Introductory Note on Operations Management PDF

908D06 INTRODUCTORY NOTE ON OPERATIONS MANAGEMENT John Haywood-Farmer wrote this note solely to provide material for class discussion. The author does not intend to provide legal, tax, accounting or other professional advice. Such advice should be obtained from a qualified professional. This publ...

908D06 INTRODUCTORY NOTE ON OPERATIONS MANAGEMENT John Haywood-Farmer wrote this note solely to provide material for class discussion. The author does not intend to provide legal, tax, accounting or other professional advice. Such advice should be obtained from a qualified professional. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Copyright © 2008, John Haywood-Farmer1 Version: 2016-05-03 Operations is one key to any organization’s success. Along with marketing, operations, often called production, is where an organization adds value and makes money. You all have experience with operations through your day-to-day lives. The goal of operations is to produce goods and services efficiently and effectively. To help you develop an effective operating point of view and decision-making skills related to operations, this note explores four fundamental aspects of all organizations: 1. The purpose and components of operations; 2. The key tasks that operations managers must manage for their respective organizations to do well; 3. The types of operations systems and their management requirements; and 4. Some tools to help you diagnose and solve operations problems. THE PURPOSE AND BASIC COMPONENTS OF OPERATIONS One common way to describe operations is the input-transformation-output model shown in Exhibit 1. According to this model, the organization “purchases” inputs from suppliers, changes them in some way through a transformation process, and then “sells” the outputs to customers. Although the core of operations is the transformation process, the scope of the operations function usually includes purchasing and often distribution. One key message in the sections that follow is that operations is where the action is: it makes things happen. Operations is everywhere, all around each of us every day. All parts of every organization have an operations component, which is often critical to financial success. Although we normally associate operations with mines, factories, and food processing plants, we also see it in everyday settings such as restaurants, hotels, airlines, universities, hospitals, banks, and stores. Exhibit 2 gives some examples. Exhibit 3 lists six conclusions drawn from Exhibits 1 and 2. First, some enterprises transform materials, others transform customers, and others transform information. Although almost every organization transforms a mixture of inputs, one type usually dominates. Steel companies concentrate on transforming materials — iron ore, lime, and coal. Dentists, doctors, theatres, and universities transform customers 1 This material appears as Chapter 6 of: E. Grasby, M. Crossan, A. Frost, J. Haywood-Farmer, M. Pearce and L. Purdy, Making Business Decisions, 9th ed., London, Ont.: Richard Ivey School of Business, 2016. Page 3 9B08D006 OPERATING SYSTEM COMPONENTS The transformation process usually involves equipment, people with a range of skills, inventories of goods to help smooth out the operation, and energy to make it all happen. These four elements are the normal components of operations (see Exhibit 1). Equipment Equipment is the machinery needed to make production happen: lathes and grinders in machine shops; mixers, stoves, and cash registers in restaurants; aircraft and baggage-handling apparatus in airlines; computers and automated teller machines in banks. Some operations, for example, counselling services, might use little, if any, equipment. Four important features of equipment are capability, capacity, flexibility, and reliability. Each feature which has a number of important aspects. Capability refers to what a piece of equipment can do. Drill presses are capable of drilling round holes but not square ones. In quality terms, capability refers to a machine’s ability to perform reproducibly. In printed circuit board manufacture, component positioning is crucial to product quality. Thus, a surface mount technology machine that can place memory chips on printed circuit boards to within 0.03 mm of the desired location is more capable than one that can do the same task with an accuracy of only 0.10 mm. Capacity is different from capability. This word has two distinct notions: how much a piece of equipment can hold and the amount of material, number of customers, or quantity of information that can be processed or produced in a given period of time. Exhibit 4 gives some examples. As with many areas of our study, one key to understanding these different meanings of capacity is to keep the units straight. Note that the volume examples in Exhibit 4 have single units, whereas speed is always expressed as a ratio. We normally discuss capacity in terms of theoretical capacity — what the equipment manufacturer designed and built the unit to do — and operating capacity — what happens in actual use. The extent to which theoretical capacity is achieved is one measure of the equipment’s efficiency. Thus, a class of 72 students (operating capacity) scheduled for a classroom with 90 seats (theoretical capacity), has an equipment efficiency, or utilization, of 72/90 or 80.0 per cent. A hamburger grill designed to produce 12 patties every three minutes (or 240 per hour), operating nonstop and producing 220 per hour is 91.7 per cent efficient (220/240). Why don’t we get 100 per cent utilization? The reasons vary. In the beer kettle example we might be unable to stir a completely full kettle without spilling some of the contents. Dents or sensing and stirring devices installed inside the kettle might reduce its effective volume. In the case of hamburger cooking, the operator might have to clean