Operations Management Instructional Materials PDF

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Academic Affairs College of Business Administration INSTRUCTIONAL MATERIALS FOR BUMA 011: OPERATIONS MANAGEMENT...

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Office of the Vice President for Academic Affairs College of Business Administration INSTRUCTIONAL MATERIALS FOR BUMA 011: OPERATIONS MANAGEMENT COMPILED BY: Asst. Prof. Bonifacio P. Echauz PUP A. Mabini Campus, Anonas Street, Sta. Mesa, Manila 1016 Direct Line: 335-1730 | Trunk Line: 335-1787 or 335-1777 local 000 Website: www.pup.edu.ph | Email: [email protected] THE COUNTRY’S 1st POLYTECHNIC Introduction Global competition has caused fundamental changes in the competitive environment of manufacturing industries. Firms must develop strategic objectives which, upon achievement, result in a competitive advantage in the market place. However, for almost all manufacturing industries, an increased productivity and better overall efficiency of the production line are the most important goals. Most industries would like to find the formula for the ultimate productivity improvement strategy. Industries often suffer from the lack of a systematic and consistent methodology. In particular the manufacturing world has faced many changes throughout the years and as a result, the manufacturing industry is constantly evolving in order to stay ahead of competition. Innovation is a necessary process for the continuous changes in order to contribute to the economic growth in the manufacturing industry, especially to compete in the global market. In addition to innovation as a mode for continued growth and change, there are many other vehicles for growth in the manufacturing industry. While operations management has been recognized as an important factor in a country’s economic growth. The traditional view of manufacturing management is the concept of Production Management with the focus on economic efficiency in manufacturing. Later the new name Operations Management was identified, as service sector became more prominent. Rapid changes in technology have posed numerous opportunities and challenges, which have resulted in enhancement of manufacturing capabilities through new materials, facilities, techniques and procedures. Hence, managing a service system has become a major challenge in the global competitive environment. Operations Management has been a key element in the improvement and productivity in business around the world. Operations Management leads the way for the organizations to achieve its goals with minimum effort. Hence, the study of the subject at undergraduate and postgraduate level has more significance. Page 2 of 156  TABLE OF CONTENTS INTRODUCTION...........................................................................................................................2 COURSE OUTCOMES.................................................................................................................7 LESSON 1 – OPERATIONS AND PRODUCTIVITY...................................................................8 Introduction to Operations Management......................................................................................8 Historical Development.................................................................................................................9 Goods-Service Continuum........................................................................................................ 11 Manufacturing Vs. Service..........................................................................................................11 Supply Chain............................................................................................................................. 12 Concept of Production............................................................................................................... 13 Production System.....................................................................................................................13 Role of the Operations Manager............................................................................................... 16 Systems Approach.................................................................................................................... 19 Ethical Issues in Operations...................................................................................................... 19 LESSON 2 – THE GLOBAL ENVIRONMENT AND OPERATIONS STRATEGY................... 20 Competitiveness........................................................................................................................ 20 Marketing’s Influence......................................................................................................................... 20 Businesses Compete Using Operations.................................................................................... 20 Why Some Organizations Fail................................................................................................... 20 Hierarchical Planning................................................................................................................. 21 Strategy Formulation................................................................................................................. 22 Environmental Scanning.............................................................................................................22 Strategic OM Decision Areas.................................................................................................... 23 The Balanced Scorecard Approach.......................................................................................... 24 Why Productivity Matters........................................................................................................... 25 LESSON 3 – MANAGING PROJECTS..................................................................................... 27 The Nature of Projects............................................................................................................... 27 Project Management Decisions..................................................................................................27 Work Breakdown Structure (WBS)............................................................................................ 28 Program Evaluation And Review Technique (PERT) And Critical Path Method (CPM)........... 29 LESSON 4 – FORECASTING DEMAND.................................................................................. 31 Forecasting................................................................................................................................ 31 Elements of a Good Forecast.................................................................................................... 31 Steps in the Forecasting Process.............................................................................................. 32 Forecasting Approaches............................................................................................................ 32 LESSON 5 - PRODUCT DESIGN............................................................................................. 40 Reasons Design or Re-Design.................................................................................................. 40 Legal Considerations................................................................................................................. 41 Life Cycle Assessment (LCA).....................................................................................................42 Product or Service Life Stages.................................................................................................. 43 Designing for Mass Customization.............................................................................................44 Component Commonality.......................................................................................................... 48 Reliability.................................................................................................................................... 50 LESSON 6 – QUALITY MANAGEMENT.................................................................................. 51 Quality Management...................................................................................................................51 Dimensions of Product Quality.................................................................................................. 52 Assessing Service Quality......................................................................................................... 52 Determinants of Quality............................................................................................................. 53 Responsibility for Quality........................................................................................................... 53 Costs of Quality......................................................................................................................... 53 Ethics and Quality...................................................................................................................... 54 Baldrige Criteria..........................................................................................................................54 Quality Certification.................................................................................................................... 55 Total Quality Management........................................................................................................ 55 LESSON 7 - PROCESS DESIGN.............................................................................................. 66 Process Selection.......................................................................................................................66 Process Strategy........................................................................................................................67 Technology for Competitive Advantage.................................................................................... 67 Product and Service Profiling.................................................................................................... 69 LESSON 8 – LOCATION DECISIONS...................................................................................... 71 The Need For Location Decisions............................................................................................. 71 Location Decisions: Objectives.................................................................................................. 71 Location Decision: General Procedure...................................................................................... 