planning) systems.

• JIT (just in time) approaches.

• TOC (theory of constraints) approach.

168
7.4. MRP SYSTEM (MATERIAL REQUIREMENT
PLANNING)
WHAT IS AN MRP SYSTEM

MRP systems emerged in the 1970s in manufacturing industries. Organizations, which were
already using computers for financial calculations, began to use them for complicated
production planning tasks. IBM developed the first successful application for material
requirements planning (MRP).

Material requirements planning (MRP) consists of determining the "dependent" demand that
derives, in turn, from the "independent" demand of the customer; that is, if an organization
estimates the quantity of final products to be sold (customer demand), it will implicitly
(dependent on it) know, for example, how many components of the final product to
manufacture or how much raw material will be needed.

MRP systems have undergone different evolutions throughout their history, but
all of which have been at the center of production planning in many companies.

BASIC COMPONENTS OF AN MRP SYSTEM

Master production schedule Exception report

MRP system processing
Bill of materials Production plan
logic
Inventory status Procurement plan

Figure 4. Components of an MRP system.

The basic components of an MRP system are:

• Master production schedule (PMP) or master production schedule (PMS). It defines the
quantities of each of the final products, as well as when they need to be produced during
each time period within the production planning horizon.

• Bill of materials or bill of materials (BOM). It defines how each final product is
manufactured, detailing its components and integration sequence.

• Legal status of the inventory. Updated file of the legal status of the inventory of each
item.

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 Operations management
Operational planning

IMPORTANT • The processing logic of the MRP system establishes the

requirements plan from the master production schedule. It estimates,
for each period (usually weeks), how many components of each type
are needed, how many inventory units are available and how many
need to be produced, as well as the raw materials that need to be
procured.

• As a result of the MRP system's processing logic, you get the

production plan (detailing production order quantities and dates), the
procurement plan (detailing supplier order dates and sizes) and the
exception report (detailing which production orders are behind
schedule and may affect customer order delivery dates).

MRP PLANNING CALCULATION EXAMPLE1

Suppose a furniture manufacturing company wants to plan its table production line using an
MRP system. The starting data are:

• Expected demand for tables:

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6

20 30 60 30 50 40

Table 2. Table demand forecast.

• Bill of materials and MRP scheme:

Level 2Level 1

Board Board (cut and

(purchase) Lot: polished) Lot: 75 pcs.
1000 pcs. SS: 50 pcs.
SS: 100 pcs. LD: 2 weeks. Level 0

LD: 4 weeks. Table (assembly)

Lot: 75 pcs.
Level 1 SS: 10 pcs.
Board (compa) LD: 1 week.
Lot: 150 pcs.
SS: 50 pcs. MRP PLAN

LD: 2 weeks. Level 0

Figure 5. Bill of Materials and MRP schematic.

1 Lago, A. and Moscoso, P. (2016). Operations management for managers. McGraw-Hill.

170
• Initial stock (week 0): 70 tables, 200 legs, 75 table tops. The MRP system calculates,
for each manufacturing level and component, the quantities to be ordered and/or
produced in each week.

TABLES: level 0.
• Production lot: 75 pcs.
• Safety stock (SS) = 10 pcs.
• Delivery or manufacturing lead time (LD) = 1 week.
• Initial stock: 70 pcs.
S0 S1 S2 S3 S4 S5 S6
Gross table requirements 20 30 60 20 50 40
Confirmed deliveries
Gross ending stock (before planning
70 50 20 -40 5 30 -10
deliveries)
Net requirements 0 0 50 5 0 20
Planned delivery of tables 0 0 75 75 0 75
Actual closing stock (after planning deliveries) 70 50 20 35 80 30 65
Table production order 0 75 75 0 75 0

Table 3. Calculation of table production orders.

CHAIRS: level 1.
• Production lot: 75 pcs.
• Safety stock (SS) = 10 pcs.
• Delivery or manufacturing lead time (LD) = 1 week.
• Initial stock: 70 pcs.
S0 S1 S2 S3 S4 S5 S6
Table production order 0 75 75 0 75 0
Gross table requirements 0 300 300 0 300 0
Confirmed deliveries 150
Gross ending stock (before planning deliveries) 200 350 50 -250 50 -250 50
Net requirements 0 0 300 0 300 0
Planned delivery of legs 0 0 300 0 300 0
Actual ending stock (after planning deliveries) 200 350 50 50 50 50 50
Leg production order 300 0 300 0 0 0

Table 4. Calculation of purchase orders for legs.