the grill periodically and must take time to remove cooked patties and replace them with raw ones. These times might not have been considered in calculating theoretical capacity. In many cases managers choose to operate equipment below capacity because of external factors. Although your car might be designed to go 200 kilometres per hour, because of traffic and road conditions, regulations, the effect of high speed on the car and your desire to save on fuel costs, you might never reach such a speed. Although operating capacity is usually less than theoretical capacity, there are exceptions. Workers might speed up machines or change methods to get more than the theoretical capacity. Special equipment and tuning routinely give stock car racers speeds above the manufacturer’s rating. Flexibility refers to an operating system’s ability to cope with changing circumstances with little penalty in cost, time, effort, or performance. Flexibility refers to many things, such as product range, rates of output, Page 4 9B08D006 and speed of change, so use the word carefully. General purpose equipment or skilled workers are usually very flexible. A lathe, for example, can often turn wide ranges of items that have different diameters and lengths and are composed of various materials. And a kitchen stove can cook almost anything. An oil refinery, however, is relatively inflexible — it is designed to handle only certain types of crude oil and put out a limited range of petroleum products — but very efficient. A bottling machine might be flexible in its ability to bottle almost any liquid, but inflexible because it can put it in only one size and shape of bottle. Although an automobile assembly plant might be able to produce cars with a wide range of colours and options, it can handle only a single body design and produce efficiently at only one car per minute without major line rebalancing. Labour contracts that spell out detailed job classifications often reduce flexibility by restricting the right to do certain types of work. Reliability refers to the likelihood that a piece of equipment will perform as designed. Some equipment is extremely reliable; the two Voyager spacecraft launched in 1977 to explore the solar system performed both at much higher levels and much longer than expected. Originally planned for four-year missions, they are still sending back useful information over 35 years later. In mid-2012 one of the craft experienced significant changes in radiation levels, indicating that it was at the point of leaving the heliosphere,2 some 18 billion kilometres from earth. Other products never seem to achieve their goals, possibly from a design flaw (as with software sold with bugs) or from failures of equipment, people, or systems (exemplified by automobiles recalled by the manufacturer because of faults, or the Challenger and Columbia Space Shuttles, both of which failed catastrophically). High or increasing downtime and maintenance costs might indicate a decrease in reliability. People Capability, capacity, flexibility, and reliability also apply to people, who bring muscles, brains, and interpersonal skills to operations. Although most operations require some labour to operate machines, move materials, or perform operating tasks, physical labour is increasingly being reduced as tasks become automated or otherwise changed. Instead of doing hard physical work, operations employees are increasingly expected to watch dials or monitors, make periodic quality checks, stop the process, and make minor adjustments to machines. In many services, operations workers interact directly with customers. In such a role, their interpersonal skills are an important determinant of the quality of service provided. The people component brings the psychological concepts and theories of managing people face to face with the realities of assigning workers to tasks, assessing performance, and achieving reliability. In this area, operations and human resource managers must work together closely to match the people and production tasks, and manage the human resource. Energy Energy is a component of almost any operation. Normally, we don’t think very much about it — it is just there. In other cases, however, energy is a major operations factor. Traditionally, our economy developed around energy sources, as many watercourses were exploited to run mills and factories (as well as for transportation). Although with transportation and electricity now widely available, this argument for site 2 The heliosphere is the region of space surrounding the sun, outside of which the sun’s influence is negligible. Page 5 9B08D006 selection has largely disappeared, operations needing huge amounts of energy, such as aluminum smelters, are typically located near an electricity generation facility. Inventory Inventory is an input, a component, and a product of most operating systems. Inventory can be defined as anything that is purchased or acquired for transformation or resale, or that assists in the transformation of materials into saleable goods. Although we can thus talk about inventories of people, plants, equipment, capacity, or light bulbs, we will restrict our discussion to inventories of items along the material flow shown in Exhibit 1. There are three basic kinds of inventory: raw materials, work in process, and finished goods. Wendy’s, for example, buys frozen hamburger meat and buns in batches — maybe several days’ worth — which it stores as raw materials inventory. During a normal day the staff will frequently remove some of the materials from storage and process them. For example, they might put 12 hamburger patties on a grill, where they cook for a set length of time. Then, the patties sit, waiting for orders from customers. While they are sitting, they are work-in-process inventory — partially completed units. When a customer orders a hamburger, it is assembled quickly from a number of