72 Global Location: Facilitating Factors......................................................................................... 72 Managing Global Operations..................................................................................................... 73 Geographic Information System (GIS)...................................................................................... 75 Service and Retail Locations..................................................................................................... 76 Factor Rating............................................................................................................................. 77 LESSON 9 – LAYOUT DECISIONS.......................................................................................... 79 Facilities Layout......................................................................................................................... 79 Repetitive Processing................................................................................................................ 80 Service Layout........................................................................................................................... 83 Designing Process Layouts....................................................................................................... 85 LESSON 10 – JOB DESIGN AND WORK MEASUREMENT.................................................. 86 Quality of Work Life....................................................................................................................86 Job Design................................................................................................................................. 88 Ergonomics................................................................................................................................ 90 Methods Analysis...................................................................................................................... 90 Developing Work Methods........................................................................................................ 93 Work Sampling.......................................................................................................................... 94 LESSON 11 – SUPPLY CHAIN MANAGEMENT..................................................................... 96 Supply Chain............................................................................................................................. 96 Supply Chain Management....................................................................................................... 97 Flow Management..................................................................................................................... 98 Global Supply Chains................................................................................................................ 98 Procurement.............................................................................................................................. 98 Supplier Management..............................................................................................................101 Inventory Management.............................................................................................................102 Logistics....................................................................................................................................103 LESSON 12 – MANAGING INVENTORY................................................................................108 Inventory...................................................................................................................................108 Inventory Counting Systems.....................................................................................................109 Abc Classification System........................................................................................................110 Cycle Counting.........................................................................................................................110 When to Reorder......................................................................................................................114 Fixed-Quantity Vs. Fixed-Interval Ordering..............................................................................117 LESSON 13 – AGGREGATE PLANNING...............................................................................119 Sales and Operations Planning................................................................................................119 Techniques for Aggregate Planning.........................................................................................123 Aggregate Planning in Services...............................................................................................124 Disaggregating the Aggregate Plan.........................................................................................125 LESSON 14 – MATERIAL REQUIREMENTS PLANNING (MRP) AND ENTERPRISE RESOURCE PLANNING (ERP).............................................................................................. 129 Dependent Demand................................................................................................................ 129 Overview of MRP..................................................................................................................... 130 MRP Lot Sizing Rules.............................................................................................................. 134 Using the MRP......................................................................................................................... 134 Capacity Requirements Planning............................................................................................ 137 Enterprise Resource Planning................................................................................................. 138 LESSON 15 – SCHEDULING................................................................................................. 140 Scheduling............................................................................................................................... 140 High Volume Systems............................................................................................................. 141 Loading Approaches................................................................................................................ 143 LESSON 16 – LEAN OPERATIONS....................................................................................... 144 Lean Operations: The Beginning............................................................................................. 144 Lean: Ultimate Goal................................................................................................................. 145 Lean: Supporting Goals........................................................................................................... 145 Lean: Building Blocks.............................................................................................................. 146 Value Stream Mapping............................................................................................................ 152 Transitioning to Lean Systems................................................................................................ 152 Lean Services.......................................................................................................................... 153 REFERENCES......................................................................................................................... 156  Course Outcomes Understand the application of managerial functions to effective and efficient operations management Understand the operative functions involve in operations management Analyze operational problems and apply appropriate techniques to address them Evaluate effective and efficient operational strategy applicable to different business situations Create an effective and efficient operational strategy to different business situations Page 7 of 156 LESSON 1 – OPERATIONS AND PRODUCTIVITY  OVERVIEW Effective operations management helps with employee engagement and defines the roles and responsibilities within an organization. No matter what challenges that an organization faces, a strategic operations management plan in place will ensure that employees’ workflow and company production remain unaffected.  LEARNING OUTCOMES After this lesson, students will be able to: ✓ Appreciate and learn the concept of operations management and the functions associated with it. ✓ Describe the operations management for goods and services. ✓ Determine the challenges in achieving sustainable production while ensuring the company’s ethical and social responsibilities.  COURSE MATERIALS Introduction to Operations Management What is operations? The part of a business organization that is responsible for producing goods or services How can we define operations management? The management of systems or processes that create goods and/or provide services. Scope of Operations Management The scope of operations management ranges across the organization. The operations function includes many interrelated activities such as: Forecasting Capacity planning Scheduling Managing inventories Assuring quality Motivating employees Deciding where to locate facilities And more Basic Functions of the Business Organization Organization Marketing Operations Finance Page 8 of 156 Marketing refers to activities a company undertakes to promote the buying or selling of a product or service. Marketing includes advertising, selling, and delivering products to consumers or other businesses. Some marketing is done by affiliates on behalf of a company. (Source: Investopedia.com) Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. (Source: Managementstudyguide.com) Historical Development Industrial Revolution Pre-Industrial Revolution Craft production - System in which highly skilled workers use simple, flexible tools to produce small quantities of customized goods Some key elements of the industrial revolution Began in England in the 1770s Division of labor - Adam Smith, 1776 Application of the “rotative” steam engine, 1780s Cotton Gin and Interchangeable parts - Eli Whitney, 1792 Management theory and practice did not advance appreciably during this period Scientific Management Movement was led by efficiency engineer, Frederick Winslow Taylor Believed in a “science of management” based on observation, measurement, analysis and improvement of work methods, and economic incentives Management is responsible for planning, carefully selecting and training workers, finding the best way to perform each job, achieving cooperate between management and workers, and separating management