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 Operations management
Operational planning

Level 2 Level 1 Level 0

MRP PLAN MRP PLAN
Level 2 Level 1

Board Board (cut

(purchas and polished)
Assembl MRP PLAN
e)
y table Level 0
Legs
(purchas
e)

MRP PLAN
Level 1

Where:

Planning

Planning communication flow

Actual orders
Inventory

Figure 6. Planning, MRP system. Push system.

ADVANTAGES AND DISADVANTAGES OF THE MRP SYSTEM

ADVANTAGES OF MRP SYSTEMS DISADVANTAGES OF MRP SYSTEMS

Inventories are reduced by knowing how many They are not very robust if there are changes
components will be needed to manufacture a in the state of the system, such as changes in
product and when they will be needed. demand. If this happens, the MRP planning will
have to be adjusted and may even become
unfeasible. Sometimes, to reduce this risk,
lead times are increased to include safety
buffers.

Reduce lead times (production and delivery)

by coordinating procurement, inventory and
production.

They increase efficiency, since the basis of

any MRP system is to have all the components
available at the required times.

Advantages and disadvantages of MRP.

172
 DID YOU KNOW The main concern with MRP systems is the uncertainty that is created
THAT...?
around the schedule defined for the products in the event of changes in
the state of the system, since the adjustments that must be made to the
schedule entail large costs. This is known as MRP system
nervousness.

WHEN IS THE MRP SYSTEM USEFUL?

MRP systems can be successfully applied in environments where the final product is
complex (with several assembly levels) and costly, where long processing times of raw
materials and/or components are needed, where lead time is long or where items have
dependent demands and batch manufacturing.

7.5. PRODUCTIVITY IMPROVEMENT: JUST IN TIME

(JIT), LEAN MANUFACTURING AND
KANBAN. THE TOYOTA MODEL
WHAT IS A JIT APPROACH

The concept of just-in-time (JIT) arose in 1954, when Taiichi Ohno, an executive of To- yota
Motor, was visiting a supermarket in the United States. This way of shopping, whereby
consumers selected the products they needed, in the quantity they required, from among all
the products offered by the supermarket, was not yet seen in supermarkets in Japan. With
his company in mind, Taiichi Ohno felt that this could greatly reduce assembly-related
problems, such as lack of or excess stocks, overproduction, over- or under-purchasing, etc.

IMPORTANT
The just-in-time approach aims to ensure that the customer's or
consumer's needs are met when required (just in time) and in the quantity
and quality required.

This gave rise to a just-in-time (JIT) approach to planning that is totally different from the
MRP system, whose main objective is to reduce work in process. This approach is usually
associated with other forms of continuous improvement, such as total quality or set-up time
reduction.

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 Operations management
Operational planning

IMPORTANT Work in progress (WIP), also called processable inventory, refers to

those partially finished products (raw materials, labor or overhead generated
by the products during the unfinished process), which are awaiting
completion.
Set-up time is the time needed to produce a different model on a piece of
equipment, changing the device required for it, maintaining the quality
required by the customer and without increasing costs for the company,
thus reducing the production time of the entire process.

THE LOGIC OF THE JIT APPROACH

The logic of the just-in-time approach is based on a fundamental principle: the production
of any item on a workstation is conditioned by the existing inventory level and by the needs of
the workstations that follow.

The JIT approach is based on an order plan similar to the PMP of MRP. In this case, the
order plan will be based on actual orders if the work is against order, or on forecast orders if
the work is against stock. The JIT approach requires homogeneous and consistent
workloads over time, for which the order plan must be leveled.

At each workstation, the production of in-process stocks (WIP reduction) is limited through
the use of physical or digital cards called kanban.

EXAMPLE2
OF JIT PLANNING CALCULATION

Let's imagine again the same furniture factory producing tables as in the previous example. A
just-in-time approach to planning would involve:

1. Level the order plan. Recall that the following demand was expected:

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6

20 30 60 30 50 40

Table 6. Table demand forecast.