work-in-process inventories and delivered to the customer. Because Wendy’s makes hamburgers to customers’ orders (one, two, or three patties, and many combinations of toppings), it does not hold a finished goods inventory of hamburgers (although its salad bar items are finished goods). In contrast, McDonald’s, whose hamburger production process is devoted to making to stock, does carry a small finished hamburger inventory ready for sale when customers order. Depending on your perspective, an inventory item can be raw materials, work in process, or finished goods simultaneously. The cooked patties are raw material to the assemblers, finished goods to the cook and work-in-process to the operation as a whole. Inventories both cost and save money and organizations have inventory because it is cheaper to have it than not. Inventory management involves managing the economic balance. The major benefits can be summed up as helping to smooth the flow of materials and reduce the costs in going from the supplier through the production process and on to the customer. Some of the costs are described in Exhibit 5. Exhibit 6 shows the functions of inventory. Just as an inventory item can be raw materials, work in process, or finished goods simultaneously (depending on your perspective), it can also serve more than one function at any given time. Despite the usefulness of inventory, having too much creates its own problems. Inventory not only costs money to keep, but having it can confuse workers and managers. The goal in managing inventory is to have the right amount, of the right material, in the right place, at the right time, every time. In general, the amount should be the minimum possible to ensure smooth operations. Careful attention to inventory function and operating system design can allow spectacular reductions in inventory levels. Can you eliminate the reasons for having inventory? Exhibit 7 gives some examples of how you might do so. OPERATIONS TASKS Operations tasks are what an organization must do to produce products and/or services to satisfy customers and realize its overall objectives. The main function of operations is to transform inputs into the desired outputs, using the necessary (and available) resources (see Exhibit 1). The goal is to provide the right Page 6 9B08D006 product or service, in the right quantity, at the right price, in the right place, at the right time, every time, with an acceptable level of side effects. To understand the activities properly, it is necessary to consider the environment of operating managers. Although their main job is transforming inputs, operations is very much an integrating function because operations managers must also interact with managers in virtually every other function. The different departments are all interdependent: operations needs them and they need operations (and each other). But each of the various departments has its own agenda, priorities, and ways of doing things. The operations manager must deal with the inherent conflicts to which these distinctions will give rise in the internal environment. In addition, the manager must keep up with changes in the outside world — developments in equipment and ways of making things (technology), new materials, cost changes, and competitive developments, such as changes in capacity by suppliers or competitors. Operations managers must manage people. The liaison between operations and its sources of employees is the human resources department, which helps to locate, hire, train, evaluate, and, if necessary, discipline staff; establish personnel policies; keep records; and so on. In conjunction with finance and accounting, operations must manage financial resources. Finance connects operations to the firm’s treasury. Finance and accounting, often separate departments, should establish financial policies, help operations make investment decisions, measure the costs incurred in operations, and be prepared to provide the funds necessary to support effective production systems. The two departments (particularly accounting) maintain many of the records necessary to perform and measure operations and are also responsible for sending invoices and collecting and making payments. Although operations has a role in satisfying customers, marketing is the liaison between production and the firm’s external customers. Marketing should help to translate customer needs and wishes into product specifications, forecasts of sales volumes, delivery schedules, and the like. Marketing should also be both aware of and geared up to sell what operations can produce. Note that in services, the operations and marketing functions tend to merge, as customers come into direct contact with production. One way to help to define the operations tasks is to consider operations from the customer’s perspective — after all, customers really determine what products and services the organization should provide. Exhibit 8 outlines five important customer needs that have significant implications for operations. Function You expect a computer to have certain characteristics, the exact nature of which depends on you. It might be operating speed, working memory, hard drive size, adaptability, portability, or something else. Function depends on design. A computer’s failure to run Windows software might be the result of its design. In a changing world unless product or service function changes, the product might well become obsolete. Quality When you buy a computer, you want the quality to be high. You do not expect that it will fall apart after a year’s use (unless, of course, you have some special, hard use in mind). Quality must be such that the product will perform its functions reliably. Manufacturing affects quality. For example, no matter how good the design, putting a faulty disk drive in a computer will result in a poor quality finished product. Page 7 9B08D006 When we use the term quality in the