activities from work activities. Emphasis was on maximizing output Scientific Management – contributors Frank Gilbreth - father of motion studies Henry Gantt - developed the Gantt chart scheduling system and recognized the value of non-monetary rewards for motivating employees Harrington Emerson - applied Taylor’s ideas to organization structure Henry Ford - employed scientific management techniques to his factories - Moving assembly line - Mass production Human Relations Movement The human relations movement emphasized the importance of the human element in job design Page 9 of 156  Lillian Gilbreth Elton Mayo – Hawthorne studies on worker motivation, 1930 Abraham Maslow – motivation theory, 1940s; hierarchy of needs, 1954 Frederick Hertzberg – Two Factor Theory, 1959 Douglas McGregor – Theory X and Theory Y, 1960s William Ouchi – Theory Z, 1981 Decision Models & Management Science F.W. Harris – mathematical model for inventory management, 1915 Dodge, Romig, and Shewart – statistical procedures for sampling and quality control, 1930s Tippett – statistical sampling theory, 1935 Operations Research (OR) Groups – OR applications in warfare George Dantzig – linear programming, 1947 Influence of Japanese Manufacturers Refined and developed management practices that increased productivity Credited with fueling the “quality revolution Just-in-Time production Exhibit 1.1 Historical summary of operations management Page 10 of 156 Goods-service Continuum Products are typically neither purely service- or purely goods-based. Exhibit 1.2 Examples of Goods and Services Manufacturing vs. Service Manufacturing is characterized by tangible outputs (products). Consumption of outputs at overtime. Jobs useless labor and more equipment, little customer contact, no customer participation in the conversion process (in production). Sophisticated methods for measuring production activities and resource consumption as product are made. Service is characterized by intangible outputs. In addition, it possesses a potential for high variability in quality of output. Production and consumption occur simultaneously. Jobs use more labor and less equipment, direct consumer contact, frequent customer participation in the conversion process. Elementary methods for measuring conversion activities and resource consumption are used. Manufacturing and Service Organizations differ chiefly because manufacturing is goods- oriented and service is act-oriented. The following characteristics can be considered for distinguishing Manufacturing Operations with Service Operations: 1. Tangible/Intangible nature of output 2. Production and consumption 3. Nature of work (job) 4. Degree of customer contact 5. Customer participation in conversion 6. Measurement of performance 7. Quality of output 8. Inventory accumulated. Page 11 of 156 Managing Services is Challenging 1. Jobs in services are often less structured than in manufacturing 2. Customer contact is generally much higher in services compared to manufacturing 3. In many services, worker skill levels are low compared to those of manufacturing employees 4. Services are adding many new workers in low-skill, entry-level positions 5. Employee turnover is high in services, especially in low-skill jobs 6. Input variability tends to be higher in many service environments than in manufacturing 7. Service performance can be adversely affected by many factors outside of the manager’s control (e.g., employee and customer attitudes) Supply Chain Supply Chain – a sequence of activities and organizations involved in producing and delivering a good or service. Exhibit 1.3 Supply Chain Process Elements of Supply Chain Management Customers – what products/services do customers want Forecasting – predicting timing and volume of customer demand Design – incorporating customer wants, manufacturability, and time to market Capacity planning – matching supply and demand Processing – controlling quality, scheduling work Inventory – meeting demand requirements while managing costs Purchasing – evaluating potential suppliers, supporting the needs of operations on purchased goods and services Suppliers – monitoring supplier quality, on-time delivery, and flexibility; maintaining supplier relations Location – determining the location of facilities Logistics – deciding how to best move information and materials The Need for Managing the Supply Chain In the past, organizations did little to manage the supply chain beyond their own operations and immediate suppliers which led to numerous problems: Page 12 of 156  Oscillating inventory levels Inventory stockouts Late deliveries Quality problems Supply and Demand Concept of Production Production function is ‘the part of an organization, which is concerned with the transformation of a range of inputs into the required outputs (products) having the requisite quality level’. Production is defined as ‘the step-by-step conversion of one form of material into another form through chemical or mechanical process to create or enhance the utility of the product to the user’. Thus, production is a value addition process. At each stage of processing, there will be value addition. Edwood Buffa defines production as ‘a process by which goods and services are created’. Some examples of production are: manufacturing custom-made products like, boilers with a specific capacity, constructing flats, some structural fabrication works for selected customers, etc., and manufacturing standardized products like, car, bus, motor cycle, radio, television, etc. Production System The production system is ‘that part of an organization, which produces products of an organization. It is that activity whereby resources, flowing within a defined system, are combined and transformed in a controlled manner to add value in accordance with the policies communicated by management’. Page 13 of 156  A simplified production system is shown below: Exhibit 1.4 Schematic Production System Feedback - measurements taken at various points in the transformation process Control - the comparison of feedback against previously established standards to determine if corrective action is needed. The production system has the following characteristics: 1. Production is an organized activity, so every production system has an objective. 2. The system transforms the various inputs to useful outputs. 3. It does not operate in isolation from the other organization system. 4. There exists a feedback about the activities, which is essential to control and improve system performance. Transformation and Value Adding Activities The objective of combining resources under controlled conditions is to transform them into goods and services having a higher value than the original inputs. The transformation process applied will be in the form of technology to the inputs. The effectiveness of the production factors in the transformation process is known as productivity. The productivity refers to the ratio between values of output per work hour to the cost of inputs. The firm’s overall ratio must be greater than 1, then we can say value is added to the product. Operations manager should concentrate improving the transformation efficiency and to increase the ratio. Exhibit 1.6 Schematic model for operations/production system Operations Management Objectives Page 14 of 156  Objectives of Operations Management can be categorized into Customer Service and Resource Utilization. Customer Service. The first objective of operating systems is to utilize resources for the satisfaction of customer wants. Therefore, customer service is a key objective of operations management. The operating system must provide something to a specification, which can satisfy the customer in terms of cost and timing. Thus, providing the ‘right thing at a right price at the right time’ can satisfy primary objective. These aspects of customer service – specification, cost and timing – are described for four functions in Exhibit 1.7. They are the principal sources of customer satisfaction and must therefore be the principal dimension of the customer service objective for operations managers. Generally, an organization will aim reliably and consistently to achieve certain standards and operations manager will be influential in attempting to achieve these standards. Hence, this objective will influence the operations manager’s decisions to achieve the required customer service. Exhibit 1.7 Aspects of customer service Resource Utilization. Another major objective of operating systems is to utilize resources for the satisfaction of customer wants effectively. Customer service must be provided with the achievement of effective operations through efficient use of resources. Inefficient use of resources or inadequate customer service leads to commercial failure of an operating system. Operations management is concerned essentially with the utilization of resources, i.e. obtaining maximum effect from resources or minimizing their loss, underutilization or waste. The extent of the utilization of the resources’ potential might be expressed in terms of the proportion of available time used or occupied, space utilization, levels of activity, etc. Each measure indicates Page 15 of 156 the extent to which the potential or capacity of such resources is utilized. This is referred as the objective of resource utilization. Operations management is concerned with the achievement of both satisfactory customer service and resource utilization. An improvement in one will often give rise to deterioration in the other. Often both cannot be maximized, and hence a satisfactory performance must be achieved on both objectives. All the activities of operations management must be tackled with these two objectives in mind, and because of this conflict, operations managers will face many of the problems. Hence, operations managers must attempt to balance these basic objectives. The Exhibit 1.8 summarizes the twin objectives of operations management. The type of balance established both between and within these basic objectives will be influenced by market considerations, competitions, the strengths and weaknesses of the organization, etc. Hence, the operations managers should make a contribution when these objectives are set. Exhibit 1.8 The twin objectives of operations management Role of the Operations Manager The Operations Function consists of all activities directly related to producing goods or providing services. A primary function of the operations manager is to guide the system by decision making. System Design Decisions System Operation Decisions System Design Decisions System Design Capacity Facility location Facility layout Product and service planning Acquisition and placement of equipment These are typically strategic decisions that require long-term commitment of resources