Adding all the quantities we obtain a total of 230 units of tables required in 6 weeks.
Considering 5 working days per week, in shifts of 8 hours/day, we would have the
following production per hour (takt time):

Takt time: (230 tables/6 weeks) * (1 week/5 days) * (1 day/8 h) ≈ 1 table/h.

2. Communication to higher levels. This production will be communicated to higher levels

to be taken into account in the response time. If the time lead is, for example, 6 hours, the
order plan should be passed on to them 12 hours in advance. In this case, the order and
production dates will not be fixed (as was done in the MRP system).

2 Lago, A. and Moscoso, P. (2016). Operations management for managers. McGraw-Hill.

174
 3. Pull production with Kanban. The stock level required between the cutting-
assembly phases and between the wood purchase-cutting phases must be defined and
set according to the times required between stations and the variability of production. It
will only occur if the downstream station sends a signal via a kanban card.

The planning in the JIT approach would be as follows:

Level 2
Level 1

Level 0

Board Board (cut

(purchas and polished)
e) Assembl JIT PLAN
y table
Legs
(purchas
e)

Where:

Planning
Planning communication flow
Actual orders
Inventory

Figure 7. JIT planning approach. Pull system.

LINES OF ACTION OF THE JIT APPROACH

The just-in-time approach to planning is implemented through three lines of action:

1. Production flexibility.

DID YOU KNOW Companies usually have production management tools in which
THAT...? production is carried out on the basis of forecasted demand within a
given time frame. These systems plan the raw materials required, the
production capacity to be developed or the batches to be manufactured
to meet that demand. They are very rigid systems, not very flexible to
changes in demand or to problems in the production process. They are
known as push systems, in which production lots "push" production.
MRP systems are push systems.
But there are also pull systems, such as the JIT approach to planning.
In these systems, a process produces only if the following process
indicates that it needs parts. The production flow goes in the opposite
direction to the traditional one: it is the needs of the final assembly that
"pulls" the materials to be produced. They are much more flexible
systems.

175
 Operations management
Operational planning

As we saw earlier, JIT systems are governed by a fundamental principle: the

production of any item at a workstation is conditioned by the existing inventory level and
by the needs of the following workstations. A workstation does not produce its items if
the next workstation does not inform it (via kanban cards) that it needs them, which
means greater flexibility in production, which will be able to react better to changes in
demand or process problems.

2. Quality improvement. JIT systems aim at total quality: it is the operators themselves
who remove defective parts from the chain and propose solutions to the production
processes. This, in addition to improving the quality of the system, is an extra motivation
for the worker.

Likewise, these systems seek to reduce set-up times, thereby reducing the production
time of the entire process.

3. Cost minimization. Cost minimization, which in most cases can be a competitive

advantage for the company, is another line of action of JIT management systems. This
technique focuses on stock reduction, since it is not necessary to secure employees or
space to handle this fact. It promotes the significant reduction of both the final cost of
products (machinery and labor costs are lower) and production time.

KANBAN: THE TACTICAL TOOL OF THE JIT APPROACH

IMPORTANT • Kanban is a management tool based on pull systems and developed

by Toyota in which, through physical or digital cards, a process
communicates to the previous process when and how many parts it
needs, which only in this case will be manufactured, thus achieving a
reduction in stocks between processes.

• Thanks to this stock reduction, kanban reduces "waste": only what is

needed is produced when it is needed.

No process will send defective products to the next process, which will be withdrawn from
circulation. The ideal for these management systems is to level production, so that it is as
stable as possible.

Kanban uses three card models to communicate:

• Transport cards. With these, a workstation communicates to the prediction station the
amount of material it needs at the time it is needed.

• Manufacturing cards. These are used to communicate production orders within the
same production station.

• Supplier cards. These are used to communicate between the raw material receiving
plant and the external plant that uses it for manufacturing.

176
 ADVANTAGES AND DISADVANTAGES OF THE JIT SYSTEM

DISADVANTAGES OF THE
ADVANTAGES OF JIT SYSTEMS
JIT SYSTEMS

Reduce work-in-process (WIP) and Demands and workloads must be stable and
stocks between processes. level.

They seek the total quality of the system. They require high quality levels: a defect
means a delay in production.

Reduce set-up times. They require specialized workers.

Advantages and disadvantages of JIT.

WHEN IS THE JIT APPROACH USEFUL?