context of operations, we normally think of the quality of the primary product — the computer, the disk drive, etc. Society is rapidly coming to realize, though, that operating processes have other effects that should be considered. Petroleum engineers have developed induced hydraulic fracturing (commonly known as fracking) technology, a technique by which liquids under high pressure induce fractures in hydrocarbon-bearing rock, thus allowing the hydrocarbons (oil and gas) to be extracted economically. Although the benefits are clear, this technique poses many potential environmental threats. Large wind farms pose similar challenges. The widespread use of the Internet exposes users to industrial espionage. On a more positive note, the development of minimally invasive surgical techniques has significantly reduced many of the side effects of traditional methods of surgery. Quantity Quantity is an easily understood need. Organizations must provide enough goods or services to satisfy their customers’ needs. A university must ensure that it offers enough course sections of sufficient size to enable all its students to take a full load; a city must ensure that it has enough police, fire-fighting, hospital, and library services; and a railroad must see that it has enough space to carry all passengers or freight. Not being able to meet demand usually leads to loss of business to alternative suppliers, but, in extreme cases can cause loss of life, or, in the case of public services, to civil unrest. On the other hand, overproducing goods and services results in higher than necessary costs. For operations, quantity demands require attention to customer needs and the timing of those needs. Price Price also appears to be a fairly simple idea. Most customers have limited income and are able or willing to spend only a limited amount on any specific product or service. Potential customers who perceive the price to be too high will either not buy or switch to an alternative. However, it is clear that price, particularly that of a single purchase, is not the sole purchase criterion. If it were, many goods and services would not exist. Value is a notion that comes closer to the mark. Consumers and organizations often buy more expensive items because they perceive them to be more valuable — providing more function, quality, or quantity per dollar. They might arrive more quickly (courier services), last longer (light bulbs), be more reliable (solid state electronics), or bestow more status on the buyer (luxury cars). Although price and value are marketing concerns, they have a major effect on operations. For an organization to make money, it must produce products or services that compete on the basis of low price at low cost. Similarly, those competing with high prices must have high quality and/or high functional utility to attract customers. Few organizations can manage to produce low cost products or services with a full range of features and high quality. Service Service has many dimensions. Service might include advice on how to operate or maintain a product, financing arrangements, checkups, availability of parts, provision of qualified labour, or assurance that the manufacturer or service firm will survive the lifetime of the product or service. Once a manufacturer announces that it intends to stop making a product line, some purchasers might not be keen to buy one (others might flock to buy while it is still available). And who wants to deposit or invest their money in a weak financial institution, obtain a degree from a university that might close, buy a computer with a chip Page 8 9B08D006 that might give arithmetic errors, even rarely, or buy a ticket from a tour company or airline that faces possible bankruptcy? Delivery is yet another facet of service. Delivery has several meanings. Some organizations, such as appliance and furniture retailers, and pizza suppliers, deliver purchased goods to customers and remove old items. They use these services competitively. Insurance salespeople make home visits. Some fitness clubs will send staff members to your home if you wish. However, the once-routine services of doctors who make house calls and grocery stores that deliver now make headlines. Time is another dimension of delivery. We expect fast response from fire, ambulance, and emergency departments to save lives. We expect newspapers to include the latest news in their current editions. Every manufacturer gets the occasional call from a customer looking for a product in a hurry. Although producing quickly might be important, producing on time might be even more so. How useful are snowmobiles delivered to Canadian retailers in April, Christmas cards in February, completed income tax forms after the deadline, or lunch salads at 2:00 p.m.? Many people criticize VIA Rail and Canada Post not for genuine slowness, but because they perceive that they cannot rely on these services’ advertised delivery times. Competing on service requires that operations have a very flexible delivery system; often excess capacity; equipment, people, and suppliers that are fully competent, reliable, and at least somewhat interchangeable; and intelligent scheduling. Achieving the Desired Outcomes It is tempting to ask: Which of the needs is most important? The answer is simple but frustrating: It depends. Customer needs vary from one individual to another and depend very much on the situation. The operations manager’s job includes determining what today’s need is and having the flexibility to provide it. The ranking of those needs will dictate what the operations manager should emphasize. One restaurateur trains his staff to determine if customers are “eaters” or “diners.” Although both groups choose from the same menu and receive food of the same quality, the serving staff members make sure the eaters are served promptly and the diners have time to relax. The result is a higher portion of