Determine parameters of system operation Key Trends and Issues in Business E-Business & E-Commerce Management of Technology Globalization Management of Supply Chains Outsourcing Agility Ethical Behavior Page 16 of 156 The Decline in Manufacturing Employment Productivity - Increasing productivity allows companies to maintain or increase their output using fewer workers Outsourcing - Some manufacturing work has been outsourced to more productive companies A Statistical Artifact - Manufacturers are increasingly using contract and temporary labor which no longer show up in the statistics as manufacturing employment Decision Making Most operations decisions involve many alternatives that can have quite different impacts on costs or profits Typical operations decisions include: What: What resources are needed, and in what amounts? When: When will each resource be needed? When should the work be scheduled? When should materials and other supplies be ordered? Where: Where will the work be done? How: How will he product or service be designed? How will the work be done? How will resources be allocated? Who: Who will do the work? General Approach to Decision Making Modeling is a key tool used by all decision makers o Model - an abstraction of reality; a simplification of something. o Common features of models: ▪ They are simplifications of real-life phenomena ▪ They omit unimportant details of the real-life systems they mimic so that attention can be focused on the most important aspects of the real-life system Types of Models: o Physical Models ▪ Look like their real-life counterparts o Schematic Models ▪ Look less like their real-life counterparts than physical models o Mathematical Models ▪ Do not look at all like their real-life counterparts Understanding Models Keys to successfully using a model in decision making What is its purpose? How is it used to generate results? How are the results interpreted and used? What are the model’s assumptions and limitations? Benefits of Models Models are generally easier to use and less expensive than dealing with the real system Require users to organize and sometimes quantify information Increase understanding of the problem Page 17 of 156  Enable managers to analyze “What if?” questions Serve as a consistent tool for evaluation and provide a standardized format for analyzing a problem Enable users to bring the power of mathematics to bear on a problem. Model Limitations Quantitative information may be emphasized at the expense of qualitative information Models may be incorrectly applied and the results misinterpreted - This is a real risk with the widespread availability of sophisticated, computerized models are placed in the hands of uninformed users. The use of models does not guarantee good decisions. Quantitative Methods A decision-making approach that frequently seeks to obtain a mathematically optimal solution Linear programming Queuing techniques Inventory models Project models Forecasting techniques Statistical models Metrics and Trade-Offs Performance Metrics - All managers use metrics to manage and control operations Profits Costs Productivity Forecast accuracy Analysis of Trade-Offs - A trade-off is giving up one thing in return for something else Carrying more inventory (an expense) in order to achieve a greater level of customer service Degree of Customization Relative to other standardized products and services customized products: Tend to be more labor intensive Tend to be more time consuming Tend to require more highly-skilled people Tend to require more flexible equipment Have much lower volume of output Have higher price tags Degree of customization has a significant influence on the entire organization Process selection Job design Affects marketing, sales, accounting, finance, and information systems Page 18 of 156 Establishing Priorities 1. In nearly all cases, certain issues or items are more important than others 2. Recognizing this allows managers to focus their attention to those efforts that will do the most good a. Pareto Phenomenon - a few factors account for a high percentage of occurrence of some event(s) i. The critical few factors should receive the highest priority ii. This is a concept that is appropriately applied to all areas and levels of management Systems Approach System - a set of interrelated parts that must work together The business organization is a system composed of subsystems ▪ marketing subsystem ▪ operations subsystem ▪ finance subsystem The systems approach ▪ Emphasizes interrelationships among subsystems ▪ Main theme is that the whole is greater than the sum of its parts ▪ The output and objectives of the organization take precedence over those of any one subsystem Ethical Issues in Operations Ethical issues arise in many aspects of operations management: Financial statements Worker safety Product safety Quality The environment The community Hiring and firing workers Closing facilities Workers’ rights  ACTIVITIES/ASSESSMENT Answer the following: (30 pts.) 1. Define operations management and the functions associated with it. 2. Compare the operations management in a company that produces goods with a company that offers services. 3. In ensuring ethical and social responsibilities in business, what are some challenges in operations that a company may face? Page 19 of 156  LESSON 2 – THE GLOBAL ENVIRONMENT AND OPERATIONS STRATEGY  OVERVIEW An organization which formulates long-term strategies will likely succeed in a highly competitive global environment. An organization’s operations strategy must be designed in order to address future needs and challenges of international competition. In order to succeed, the organization. Strategy is the unifying factor in an organization which keeps the organization in the right direction.  LEARNING OUTCOME After the end of this lesson, students will be able to: ✓ Analyze the operations strategy applicable to a global business environment. Competitiveness: How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services – Organizations compete through some combination of their marketing and operations functions What do customers want? How can these customer needs best be satisfied? Marketing’s Influence Identifying consumer wants and/or needs Pricing Advertising and promotion Businesses Compete Using Operations 1. Product and service design 2. Cost 3. Location 4. Quality 5. Quick response 6. Flexibility 7. Inventory management 8. Supply chain management 9. Service 10. Managers and workers Why Some Organizations Fail Neglecting operations strategy Failing to take advantage of strengths and opportunities Failing to recognize competitive threats Too much emphasis in product and service design and not enough on improvement Neglecting investments in capital and human resources Page 20 of 156  Failing to establish good internal communications and cooperation Failing to consider customer wants and needs Hierarchical Planning Vision Mission Goals Organizational Strategies Functional Strategies Tactics Vision- how the company sees itself in the future. - the vision statement describes the company’s future Mission- the reason for an organization’s existence - the mission statement states the purpose of the organization - the mission statement should answer the question of “What business are we in?” - the mission statement serves as the basis for organizational goals Goals – provide detail and the scope of the mission – can be viewed as organizational destinations – goals serve as the basis for organizational strategies Strategy- a plan for achieving organizational goals Serves as a roadmap for reaching the organizational destinations – Organizations have Organizational strategies – Overall strategies that relate to the entire organization Page 21 of 156  – Support the achievement of organizational goals and mission Functional level strategies – Strategies that relate to each of the functional areas and that support achievement of the organizational strategy Tactics and Operations Tactics – The methods and actions taken to accomplish strategies – The “how to” part of the process Operations – The actual “doing” part of the process Core Competencies Core Competencies The special attributes or abilities that give an organization a competitive edge To be effective core competencies and strategies need to be aligned Strategy Formulation Effective strategy formulation requires taking into account: – Core competencies – Environmental scanning SWOT Successful strategy formulation also requires taking into account: – Order qualifiers – Order winners Order qualifiers – Characteristics that customers perceive as minimum standards of acceptability to be considered as a potential purchase Order winners – Characteristics of an organization’s goods or services that cause it to be perceived as better than the competition Environmental Scanning Environmental Scanning is necessary to identify – Internal Factors Strengths and Weaknesses – External Factors Opportunities and Threats Key External Factors Economic conditions Political conditions Page 22 of 156  Legal environment Technology Competition Markets Key Internal Factors Human Resources Facilities and equipment Financial resources Customers Products and services Technology Suppliers Operations strategy – The approach, consistent with organization strategy, that is used to guide the operations function. Strategic OM Decision Areas Decision Area What the Decisions Affect Product and service design Costs, quality, liability, and environmental issues Capacity Cost, structure, flexibility Process selection and layout Costs, flexibility, skill level needed, capacity Work design Quality of work life, employee safety, productivity Location Costs, visibility Quality Ability to meet or exceed customer expectations Inventory Costs, shortages Maintenance Costs, equipment reliability, productivity Scheduling Flexibility, efficiency Supply chains Costs, quality, agility, shortages, vendor relations Projects Costs, new products, services, or operating systems Page 23 of 156 Quality-based strategy – Strategy that focuses on quality in all phases of an organization Pursuit of such a strategy is rooted in a number of factors: – Trying to overcome a poor-quality reputation – Desire to maintain a quality image – A part of a cost reduction strategy Time-based strategies – Strategies that focus on the reduction of time needed to accomplish tasks It is believed that by reducing time, costs are lower, quality is higher, productivity is higher, time-to-market is faster, and customer service is improved Time-Based Strategies Areas where organizations have achieved time reductions: – Planning time – Product/service design time – Processing time – Changeover time – Delivery time – Response time for complaints Agile operations – A strategic approach for competitive