Just-in-time systems can be successfully applied in repetitive manufacturing environments,

with preferably stable demands and a limited product range, or where processes are flexible.
Similarly, a suitable distribution of machines is needed, being advisable to place them in a U-
shape.

TOYOTA TPS (TOYOTA PRODUCTION SYSTEM) MODEL

In the 1980s, the whole world was paying attention to Japanese efficiency and effectiveness.
Why did their cars last longer and need fewer repairs than American cars? A decade later, in
the 1990s, the difference was even greater for cars made by Toyota. Why was that? It wasn't
the design or performance of their cars that amazed: it was the way they were made that
made their processes and production incredibly consistent.

Why was it producing more reliable cars faster and at a more competitive cost? It even paid
higher wages to its workers. What was the success of its model?

The Toyota TPS model is more than a set of tools (such as just in time, kaizen, piece-by-
piece flow, jidoka or heijunka): it is a whole philosophy to be implemented in the company, a
culture characterized by the long term, maximum product quality, a level workload and ethical
responsibility of the work team. This is why not all companies, even by copying its tools, have
achieved Toyota's success.

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 Operations management
Operational planning

THE TPS HOUSE

The Toyota model can be represented by a house:

Quality
Cost
Deadline
Safety

Team
Just in time

Continuous

Jidoka
improvement
Waste reduction

Leveled workload Stable

processes Lean
philosophy

Figure 8. The TPS house.

• The foundations: a house must always start with the foundations. In them are the
lean philosophy, stable processes and level workload.

• The pillars: these include the most well-known lean tools, such as:

– The JIT approach: pull system that produces the right parts in the required quantity
and at the required time.

– Jidoka: consisting of not letting any defective part pass from one workstation to the
next.

• The heart: the people, the self-managed team, who will always seek continuous
improvement by reducing waste.

• The roof: it is composed of the results obtained, which will be the required quality, the
expected costs, the delivery times met and the safety.

ELIMINATION OF WASTE: THE 7 MUDAS

Traditional methods focus on finding, in order to enhance and improve them, the activities
that add value to the system or to the customer. The lean system, however, seeks to reduce
or eliminate precisely the opposite: the activities that do not add value.

Taiichi Ohno, an executive at Toyota Motor, identified 7 activities that do not add value (also
called waste, squandering, waste or moulting): overproduction, waiting, transportation,
overprocessing, excess inventory, unnecessary movements and defects.

178
THE KEYS TO THE SUCCESS OF THE TOYOTA MODEL

The success of the Toyota model is based on 14 principles, organized into 4 pillars, which we will represent
in the form of a pyramid: the 4P pyramid.

Problem solving

People and
partners
(people and
partners)

Process
(process)

Philosophy
(philosophy)

Figure 9. The 4P pyramid of the Toyota model.

The 14 principles3 on which the Toyota model is based are:

"Principle 1. Base your management decisions on a long-term

Philosophy
Foundatio philosophy, at the expense of what happens with short-term financial
(philosophy)
ns objectives."
"Create continuous flow processes to bring problems to the surface".

"Principle 3. Use pull systems to avoid overproduction".

"Principle 4. Level the workload (heijunka)".
"Create a culture of stopping to solve problems in order to achieve
Process good quality the first time".
Pillars
(process)
Principle 6. Standardized tasks are the foundation of the me-"
Principle 7.
continuous improvement and employee autonomy".
"Principle 7. Use visual control so as not to obscure the
problems.
"Use only reliable and absolutely proven technology that serves your
people and your processes".

3 Liker, J. K. (2010). Toyota's keys to success: 14 management principles of the world's largest manufacturer.

179
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Operational planning
Gestión 2000. Grupo Planeta.

180
 "Principle 9. Grow leaders who fully understand
work, live the philosophy and teach it to others".
People and
"Principle 10. Develop exceptional individuals and teams that will
Heart partners
the philosophy of your company".
"Respect your extended network of partners and suppliers,
by challenging them and helping them to improve".
"Go see it for yourself to thoroughly understand the situation (genchi
genbutsu)".
Problem
"Make decisions by consensus slowly, conscientiously considering
solving
Roof all options; implement them quickly (nemawashi)".

Become a better learning organization" Principle 14.

through constant reflection (hansei) and continuous improvement
(kaizen)".