satisfied customers and a higher number of table turns from the eaters. It is worth trying at least to rank the five categories of customer need. As a manager you have to know where to focus your attention. Because you can’t do everything well, you need to know what is most important so you can at least achieve that. Why are we focusing all this attention on customers in a note on operations? The answer is in two parts: operations is responsible for supplying goods and services to satisfy specific customer needs, and the viability of the whole enterprise depends on how well this is done. Although well-managed operations can never guarantee corporate success — all functions must be in good shape and well coordinated throughout the company and with the external environment to achieve that — it is fair to say that it is extremely difficult to have good corporate performance if operations is poorly managed. Because operations often accounts for 50 to 70 per cent of total costs and employs most of an enterprise’s work force, it warrants close attention. Customer needs must be used to set objectives, and operations should be organized to meet them. In most well-run firms, these objectives are set jointly by operations, marketing, finance, and other key groups. Function and quality come from the new product development group. The design must both do what the customer wants it to do and can be manufactured. Operations should be involved throughout the product Page 9 9B08D006 development process. There are many examples of product designs handed to operations (“thrown over the wall”), as though their manufacture were automatic, that have turned out to be either impossible or too expensive to make. The result is usually unplanned design compromises or extremely high costs. Early integration can prevent such undesirable outcomes. Throughout the production process, targets should be set and measurements taken to ensure that the product design’s quality needs are met. Sometimes marketing alone translates customer needs into required product quantities; in more progressive companies, operations and other functions will also be involved. The problem is to match the quantity produced with customer demand in any given time period. Both producing too much and producing too little might result in losses. Firms translate customer price requirements into a target manufacturing cost, on which company profits hinge. Thus, operations can be highly cost-oriented; many enterprises establish elaborate systems to measure and control costs to ensure profitable operation. Organizations translate customer needs for delivery into operational time targets. They schedule and continually monitor where everything is in the whole operation so that each product will be completed by a certain time. They require information: What is ahead of schedule? Can it be delayed? What is late? Why? What can be done to expedite the items that are behind? Organizations translate the need for other services much as they do the price need. Because many service aspects have implications for function, quality, quantity, and price, they can be considered as part of these objectives. However, it is not good enough simply to meet only some of these targets, even perfectly. Because the process must be repeatable and improvable, managers must manage operations to ensure that it is in harmony with overall company policies and objectives for continuity of the enterprise. They must also plan both for the short and the long term. It is not good enough simply to do well today — tomorrow and next year count at least as much. On the other hand, the short term cannot be ignored. A brilliant long-range plan is useless if the organization does not survive that long. In many organizations, the distinctions between the five categories of function, quality, quantity, price and service are clear; in many other, however, that is not so. Assume you are in a restaurant for a meal. The operation’s function is to provide food and beverages to customers. The quality of the meal is affected not only by the quality of the ingredients but also by how they are prepared and how they are delivered to you. Quantity has to do with portion size, although portion size might also be considered to be part of function and/or quality. Price is, in most cases, unambiguous. Service includes a host of attributes — the politeness, personality and appearance of staff, the accuracy of descriptions, order taking and meal preparation, promptness, how staff deal with problems or questions, etc. In short, trying to cleanly assign the numerous important factors into the five categories above can be an exercise in futility. This does not, of course, mean that such organizations cannot be managed. The situation is mirrored in many human conditions. Either you have a valid driver’s license or you do not. Intelligence or language fluency, though, are continua with many dimensions and no really good measurement scales. Managers have to use categorizations wisely and exercise judgment in making decisions. Effectiveness and Efficiency The role of the operations manager is to accomplish the necessary tasks as effectively and as efficiently as possible. Exhibit 9 describes and gives some examples of these two concepts. Effectiveness is related to quality. An operation is effective if it makes the product as designed, on time. Although a prescribed Page 10 9B08D006 design is important, many service organizations are demonstrating their effectiveness in satisfying customers by expecting employees to go to whatever lengths are necessary to solve customer problems. Efficiency is related to productivity. An operation is efficient if it functions with a minimum of cost, effort, and waste. Effectiveness and efficiency often seem to conflict — you can have one, but only at the expense of the other. In other words, it is possible for an operation to be efficient but not effective; or