advantage that emphasizes the use of flexibility to adapt and prosper in an environment of change Involves the blending of several core competencies: – Cost – Quality – Reliability – Flexibility The Balanced Scorecard Approach A top-down management system that organizations can use to clarify their vision and strategy and transform them into action – Develop objectives – Develop metrics and targets for each objective – Develop initiatives to achieve objectives – Identify links among the various perspectives Finance Customer Internal business processes Learning and growth – Monitor results Page 24 of 156 The Balanced Scorecard Productivity – A measure of the effective use of resources, usually expressed as the ratio of output to input – Productivity measures are useful for – Tracking an operating unit’s performance over time – Judging the performance of an entire industry or country Why Productivity Matters High productivity is linked to higher standards of living – As an economy replaces manufacturing jobs with lower productivity service jobs, it is more difficult to maintain high standards of living Higher productivity relative to the competition leads to competitive advantage in the marketplace – Pricing and profit effects For an industry, high relative productivity makes it less likely it will be supplanted by foreign industry Service Sector Productivity Service sector productivity is difficult to measure and manage because – It involves intellectual activities – It has a high degree of variability A useful measure related to productivity is process yield Factors Affecting Productivity Methods Capital Quality Technology Management Page 25 of 156  Improving Productivity 1. Develop productivity measures for all operations 2. Determine critical (bottleneck) operations 3. Develop methods for productivity improvements 4. Establish reasonable goals 5. Make it clear that management supports and encourages productivity improvement 6. Measure and publicize improvements Don’t confuse productivity with efficiency.  ACTIVITIES/ASSESSMENT Answer the following: (15 pts.) Discuss the advantages and disadvantages of the different operations strategies. Page 26 of 156 LESSON 3 – MANAGING PROJECTS  OVERVIEW Management is concerned with planning, organizing, leading and controlling of resources and activities in order to achieve organizational goals. Project management in particular requires the commitment of people and other to an important activity such as production of goods or delivery of services. In this chapter, the importance of the project, project management and some project management techniques will be illustrated and discussed.  LEARNING OUTCOME After the end of this lesson, students will be able to: ✓ Describe the different project management techniques to guide project managers in the implementation of projects. Projects – Unique, one-time operations designed to accomplish a specific set of objectives in a limited time frame Examples: The Olympic Games Producing a movie Software development Product development ERP implementation The Nature of Projects Projects go through a series of stages– a life cycle Projects bring together people with a diversity of knowledge and skills, most of whom remain associated with the project for less than its full life Organizational structure affects how projects are managed Project Management Decisions Project success depends upon making key managerial decisions over a sequence of steps: – Deciding which projects to implement – Selecting the project manager – Selecting the project team – Planning and designing the project – Managing and controlling project resources – Deciding if and when a project should be terminated Page 27 of 156 Project Manager The project manager is ultimately responsible for the success or failure of the project The project manager must effectively manage: – The work – The human resources – Communications – Quality – Time – Costs Work Breakdown Structure (WBS) - A hierarchical listing of what must be done during a project - Establishes a logical framework for identifying the required activities for the project: - Identify the major elements of the project - Identify the major supporting activities for each of the major elements - Break down each major supporting activity into a list of the activities that will be needed to accomplish it Gantt Chart - a management technique for scheduling and planning small projects. It is a graph or bar chart enumerating the different activities and the time for each activity in the project. Page 28 of 156 Program Evaluation and Review technique (PERT) and Critical Path Method (CPM) PERT and CPM are two techniques used to manage large-scale projects Managers can obtain: 1. A graphical display of project activities 2. An estimate of how long the project will take 3. An indication of which activities are most critical to timely project completion 4. An indication of how long any activity can be delayed without delaying the project Advantages: Among the most useful features of PERT-CPM: 1. It forces the manager to organize and quantify available information and to identify where additional information is needed 2. It provides a graphic display of the project and its major activities 3. It identifies a. Activities that should be closely watched b. Activities that have slack time Potential sources of error: 1. The project network may be incomplete 2. Precedence relationships may not be correctly expressed 3. Time estimates may be inaccurate 4. There may be a tendency to focus on critical path activities to the exclusion of other important project activities 5. Major risk events may not be on the critical path Page 29 of 156  Project Management Software Technology has benefited project management – CAD To produce updated prototypes on construction and product-development projects – Communication software Helps to keep project members in close contact Facilitates remote viewing of projects – Project management software Specialized software used to help manage projects – Assign resources – Compare project plan versions – Evaluate changes – Track performance Advantages include: – Imposes a methodology and common project management terminology – Provides a logical planning structure – May enhance communication among team members – Can flag the occurrence of constraint violations – Automatically formats reports – Can generate multiple levels of summary and detail reports – Enables “what if” scenarios – Can generate a variety of chart types  ACTIVITIES/ASSESSMENT Answer the following: (20 pts.) Describe the different project management techniques to guide project managers in the implementation of projects. Page 30 of 156 LESSON 4 – FORECASTING DEMAND  OVERVIEW Forecasts are important basis for budgetary planning and cost control. Good forecasts are an essential part of efficient service and manufacturing operations. In this chapter, different types and models of forecasts are presented. Production and operations personnel use forecast to make periodic and continual decisions in the organization. Qualitative and quantitative techniques will be presented in this chapter. LEARNING OUTCOMES After the end of this lesson, students will be able to: ✓ Describe forecasting and determine the elements of a good forecast. ✓ Identify the importance of forecasting in making decisions.  COURSE MATERIALS Forecasting Forecast – a statement about the future value of a variable of interest – We make forecasts about such things as weather, demand, and resource availability – Forecasts are an important element in making informed decisions Two Important Aspects of Forecasts Expected level of demand – The level of demand may be a function of some structural variation such as trend or seasonal variation Accuracy – Related to the potential size of forecast error Features Common to All Forecasts 1. Techniques assume some underlying causal system that existed in the past will persist into the future 2. Forecasts are not perfect 3. Forecasts for groups of items are more accurate than those for individual items 4. Forecast accuracy decreases as the forecasting horizon increases Elements of a Good Forecast The forecast: should be timely should be accurate should be reliable should be expressed in meaningful units should be in writing Page 31 of 156  technique should be simple to understand and use should be cost effective Steps in the Forecasting Process 1. Determine the purpose of the forecast 2. Establish a time horizon 3. Select a forecasting technique 4. Obtain, clean, and analyze appropriate data 5. Make the forecast 6. Monitor the forecast Forecast Accuracy and Control Forecasters want to minimize forecast errors – It is nearly impossible to correctly forecast real-world variable values on a regular basis – So, it is important to provide an indication of the extent to which the forecast might deviate from the value of the variable that actually occurs Forecast accuracy should be an important forecasting technique selection criterion Forecast Accuracy and Control Forecasters want to minimize forecast errors – It is nearly impossible to correctly forecast real-world variable values on a regular basis – So, it is important to provide an indication of the extent to which the forecast might deviate from the value of the variable that actually occurs Forecast accuracy should be an important forecasting technique selection criterion Forecast errors should be monitored – Error = Actual – Forecast – If errors fall beyond acceptable bounds, corrective action may be necessary Forecasting Approaches Qualitative Forecasting – Qualitative techniques permit the inclusion of soft information such as: Human factors Personal opinions Hunches – These factors are difficult, or impossible, to quantify Quantitative Forecasting – Quantitative techniques involve either the projection of historical data or the development of associative methods that attempt to use causal variables to make a forecast – These techniques rely on hard data Page 32 of 156 Judgmental Forecasts Forecasts that use subjective inputs such as opinions from consumer surveys, sales staff, managers, executives, and experts – Executive opinions – Salesforce opinions – Consumer surveys – Delphi method Time-Series Forecasts Forecasts that project patterns identified in recent time-series observations – Time-series - a time-ordered sequence of observations taken at regular time intervals Assume that future values of the time-series can be estimated from past values of the time- series Time-Series Behaviors Trend Seasonality Cycles Irregular variations Random variation Trends and Seasonality Trend – A long-term upward or downward movement in data Population shifts Changing income Seasonality – Short-term, fairly regular variations related to the calendar or time of day – Restaurants, service call centers, and theaters all experience seasonal demand Cycles and Variations Cycle – Wavelike variations lasting more than one year These are often related to a variety of economic, political, or even agricultural conditions Random Variation – Residual variation that remains after all other behaviors have been accounted for Page 33 of 156  Irregular variation – Due to unusual circumstances that do not reflect typical behavior Labor strike Weather event Time-Series Forecasting - Naïve Forecast Naïve Forecast – Uses a single previous value of a time series as the basis for a forecast The forecast for a time period is equal to the previous time period’s value – Can be used when The time series is stable There is a trend There is seasonality Time-Series Forecasting - Averaging These Techniques work best when a series tends to vary about an average – Averaging techniques smooth variations in the data – They can handle step changes or gradual changes in the level of a series – Techniques Moving average Weighted moving average Exponential smoothing Moving Average Technique that averages a number of the most recent actual values in generating a forecast Moving Average As new data become available, the forecast is updated by adding the newest value and dropping the oldest and then recomputing the the average The number of data points included in the average determines the model’s sensitivity – Fewer data points used-- more responsive – More data points used-- less responsive Page 34 of 156 Weighted Moving Average The most recent values in a time series are given more weight in computing a forecast – The choice of weights, w, is somewhat arbitrary and involves some trial and error Exponential Smoothing A weighted averaging method that is based on the previous forecast plus a percentage of the forecast error Other Forecasting Methods - Focus Focus Forecasting – Some companies use forecasts based on a “best current performance” basis Apply several forecasting methods to the last several periods of historical data The method with the highest accuracy is used to make the forecast for the following period This process is repeated each month Other Forecasting Methods - Diffusion Diffusion Models – Historical data on which to base a forecast are not available for new products Predictions are based on rates of product adoption and usage spread from other established products Take into account facts such as – Market potential – Attention from mass media – Word-of-mouth Techniques for Trend Linear trend equation Non-linear trends – Parabolic trend equation – Exponential trend equation – Growth curve trend equation Techniques for Trend Linear trend equation Page 35 of 156  Non-linear trends – Parabolic trend equation – Exponential trend equation – Growth curve trend equation Estimating slope and intercept Slope and intercept can be estimated from historical data Trend-Adjusted Exponential Smoothing The trend adjusted forecast consists of two components – Smoothed error – Trend factor Trend-Adjusted Exponential Smoothing Alpha and beta are smoothing constants Trend-adjusted exponential smoothing has the ability to respond to changes in trend Techniques for Seasonality Seasonality is expressed in terms of the amount that actual values deviate from the average value of a series Models of seasonality – Additive Seasonality is expressed as a quantity that gets added or subtracted from the time-series average in order to incorporate seasonality – Multiplicative Seasonality is expressed as a percentage of the average (or trend) amount which is then used to multiply the value of a series in order to incorporate seasonality Seasonal relatives – The seasonal percentage used in the multiplicative seasonally adjusted forecasting model Using seasonal relatives – To deseasonalize data Page 36 of 156  Done in order to get a clearer picture of the nonseasonal components of the data series Divide each data point by its seasonal relative – To incorporate seasonality in a forecast Obtain trend estimates for desired periods using a trend equation Add seasonality by multiplying these trend estimates by the corresponding seasonal relative Techniques for Cycles Cycles are similar to seasonal variations but are of longer duration Explanatory approach – Search for another variable that relates to, and leads, the variable of interest Housing starts precede demand for products and services directly related to construction of new homes If a high correlation can be established with a leading variable, it can develop an equation that describes the relationship, enabling forecasts to be made Associative Forecasting Techniques – Home values may be related to such factors as home and property size, location, number of bedrooms, and number of bathrooms Associative techniques are based on the development of an equation that summarizes the effects of predictor variables – Predictor variables - variables that can be used to predict values of the variable of interest Simple Linear Regression Regression - a technique for fitting a line to a set of data points – Simple linear regression - the simplest form of regression that involves a linear relationship between two variables The object of simple linear regression is to obtain an equation of a straight line that minimizes the sum of squared vertical deviations from the line (i.e., the least squares criterion) Least Squares Line Page 37 of 156 Standard Error Standard error of estimate – A measure of the scatter of points around a regression line – If the standard error is relatively small, the predictions using the linear equation will tend to be more accurate than if the standard error is larger Correlation Coefficient Correlation – A measure of the strength and direction of relationship between two variables – Ranges between -1.00 and +1.00 r2, square of the correlation coefficient – A measure of the percentage of variability in the values of y that is “explained” by the independent variable – Ranges between 0 and 1.00 Simple Linear Regression Assumptions 1. Variations around the line are random 2. Deviations around the average value (the line) should be normally distributed 3. Predictions are made only within the range of observed values Issues to consider: Always plot the line to verify that a linear relationships is appropriate The data may be time-dependent. – If they are use analysis of time series use time as an independent variable in a multiple regression analysis A small correlation may indicate that other variables are important Using Forecast Information Reactive approach – View forecasts as probable future demand – React to meet that demand Page 38 of 156  Proactive approach – Seeks to actively influence demand Advertising Pricing Product/service modifications – Generally requires either and explanatory model or a subjective assessment of the influence on demand  ACTIVITIES/ASSESSMENT Answer the following: (15 pts.) 1. What is forecasting? 2. What are the elements of a good forecast? 3. Why is forecasting important in making decisions? Page 39 of 156 LESSON 5 - PRODUCT DESIGN  OVERVIEW An effective product strategy links product decision with investment, market share, and product life cycle, and defines the breadth of the production line. The objective of the product decision is to develop and implement a product strategy that meets the demands of the marketplace with a competitive advantage via differentiation, low cost, rapid response, or a combination of these.  LEARNING OUTCOME At the end of this lesson, students will be able to: ✓ Determine the interrelatedness of the product design to a successful operations strategy.  COURSE MATERIALS Product and Service Design Reasons Design or Re-Design The driving forces for product and service design or redesign are market opportunities or threats: – Economic – Social and Demographic – Political, Liability, or Legal – Competitive – Cost or Availability – Technological Key Questions Is there a demand for it? – Market size – Demand profile Can we do it? – Manufacturability - the capability of an organization to produce an item at an acceptable profit – Serviceability - the capability of an organization to provide a service at an acceptable cost or profit What level of quality is appropriate? – Customer expectations – Competitor quality – Fit with current offering Page 40 of 156  Does it make sense from an economic standpoint? – Liability issues, ethical considerations, sustainability issues, costs and profits Legal Considerations – Product liability The responsibility a manufacturer has for any injuries or damages caused by as faulty product Some of the concomitant costs – Litigation – Legal and insurance costs – Settlement costs – Costly product recalls – Reputation effects – Uniform Commercial Code Under the UCC, products carry an implication of merchantability and fitness Normative Behavior Produce designs that are consistent with the goals of the organization – e.g., Do not compromise on quality, or cut corners, even in areas that are not apparent to the customer Give customers the value they expect Make health and safety a concern – Do not place employees, customers, or third parties at risk because of faulty products and services Sustainability – Using resources in ways that do not harm ecological systems that support human existence Key aspects of designing for sustainability – Life cycle assessment – Reduction of costs and materials used – Re-using parts of returned products – Recycling Page 41 of 156 Life Cycle Assessment (LCA) LCA – The assessment of the environmental impact of a product or service throughout its useful life Focuses on such factors as – Global warming – Smog formation – Oxygen depletion – Solid waste generation LCA procedures are part of the ISO 14000 environmental management procedures Reduce: Costs and Materials Value analysis – Examination of the function of parts and materials in an effort to reduce the cost and/or improve the performance of a product – Common questions used in value analysis Could a less expensive part of material be used? Is the function necessary? Can the function of two or more parts be performed by a single part? Can a part be simplified? Could product specifications be relaxed? Could standard parts be substituted for non-standard parts? Re-Use: Remanufacturing Remanufacturing – Refurbishing used products by replacing worn-out or defective components Can be performed by the original manufacturer or another company – Design for disassembly (DFD) Designing a product to that used products can be easily taken apart Recycle Recycling – Recovering materials for future use Applies to manufactured parts Also applies to materials used during production – Why recycle? Cost savings Environmental concerns Page 42 of 156  Environmental regulations – Design for recycling (DFR) Product design that takes into account the ability to disassemble a used product to recover the recyclable parts Other Considerations Product or service life cycles Standardization Product or service reliability Product or service robustness Product or service life stages Standardization – Extent to which there is an absence of variety in a product, service, or process Advantages of Standardization 1. Fewer parts to deal with in inventory & manufacturing 2. Reduced training costs and time 3. More routine purchasing, handling and inspection procedures 4. Orders fillable from inventory 5. Opportunities for long production runs and automation 6. Need for fewer parts justifies increased expenditures on perfecting designs and improving quality control procedures Page 43 of 156 Disadvantages of Standardization 1. Designs may be frozen with too many imperfections remaining. 