Table 8. 14 management principles of the Toyota model4 .

7.6. TOC: THEORY OF CONSTRAINTS

WHAT IS A TOC APPROACH

Eliyahu M. Goldratt lays the foundations of the Theory of Constraints (TOC) in his book The
Goal: A Process of Continuous Improvement (1984)5 . It emerged as an alternative to the
MRP system (not very stable) and the JIT system (too inflexible). Goldratt proposes systems
that are more stable and easier to implement, although perhaps not as optimal. In his
opinion, companies need robust systems that can cope with the variability and instability of
today's markets.

This TOC approach designs operations systems from the point of view of capacity,
production planning and control. We will now focus on describing the Theory of Constraints
approach to production planning and control.

DID YOU KNOW

THAT...?
The theory of constraints (TOC) for production planning and control is
also known as APS (advanced production system), DBR (drum-buffer-
rope) system or synchronous manufacturing system.

4 Liker, J. K. (2010). Toyota's keys to success: 14 management principles of the world's largest manufacturer.
Gestión 2000. Grupo Planeta.
5 Goldratt, E. (1984). La meta: un proceso de mejora continua. Díaz de Santos. 3rd edition.

181
 Operations management
Operational planning

IMPORTANT The theory of constraints is governed by two principles:

• All operating systems have a bottleneck (bot- tleneck; lowest

individual maximum production rate of a process), which determines
the capacity of that system.

• All operating systems suffer from variability, which may be due to the
The "absorption" of the cushions provided for.

THE LOGIC OF THE DBR APPROACH

The DBR approach, which is a pull system, has the following elements:

The master production plan is defined for the bottleneck, so that

D Drum its production rate is maximized and it is the bottleneck that sets
the work rate.

Time buffers are added to the mean flow times defined by the
Buffer
B strings, which will serve to assume fluctuations or variations that
(mattress)
the system may experience.

Upstream and downstream checkpoints are established, the

junction of which symbolizes a guitar string. Upstream control
points are used to ensure that items arrive on schedule at the
R Rope bottleneck. Similarly, downstream control points are used to
ensure that the planned lead times to satisfy the customer are met.
The average flow times between the control points and the
bottleneck define the strings.

Table 9. Main elements of a TOC approach to planning.

EXAMPLE6
OF JIT PLANNING CALCULATION

Let's go back to the example of the table. TOC planning would take place as follows:

1. Select the drum. Let's assume that the bottleneck is in the assembly labor. We would
calculate the production volumes with the master production plan. If we wanted to
maximize capacity, we would level the order plan as seen above.

2. Select the ropes. We will take as control points the entrances of material. We establish
1 week cushions. In this case, the ordering time for the wood orders will be 6 weeks (4
weeks of wood procurement time + 1 week of cutting and polishing + 1 week of mattress)
and the ordering time for the legs will be 3 weeks (2 weeks of leg procurement time + 1
week of mattress).

6 Lago, A. and Moscoso, P. (2016). Operations management for managers. McGraw-Hill.

182
3. Launching of orders. Orders will be launched according to plan at the drum
(bottleneck), reviewed from time to time.
Level 2 Level 1 Level 0

DRUM PLAN

ROPE:
5 weeks + mattress

Board Board (cut

(purchas and polished) c Assembl DRUM PLAN
e) y table
Legs c
(purchase)

DRUM PLAN
ROPE:
2 weeks + mattress

Where:

Planning.

Planning communication flow.

Actual orders.

c Time buffer (e.g., 1 week).

Figure 10. DBR planning approach.

ADVANTAGES AND DISADVANTAGES OF THE TOC APPROACH

DISADVANTAGES OF
ADVANTAGES OF TOC SYSTEMS
TOC SYSTEMS
They are stable and easy to operate. They Although information is passed upstream
are also robust in the face of lathe well in advance, this does not preclude the
variability, different products and complex need to freeze order planning well in
processes. advance.
They do not require replanning.
BOM control is limited to key points.

System fluctuations are absorbed by the

mattresses.

Advantages and disadvantages of OCD.

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Operational planning

7.7. COMPARISON OF THE THREE MODELS OF

OPERATIONAL PLANNING
In order to determine the best planning system for each specific case, a comparative table of
the different approaches is given below: material requirements planning, just-in-time system
and theory of constraints.