it can be effective but not efficient. Another, very undesirable possibility is that it might be neither effective nor efficient. Hospitals that operate with no slack capacity in their emergency departments or universities that encourage undergraduate classes of 250 students are focusing on efficiency — some observers argue that in these cases, efficiency comes at the expense of effectiveness. The same university might have graduate classes of only five students — in this case the class might be very effective, but it might cost as much as (or even more than) the 250-student class down the hall. The ideal, of course, is to be both effective and efficient. Although this goal is not always possible, every organization should strive for it. The relative importance of efficiency and effectiveness depends on the organization’s major objectives and required tasks. Effectiveness is usually considered to be much more important than efficiency in courier services; consequently, courier services are relatively expensive. The post office puts more emphasis on efficiency; costs are much lower, but the effectiveness (here measured by delivery speed and variability) suffers. In some cases, efficiency can develop into effectiveness. Many banks originally bought automated banking machines (ABMs) to reduce costs — an efficiency rationale. Recently, however, institutions are adding services to their ABMs to give customers more choice in services — making them more effective. TYPES OF OPERATING PROCESSES AND MANAGERIAL IMPLICATIONS So far we have talked about operating processes as if they were all the same. Clearly, this is absurd. You have undoubtedly seen or can imagine several different kinds of production processes. But what is the best way to transform inputs into outputs to meet the demands on operations? What is needed to compete? Why would a customer want to buy a product or service from us rather than from one of our competitors? How should we classify production processes? The following sections describe three types of production process along a continuous spectrum as shown in Exhibit 10. Note the spacing in this exhibit. Job shops and batch processes are similar; likewise line flow and continuous processes are similar, but quite different form job shop and batching operations. Projects are different from all other processes. In reality, it is difficult to classify a particular production system as clearly one type or another because the differences are not always obvious and some organizations are hybrids because of mixing. Mixing is natural because production facilities might change process type over time. Despite classification problems, however, focusing on these three types is useful because they: 1. Stress the need to select a process according to the production tasks to be performed; and 2. Represent very different kinds of production processes, each with its own critical characteristics that must be carefully managed. Continuous-Flow and Line-Flow Processes In a continuous-flow process, inputs are transformed into outputs continuously. As Exhibit 10 shows, they are closely akin to line-flow processes. The differences between the two are largely matters of degree; one Page 11 9B08D006 distinction is that line-flow processes tend to produce discrete units (that is, they can be counted one by one, such as cars or bottles), whereas continuous-flow processes produce products counted in units of measure (litres of benzene, tonnes of steel). Exhibit 11 shows some important traits of such processes. Because all materials in production go through the same steps in the same order, a critical element to be managed is the smoothness of flow in and between the steps. A “break” in production at any place along the line effectively shuts down the whole line. Examples are everywhere: you are in a cafeteria line and someone ahead of you wants to wait for a special serving; you are on a crowded highway when two cars ahead of you collide; a work station on an automobile assembly line runs out of parts; a machine breaks down; a worker has to go to the washroom; one work centre (worker or machine) is slower than the rest. Although the possibilities are endless, the result is the same: operations stop, or at least slow down, in some cases, for a long time. To keep things moving, managers have to try to foresee some of these problems and take appropriate preventive measures. Rules forbidding special servings, great inventory management procedures, off-line places to put problems, and back-up people and equipment are some possibilities. A major concern in designing continuous-flow or line-flow operations is to make sure that each step takes the same amount of time. This process is called line balancing and is designed to control the number and location of bottlenecks that occur whenever one step in a connected sequence is slower than the others. Exhibit 12 provides an example. For dishwashing on a camping trip, the times in Scenario A might not be a great concern. However, if you were paying the workers, you would pay for idle time. Although the amount might still be trivial in a dishwashing operation, in an assembly operation with 1,000 one-person work stations working 16 hours per day, five days per week, 52 weeks per year, and paying each worker $15 per hour, 33 per cent idle time would cost $20.8 million per year. One approach to dealing with this problem is to balance the line, that is, to reduce the idle time to zero. Only rarely can a continuous- or line-flow operation be completely balanced, of course, but it is worth getting the idle time as low as possible. In the dishwashing example, adding a second dryer (Scenario B) would help. Although it would shift the bottleneck to washing, it would reduce drying time to 7.5 seconds per cycle and reduce idle time. Redesigning the drying job might help too. Perhaps the dryer has a poor technique or an awkward layout in