2. High cost of design changes increases resistance to improvements 3. Decreased variety results in less consumer appeal. Designing for Mass Customization Mass customization – A strategy of producing basically standardized goods or services, but incorporating some degree of customization in the final product or service – Facilitating Techniques Delayed differentiation Modular design Delayed Differentiation Delayed Differentiation – The process of producing, but not quite completing, a product or service until customer preferences are known – It is a postponement tactic Produce a piece of furniture, but do not stain it; the customer chooses the stain Modular Design – A form of standardization in which component parts are grouped into modules that are easily replaced or interchanged Advantages – easier diagnosis and remedy of failures – easier repair and replacement – simplification of manufacturing and assembly Disadvantages – Limited number of possible product configurations – Limited ability to repair a faulty module; the entire module must often be scrapped Reliability – The ability of a product, part, or system to perform its intended function under a prescribed set of conditions – Failure Situation in which a product, part, or system does not perform as intended Page 44 of 156  – Normal operating conditions The set of conditions under which an item’s reliability is specified Robust design – A design that results in products or services that can function over a broad range of conditions – Pertains to product as well as process design Consider the following automobiles: – Ferrari 599 – Toyota Avalon » Which is design is more robust? Degree of Newness Product or service design changes: – Modification of an existing product or service – Expansion of an existing product line or service offering – Clone of a competitor’s product or service – New product or service The degree of change affects the newness of the product or service to the market and to the organization – Risks and benefits? Phases in Design & Development 1. Idea generation 2. Feasibility analysis 3. Product specifications 4. Process specifications 5. Prototype development 6. Design review 7. Market test 8. Product introduction 9. Follow-up evaluation Idea Generation 1. Supply-chain based 2. Competitor based 3. Research based Page 45 of 156 Supply-Chain Based Ideas can come from anywhere in the supply chain: – Customers – Suppliers – Distributors – Employees – Maintenance and repair personnel Competitor-Based By studying how a competitor operates and its products and services, many useful ideas can be generated Reverse engineering – Dismantling and inspecting a competitor’s product to discover product improvements Research Based Research and Development (R&D) – Organized efforts to increase scientific knowledge or product innovation – Basic research Has the objective of advancing the state of knowledge about a subject without any near-term expectation of commercial applications – Applied research Has the objective of achieving commercial applications – Development Converts the results of applied research into useful commercial applications. Research and Development (R&D) – Organized efforts to increase scientific knowledge or product innovation – Basic research Has the objective of advancing the state of knowledge about a subject without any near-term expectation of commercial applications – Applied research Has the objective of achieving commercial applications – Development Converts the results of applied research into useful commercial applications. Page 46 of 156 Concurrent Engineering Concurrent engineering – Bringing engineering design and manufacturing personnel together early in the design phase Also may involve marketing and purchasing personnel Views of suppliers and customers may also be sought Computer-Aided Design (CAD) CAD – Product design using computer graphics – Advantages increases productivity of designers, 3 to 10 times creates a database for manufacturing information on product specifications provides possibility of engineering and cost analysis on proposed designs – CAD that includes finite element analysis (FEA) can significantly reduce time to market Enables developers to perform simulations that aid in the design, analysis, and commercialization of new products Production Requirements Designers must take into account production capabilities – Equipment – Skills – Types of materials – Schedules – Technologies Manufacturability – Ease of fabrication and/or assembly – It has important implications for Cost Productivity Quality DFM and DFA Design for manufacturing (DFM) – The designing of products that are compatible with an organization’s abilities Page 47 of 156  Design for assembly (DFA) – Design that focuses on reducing the number of parts in a product and on assembly methods and sequence Component Commonality When products have a high degree of similarity in features and components, a part can be used in multiple products Benefits: – Savings in design time – Standard training for assembly and installation – Opportunities to buy in bulk from suppliers – Commonality of parts for repair – Fewer inventory items must be handled The House of Quality The House of Quality Sequence Page 48 of 156 Kano Model Basic quality – Refers to customer requirements that have only limited effect on customer satisfaction if present, but lead to dissatisfaction if absent Performance quality – Refers to customer requirements that generate satisfaction or dissatisfaction in proportion to their level of functionality and appeal Excitement quality – Refers to a feature or attribute that was unexpected by the customer and causes excitement Service Design Definitions Service – Something that is done to, or for, a customer Service delivery system – The facilities, processes, and skills needed to provide a service Product bundle – The combination of goods and services provided to a customer Service Design Begins with a choice of service strategy, which determines the nature and focus of the service, and the target market – Key issues in service design Degree of variation in service requirements Degree of customer contact and involvement Service Blueprint Page 49 of 156 Reliability Reliability – The ability of a product, part, or system to perform its intended function under a prescribed set of conditions – Reliability is expressed as a probability: The probability that the product or system will function when activated The probability that the product or system will function for a given length of time Availability Availability – The fraction of time a piece of equipment is expected to be available for operation  ACTIVITIES/ASSESSMENT Answer the following: (20 pts.) 1. What is the most important driving force for product design or redesign? Why? 2. How often do you think should a company engage in newness of their product? Why? Page 50 of 156 LESSON 6 – QUALITY MANAGEMENT  OVERVIEW Quality is an issue that affects an entire organization. To create a quality good or service operations managers need to know what the customer expect. A successful quality strategy begins with an organizational culture that fosters quality, followed by an understanding of the principles of quality, and then engaging employees in the necessary activities to implement quality. When these things are done well, the organization typically satisfies its customers and obtains competitive advantage.  LEARNING OUTCOMES At the end of this lesson, students will be able to: ✓ Discuss and appreciate the importance of quality to the whole organization ✓ Identify the benefits of good quality to goods and services.  Course materials Quality Management Quality – The ability of a product or service to consistently meet or exceed customer expectations Prior to the 1970s and 1980s, quality was not a focal point of U.S. companies Foreign competition, due in part to a focus on quality, was able to capture significant shares of U.S. markets Since the 1980s, quality has been increasingly embraced by U.S. executives Quality Contributors Walter Shewart – “Father of Statistical Quality Control” – Control charts – Variance reduction W. Edwards Deming – Special vs. common cause variation – The 14 points Joseph Juran – Quality Control Handbook, 1951 – Viewed quality as fitness-for-use – Quality trilogy– quality planning, quality control, quality improvement Armand Feigenbaum – Quality is a “total field” – The customer defines quality Philip B. Crosby – Zero defects Page 51 of 156  – Quality is Free, 1979 Kaoru Ishikawa – Cause-and-effect diagram – Quality circles – Recognized the internal customer Genichi Taguchi – Taguchi loss function Taiichi Ohno and Shigeo Shingo – Developed philosophy and methods of kaizen Reactive vs. Proactive Quality Quality Assurance – Reactive – Emphasis is on finding and correcting defects before they reach the market Strategic Approach – Proactive – Focuses on preventing mistakes from occurring – Greater emphasis on customer satisfaction – Involves all manager and workers in a continuing effort to improve quality Dimensions of Product Quality Performance– main characteristics of the product Aesthetics– appearance, feel, smell, taste Special features– extra characteristics Conformance– how well the product conforms to design specifications Reliability– consistency of performance Durability– the useful life of the product Perceived quality– indirect evaluation of quality Serviceability– handling of complaints or repairs Dimensions of Service Quality Convenience– the availability and accessibility of the service Reliability– ability to perform a service dependably, consistently, and accurately Responsiveness– willingness to help customers in unusual situations and to deal with problems Time– the speed with which the service is delivered Assurance– knowledge exhibited by personnel and their ability to convey trust and confidence Courtesy– the way customers are treated by