MRP JIT TOC

CHARACTERISTICS CHARACTERISTICS CHARACTERISTICS

Push launching of Pull launching of pedi- Pull launching of orders
orders (according to dos (depending on the (depending on the
planning). level of downstream bottleneck).
stocks).
CONTROL OF CONTROL OF
VARIABILITY CONTROL OF VARIABILITY
Safety stocks. VARIABILITY
Safety times (mattresses).
Security capacity.
WHEN TO APPLY IT
WHEN TO APPLY IT WHEN TO APPLY IT In environments with
Environments where the In repetitive a wide variety of
final product is complex manufacturing products/customers
and costly, where long environments, with and unstable
processing times are preferably stable processes.
required, where lead demands and a limited
times are long or where product range.
items have dependent
demands and batch
manufacturing.

Figure 11. Comparison of operational planning models.

184
185
KEY IDEAS
• Operational planning is that which serves as a link between long-term planning (whose
objective is to define the resources required for the expected demand) and short-term
planning (whose objective is to define the scheduling and control of production), in which
the master production plan (MTP) is defined. The time horizon of this planning is
medium-term (between one week and six months), with a weekly or fortnightly review
period.

• There are three main operational planning models:

– MRP (material requirements planning) systems.

– JIT (just in time) approaches.

– TOC (theory of constraints) approach.

• From the master production schedule, the processing logic of the MRP system
establishes the requirements plan. It estimates, for each period (usually weeks), how
many components of each type are needed, how many units are available from inventory
and how many need to be produced, as well as the raw materials that need to be
purchased.

• The just-in-time approach aims to ensure that the customer's or consumer's needs are
met when required (just in time) and in the quantity and quality required.

• The logic of the just-in-time approach is based on a fundamental principle: the

production of any item on a workstation is conditioned by the existing inventory level and
by the needs of the workstations that follow.

• The Toyota TPS model is more than a set of tools (such as just in time, kaizen, piece-
by-piece flow, jidoka or heijunka): it is a whole philosophy to implement in the company,
a culture characterized by the long term, the highest product quality, a level workload and
an ethical responsibility of the work team.

• The theory of constraints is governed by two principles:

– All operating systems have a bottleneck (bottleneck; lowest individual maximum

production rate of a processor) that determines their capacity.

– All operating systems suffer from variability, which can be "absorbed".

for mattresses provided.

183
 GLOSSARY
— Controlling. Verify the execution, in accordance with objectives, of the activities that are to be carried out.
resources.

— Planning horizon. The amount of time into the future with which the organization will
decides to plan its objectives and make the decisions that will lead to their achievement.

— Master production schedule (MPS) or master plan. A detailed plan that establishes
which products will be produced, in what quantity (how many) and in what time periods
(when); i.e., from the orders that have already been confirmed, it decides which ones
will be served from stock, which ones will be produced in the near future and which
ones will be produced at a later date.

— Operational planning (medium term). Defines the resources or inputs required for a
specific product or service demand from customers.

— Planning. Define the activities that make up the processes, assigning them the
necessary resources.

— Scheduling. Sequencing and timing the activities that make up the processes.

— Operations planning and control systems (SPCO). These are the tools and
methods that assist the company in the management of processes, allocating the
necessary resources according to the operations, to meet the needs of customers.

— Set-up time. Time needed to produce a different model on a piece of equipment,

changing the device required for it, maintaining the quality required by the customer
and without increasing costs for the company, thus reducing the production time of the
entire process.

— Work in progress (WIP). Also called processable inventory, it refers to those partially
finished products (raw materials, labor or overheads originated by the products during
the unfinished process) that are awaiting completion.

185
BIBLIOGRAPHY .
Chase, R. B., Jacobs, F. R., & Aquilano, N. J. (2009). Operations management. McGraw-Hill,
12th edition.

Goldratt, E. M. (2010). The goal: a process of continuous improvement. Ediciones Díaz de Santos.

Heizer, R. and Render, B. (2001). Production management. Tactical decisions. Prentice Hall,
6th edition.

Lago, A. and Moscoso, P. (2016). Operations management for managers. McGraw-Hill.

187
TOPIC 8
The human factor in operations
management
 Operations management
The Human Factor in Operations Management

OBJECTIVES
• To understand the decisive power of the human factor in operations management.