which to work. Maybe the washer could also stack, giving a completely balanced two-worker line. A basic technique called process analysis is very useful in determining the degree of balance in a process and in planning improvements. We will discuss process analysis and another useful technique, trade-off analysis, in a later section of this note. First, however, we will discuss some additional process types. Job Shop and Batch Processes In job shop and batch processes work moves intermittently in groups. Exhibit 10 gives some examples. Processes can be of mixed type; although at McDonald’s the overall operation is line flow, the chain cooks its hamburgers in groups, perhaps 12 at a time. Processes can also be changed; traffic along a freeway moves continuously (at least until volume or an accident interrupts it); traffic lights convert the process into batch flow. Major features distinguish job shop and batching operations from continuous-flow and line-flow operations. In job shop and batching operations, each job uses a different amount of resources at each step Page 12 9B08D006 and produces a distinct product. In line-flow and continuous-flow operations, every unit goes through the same steps, in the same order, and at the same rate. In contrast, in batch operations, and particularly job shops, flow is jumbled. Although one flow pattern might dominate, each job might take a different pathway through the process depending on scheduling needs or technical requirements. For example, a full-service automobile repair shop might have separate areas for welding, tuning up, and wheel alignment. Some cars might be welded first, then tuned up, then aligned, and, finally, given a road test. Others might bypass welding and wheel alignment. Others might be aligned before being tuned up. Routing is not entirely random — painting is always one of the last operations in a body shop. The wide range of potential products, customers, volumes, and tasks means that purchasing, inventory planning, work force planning, and scheduling often cannot be established in isolation from specific customer orders or inventory positions. For many, all these activities begin to interact only when a customer order is received, or finished goods inventory drops to a set level (the reorder point). The operations manager’s main task is to manage conflicting objectives, such as both meeting customer needs and keeping costs low. Speed comes from processing each order through each work centre as soon as it appears. Unfortunately, this policy demands extensive facilities to handle periods of peak demand, increasing costs during idle periods. However, facilities designed for average demand cannot handle the load in peak periods. Batching operations are less exposed to this problem because they schedule production around a finished goods inventory. The manager might have to decide between customers in situations in which not all of them can be satisfied. The differences in operations, sequences of steps, and times greatly complicate the scheduling task, which should consider all jobs in the shop, their process requirements, and the current backlog at each work station, as well as orders expected but not yet received. There are some useful and common, but by no means perfect, scheduling rules, such as first come first served, shortest processing time, urgency, customer persistence, or customer importance. Many organizations use judicious combinations of these and other rules. Another difference between job shop and batching operations and continuous- and line-flow operations is the type of equipment used. Job shop and batching operations commonly use flexible, general purpose equipment rather than the more specialized machines common in line- or continuous-flow operations. A single drill press might be used to drill holes of all diameters and depths. The penalty paid for this flexibility is the cost of adjusting or setting up the equipment differently for each job. Set-ups might take from minutes to several hours or even days. Set-ups incur direct and indirect costs as they take machines out of production. A final difference lies in the amount and type of inventory. Job shop and batching operations typically build up significant work-in-process inventories. In one company that uses batch production to make plumbing products, although the cumulative production time spent making a single part is only one or two hours, parts take eight weeks on average (320 working hours, 1,344 real hours) to go from raw materials to finished goods. The work-in-process inventory is large and costly. In contrast, line- and continuous-flow operations have relatively little work-in-process inventory but more raw materials and finished goods. Although job shop and batching operations are similar, they are not identical. A key difference is their response to customer specifications. A job shop typically performs custom work in response to customer orders. Automobile repair shops, for example, work only when a customer brings in a vehicle; they perform the tasks requested by the customer and can identify the car with the customer at every stage. Page 13 9B08D006 Individual orders might not be all that complex; the process of tuning an engine is reasonably standard. A batching operation more likely makes a standard product line in response to inventory levels. Although a restaurant, for example, might prepare many of its menu items to customer order, the chef will likely prepare a batch of the Irish stew special or garden salads in advance, based on a demand forecast. The product becomes identified with an individual customer only when it is actually served. Decisions on the optimum batch size, work centre schedule, and size or mix of inventory occupy much of job shop managers’ time. Despite their difficulty and frequency, these tasks are not the job shop manager’s most important ones. Management must watch for changes over