employees Tangibles– the physical appearance of facilities, equipment, personnel, and communication materials Consistency– the ability to provide the same level of good quality repeatedly Assessing Service Quality Audit service to identify strengths and weaknesses In particular, look for discrepancies between: 1. Customer expectations and management perception of those expectations Page 52 of 156  2. Management perceptions customer expectations and service-quality specifications 3. Service quality and service actually delivered 4. Customers’ expectations of the service provider and their perceptions of provider delivery Determinants of Quality Quality of design – Intention of designers to include or exclude features in a product or service Quality of conformance – The degree to which goods or services conform to the intent of the designers Ease-of-Use and user instructions – Increase the likelihood that a product will be used for its intended purpose and in such a way that it will continue to function properly and safely After-the-sale service – Taking care of issues and problems that arise after the sale The Consequences of Poor Quality Loss of business Liability Productivity Costs Benefits of Good Quality Enhanced reputation for quality Ability to command higher prices Increased market share Greater customer loyalty Lower liability costs Fewer production or service problems Higher profits Responsibility for Quality Everyone in the organization has some responsibility for quality, but certain areas of the organization are involved in activities that make them key areas of responsibility: Top management Design Procurement Production/operations Quality assurance Packaging and shipping Marketing and sales Customer service Costs of Quality Failure Costs - costs incurred by defective parts/products or faulty services. – Internal Failure Costs Costs incurred to fix problems that are detected before the product/service is delivered to the customer. – External Failure Costs Page 53 of 156  All costs incurred to fix problems that are detected after the product/service is delivered to the customer Appraisal Costs – Costs of activities designed to ensure quality or uncover defects Prevention Costs – All TQ training, TQ planning, customer assessment, process control, and quality improvement costs to prevent defects from occurring Ethics and Quality Substandard work – Defective products – Substandard service – Poor designs – Shoddy workmanship – Substandard parts and materials Having knowledge of this and failing to correct and report it in a timely manner is unethical. Quality Awards ▪ Deming Prize ▪ EFQM Excellence Award ▪ Baldrige Award Baldrige Criteria I. Leadership (120 points) – Senior leadership – Governance and social responsibilities II. Strategic planning (85 points) – Strategy development – Strategy deployment III. Customer and market focus (85 points) – Customer and market knowledge – Customer relationships and satisfaction IV. Measurement, Analysis, and Knowledge Management (90 points) – Measurement, analysis, and improvement of organizational performance – Management of information, information technology, and knowledge V. Workforce focus (90 points) – Workforce engagement – Workforce environment VI. Process management (85 points) – Work systems design – Work process management and improvement VII. Results (450 points) – Product and service outcomes – Customer-focused outcomes – Financial and market outcomes – Workforce-focused outcomes – Process effectiveness outcomes – Leadership outcomes Page 54 of 156 Quality Certification International Organization for Standardization ISO 9000 – Set of international standards on quality management and quality assurance, critical to international business ISO 14000 – A set of international standards for assessing a company’s environmental performance ISO 24700 – Pertains to the quality and performance of office equipment that contains reused components ISO 9000: 2000 – Quality Principles: Principle 1 Customer focus Principle 2 Leadership Principle 3 Involvement of people Principle 4 Process approach Principle 5 System approach to management Principle 6 Continual improvement Principle 7 Factual approach to decision making Principle 8 Mutually beneficial supplier relationships Total Quality Management A philosophy that involves everyone in an organization in a continual effort to improve quality and achieve customer satisfaction. TQM Approach 1. Find out what the customer wants 2. Design a product or service that meets or exceeds customer wants 3. Design processes that facilitate doing the job right the first time 4. Keep track of results 5. Extend these concepts throughout the supply chain TQM Elements 1. Continuous improvement 2. Competitive benchmarking 3. Employee empowerment 4. Team approach 5. Decision based on fact, not opinion 6. Knowledge of tools 7. Supplier quality 8. Champion 9. Quality at the source 10. Suppliers are partners in the process Continuous Improvement Continuous Improvement – Philosophy that seeks to make never-ending improvements to the process of converting inputs into outputs Page 55 of 156  – Kaizen Japanese word for continuous improvement. Quality at the Source The philosophy of making each worker responsible for the quality of his or her work – “Do it right” and “If it isn’t right, fix it” Six Sigma Six Sigma – A business process for improving quality, reducing costs, and increasing customer satisfaction – Statistically Having no more than 3.4 defects per million – Conceptually Program designed to reduce defects Requires the use of certain tools and techniques Lean Six Sigma Lean Six Sigma – A balanced approach to process improvement that integrates principles from lean operation and statistical tools for variation reduction from six sigma to achieve speed and quality – An approach that is equally applicable to products and services Early application in service support functions of General electric and Caterpillar Finance Obstacles to Implementing TQM Obstacles include: – Lack of company-wide definition of quality – Lack of strategic plan for change – Lack of customer focus – Poor inter-organizational communication – Lack of employee empowerment – View of quality as a “quick fix” – Emphasis on short-term financial results – Inordinate presence of internal politics and “turf” issues – Lack of strong motivation– – Lack of time to devote to quality initiatives – Lack of leadership Total Quality Management (TQM) in HR: Structure for Freedom THE WHAT Total Quality Management aims at continuous quality improvement of the product or service offered by a business through continuous feedback. Its simple objective is to do the right thing the first time, and every subsequent time so that resources are not wasted fixing mistakes and broken processes. Page 56 of 156  At this point of time you may feel that TQM in HR sets unrealistic expectations and probably is too rigid. Total Quality Management looks at an organization as a collection of processes. To this effect there is a need for stringent recommendations and best practices that must be developed to improve them. But the philosophy piece is prominent too since Total Quality Management relies on the truth that processes repeated for a long enough duration of time have the power to shape culture. The traditional top down approach first sets culture parameters and then trickles this culture down from the C suite to the employees in the form of dos and don’ts. Through Total Quality Management, the tables are turned. The processes and practices which are being constantly tweaked based on data and feedback produce small changes which accrue over time to positively impact culture and business vision. This sets up an effective loop where culture and processes benefit from each other, the nuts and bolts of ensuring customer satisfaction are regularly optimized and the business can boldly prepare for the future. THE WHY Total Quality Management acknowledges the fact that where humans are involved, there is always room for error. But the rules that control processes should step in to compensate. 1. First and foremost, there should be provisions to ensure that mistakes are not made. 2. Second, if they do creep in, there should be a system to detect errors efficiently and swiftly. 3. Third, if an error is somehow propagated down the value chain, there must be authority vested in individuals or processes to shut down the production flow so that more errors aren’t added the mix resulting in faulty units or poor service delivery for future clients. The three-pronged approach springboards off of mundane, well-defined processes. But it also necessitates a culture of honest communication where each employee acts as a sensor gathering feedback and using it to plug the holes in the current process set, without fear of repercussions. There are of course teething pains and implementation struggles. Employees may not have the mindset of “speaking up” and by default look to consensus for action. Managers may not appreciate the new-found employee independence. But once the culture of improvement is in place and the numbers prove that the effort is worth the while, total quality management frees up the company to be progressive, innovative, risk taking and free thinking. THE HOW Total Quality Management stands on 8 key pillars. 1. Focus on Customer – Customers are the true North Star and barometer of a business. In the TQM approach, customer sentiments and feedback are closely monitored through call tracking and surveys. 2. Employee Involvement – Employees must understand why the obsession with improvement ultimately gives them the freedom to innovate on their jobs. TQM not only Page 57 of 156  boosts the financial health of a business, it also improves talent connectedness and communication. 3. Process Centeredness – The 8 requirements are met by defining processes. There should be processes to collect and integrate customer and employee feedback. There should be distinct processes to course correct on the TQM journey by adjusting strategy and tactics. And even a set of processes to measure the process centeredness of the implementation. 4. Integrated Structure – Silos stymie Total Quality Management. As discussed, though the concept advocates structure and processes, isolation is not favoured. Different departments in the organization need to learn from each other and refine their processes in collaboration. 5. Strategic Approach – Begin with the company vision and objectives to achieve. Set the processes according to this overarching strategy. Then let the TQM changes manifest as changes in culture, vision and objectives. 6. Clear Communication – Without clear, unhesitant communication between employees and between a business and its customers, gathering authentic feedback and driving improv