• Differentiate between knowledge, skills and attitudes that candidates for the company's
employees must have.

• To perceive the essential nature of continuous training of workers for their personal and
professional development.

• To understand the relevance of remuneration, incentives and professional development

in employee motivation.

• Understand the importance for operations management of task design based on worker
motivation.

190
8.1. HUMAN RESOURCES AS A
DIFFERENTIATING FACTOR
Today, there is a general consensus that the people who make up the operations system
play a fundamental role in achieving the business objectives of productivity and
competitiveness.

To ensure that the performance of the people working in the organization is optimal, we must
take into account the following:

1. The productivity of workers depends on the degree of motivation they have to carry out
their tasks.

2. Employees may make systematic biases and errors in their decision making, which
should be minimized, prevented or corrected.

3. They have the capacity to learn and develop over time.

8.2. COMPETENCY-BASED SELECTION: KNOWLEDGE,

SKILLS AND ATTITUDES
What should an operations manager look for when selecting his or her team?

The flexibility required by today's operations makes it necessary to select by competencies

based on analyzing the employee's skills that will add value in the performance of his or her
job. Both technical skills (hard skills) and personal skills (soft skills) must be taken into
account.

Competency selection focuses more on the how than on the what. The operations manager
should care more about how a worker has previously dealt with a problem than the mere fact
that he or she has had to deal with the problem. This type of selection process makes it
possible to choose the best candidate for a given position, to detect talents or multiple skills
that allow more than one job to be performed.

Hard skills are generally easy to detect and are usually reflected in candidates' resumes.
However, soft skills require direct iteration with the candidate.

Finding candidates with excellent hard and soft skills can be very difficult; therefore, the
operations manager must assess the weight given to each of them. For example, a
commercial agent of a company will need, in addition to knowledge of the product and the
technology used, other personal skills such as results orientation, empathy or service
vocation.

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The Human Factor in Operations Management

8.3. CONTINUOUS TRAINING OF EMPLOYEES

Closely related to the hard and soft skills that the selected workers have, will be their
subsequent continuous training that will allow their p r o f e s s i o n a l and personal
development.

Hard skills can be expanded through traditional training (classes or lectures) and combined
with on-the-job training (off-the-job training). For soft skills, however, although theoretical
training may also be necessary, practical on-the-job learning (on-the-job training) will be key.
To make this possible, the company must have mentors to train its employees.

8.4. COMPENSATION, INCENTIVES AND

PROFESSIONAL DEVELOPMENT
The operations manager should take special care in the policy he/she follows to define the
compensation, incentives and professional development of his/her employees, as these can
be causes of conflict.

In this sense, you have two options: define incentives based on evaluations of individual
objectives and their fit with the company's mission, or define hard indicators and external
objectives. In the latter case, his control task is undoubtedly simplified. But in the first case,
even if you have to mentor your employees and help them to see how they fit into the
company's mission, their motivation will increase, and with it their productivity.

Keep in mind that if self-managed, goal-oriented work units are adopted, the organization
becomes more horizontal and promotion and career development are more difficult. The
operations manager should then look for other ways to incentivize his team that are not
based exclusively on professional hierarchical development, such as increasing
responsibilities within a functional area, or transferring from one professional area to another.

8.5. THE IMPORTANCE OF WORKER-BASED TASK

DESIGN
EMPLOYEE MOTIVATION

There is no doubt that a worker will be more productive if he/she is motivated to perform the
tasks entrusted to him/her and feels that work is a form of personal growth and fulfillment.

There are two main currents of theories on the motivation of people at work:

• Content theories: the most significant are the theories of individuals' needs. For them,
motivation comes from the satisfaction of individuals' needs. We can highlight here
Maslow's pyramid of needs:

192
 SELF-REALIZATION

ACKNOWLEDGMENT

SOCIALS

SECURITY

PHYSIOLOGICAL

Figure 1. Maslow's pyramid of needs.

This pyramid establishes five levels of individual needs:

1. Physiological needs: are those basic needs, such as breathing or food, inherent to
human beings.

2. Security needs: related to the need for order and security in life, for example,
health or housing.

3. Social needs: need to belong to a group.

4. Recognition needs: needs for esteem and recognition, such as

trust or reputation.

5. Self-realization needs: it is only possible to achieve it if all other needs have been
satisfied. It implies the feeling of personal success.

• Cognitive process theories: among the most significant is Adams' Equity Theory. For
this theory, the evaluation of satisfaction is made by the individual himself, who desires a
reward for his work effort commensurate with that received by his peers.

In all these theories there are three types of motivation in individuals:

Intrinsic motivation Based on performing the activity itself.

Extrinsic motivation Based on expected rewards.

Transcendent or Based on the effect it has on third parties. It can be

contributory motivation positive (helping a colleague) or negative (revenge).

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 Operations management
The Human Factor in Operations Management

SYSTEMATIC BIASES AND ERRORS OF THE EMPLOYEES

Optimal results are not always achieved in the performance of workers' tasks. This may be
due, among other reasons, to workers' cognitive biases or systematic errors they may make.
From the operations point of view, we must prevent, minimize or correct these biases.

According to Kahneman1 there are two cognitive systems with which individuals operate:

• System I: based on intuitions and sensations. It is always active.

• System II: rational system. It is only activated when an in-depth conscious analysis is
required.

STANDARDIZATION VS. EMPOWERMENT

In task design, managers can move between two extreme models: standardization and
empowerment.

STANDARDIZATION
The worker has no
decision-making or
maneuvering capacity.
Tasks are fixed a priori.

The results obtained

are important, but the
employee
is free to decide how,
where or when it does its
work to achieve them. EMPOWERMENT

When is it advisable to use each of these models?

• Standardization is used in standard processes of low complexity, expensive (where

quality failure is very costly) and where technology is the key, with incentive systems
based on effort.

• Empowerment, on the other hand, is used in highly customized processes, in some

cases inexpensive and in which people are the key, with incentive systems based on
results.

The more complex the task, the less applicable is standardization, which, although applicable
to processes in general, also allows a high degree of innovation and requires a high degree
of worker independence in execution to achieve the required results. See in cases of process
redesign, for example.

1KAHNEMAN , D. (2011). Thinking, Fast and Slow. Peguin Books.

194
KEY IDEAS
• The people who make up the operations system play a fundamental role in achieving the
business objectives of productivity and competitiveness. We must bear in mind that:

– The productivity of workers depends on the degree of motivation they have for the
performance of their tasks.

– Employees may make systematic biases and errors in their decision making, which
should be minimized, prevented or corrected.

– Workers have the capacity to learn and develop.

• In employee-based task design, managers can move between two extreme models:
standardization and empowerment.

• The flexibility required by today's operations makes it necessary to select by

competencies, based on analyzing the employee's competencies that will add value in
the performance of his or her job. This selection takes into account both technical skills
(hard skills) and personal skills (soft skills).

• Hard skills can be expanded through traditional training (classes or lectures) and
combined with on-the-job performance (off-the-job training). For soft skills, however,
while theoretical training may also be necessary, practical on-the-job learning (on-the-job
training) will be key. To make this possible, the company will need to have mentors to
train its employees.

• The operations manager must be particularly careful in the policy he follows for defining
the compensation, incentives and professional development of his employees, as
these can be causes of conflict. In this regard, he has two options: to define incentives
based on evaluations of individual objectives and their fit with the company's mission, or
to define hard indicators and external objectives.

195
GLOSSARY
— Professional competencies. Set of knowledge, skills and attitudes required in a
worker to perform a job or develop a professional activity.

— Empowerment. Worker-based task design in which the results obtained are important
but the worker is free to decide how, where or how much work is done to achieve
them.

— Standardization. Worker-based design of tasks in which the worker

has no decision-making or maneuvering capacity. Tasks are fixed a priori.

197
BIBLIOGRAPHY .
Hackman, J. R. and Oldham, G. R. (1980). Work redesign. Addison-Wesley.

Hayes, R., Wheelwright, S. and Clark, K. (1988). Dynamic manufacturing: Creating the
learning organization. New York, Free Press, p. 242.

Kahneman, D. (2011). Thinking, Fast and Slow. Peguin Books.

Lago, A. and Moscoso, P. (2016). Operations management for managers. McGraw-Hill Education.

Schein, E. H. (1985). Organizational culture and leadership. San Francisco, Jossey-Bass.

199