time in customer demand regarding the five basic needs (function, quality, quantity, price, and service). As the priority of these demands changes, the manager must be prepared to respond by changing the existing process. This decision is difficult because the changes are subtle and gradual. An automobile repair shop doing a variety of repairs might become known for reliable, fast muffler replacement. The manager might notice that the services most in demand have changed. The shop now has a high portion of muffler jobs and requests for this service are steady. The number of these jobs has increased; the expected delivery time is probably shorter than for most jobs; and inefficiencies of scheduling these jobs around larger jobs might well be increasing overall cost. Changing the operation from a job shop to one in which at least its muffler jobs are done in a line- flow system might well be important to future profitability. Project Processes Some products are unique or very complex. In these situations, a somewhat different approach to production, a project process, is most efficient and effective. Economies of scale and specialization do not apply. Often, the organization is “product-dedicated,” with the job often being stationary and having resources brought to it. Exhibit 10 gives some examples. Projects resemble job shops in that both handle special custom orders. Projects are unique because of their size, complexity, and the presence of a number of steps that must be completed in a clearly defined order. Because the key cost components are investments in materials and human resources, producers and customers are both interested in early completion. A critical task is scheduling the various steps of the project so that they are finished just as they are needed. The goal is usually to reduce cost by minimizing the overall completion time and the investment in the components of the project. A number of methods that identify the project’s longest or critical path have been developed to help project managers in these tasks. Many commercial computer programs will perform the necessary calculations. Choosing a Process Although there are exceptions, observers have noted a strong correlation between the characteristics of the product and the process used to make it. The product characteristics are typical of the product life cycle, which describes changes in product volume and other traits over time. In short, customers can have any two of speed, quality or low cost, but not all three. Most products start life as prototypes. They are produced in low volumes, often with radical product changes between one unit and the next, and sold at a premium price. Customers are paying for design features, for speed of delivery, and, in many cases, for flexibility — the producer’s ability to customize the design to meet customer needs. After a product moves through the rapid growth phase to maturity, volume is usually high, the product design has stabilized, and the price has levelled off. The products now compete on such features as price, reliability, quality, and product features. In extreme cases, the product becomes a commodity. These two scenarios, Page 14 9B08D006 infancy and maturity, are quite different and demand a different approach to operations. Although changes in product characteristics should be matched by changes in the process, most organizations cannot afford to change processes frequently; consequently, they might choose to tolerate processes that are not ideal and live with the resulting inefficiencies. Consider the question: What is the best way to make clothes? It can really be answered only by more questions. What type of clothes? Who will buy them? How will they compete? What volume is expected? What features will they have? What quality is needed? After answering these questions (determining what features the product needs), managers are in a position to pick the process. For products early in their life cycles, job shops are typical. Flexibility, design, and quality are important characteristics to the customer, and job shops are ideally set up to provide them. As a product becomes more stable and volume increases, the job shop might well give way to a batching operation, which is less flexible, more price competitive, and more able to produce in volume. At maturity and high volumes, a line-flow or continuous-flow process is usually most appropriate. In the clothing industry, a large producer of off-the-rack ladies’ wear would probably use some form of line-flow process requiring specialized machinery and relatively unskilled labour, possibly from a Third World country. In contrast, a producer of custom clothing, such as wedding dresses, for whom design and quality are paramount and volumes are low, would use a quite different operation. In this case, mechanization would be low, those hired would have to be skilled, and, typically, it would be located near the customer. Intermediate product characteristics would demand an intermediate process — batching. Exhibit 13 shows the relationship between product and process characteristics. According to this model, successful organizations are found in or near the diagonal band; those found significantly above or below it are uncompetitive. Think about how you would make a line of family cars versus a high-performance race car, or how you would set up a cafeteria as opposed to an haute cuisine restaurant. Other Management Decisions Obviously, operations managers need to do more than simply choose a suitable process type and change it as the product traits change. Exhibit 14 gives examples of the sorts of decisions managers must make during design and start-up as well as on a day-to-day basis. This note’s cases and problems will give you more practice in applying the principles of operations and other functions to some of them. Each of these and many other decisions must consider the production tasks and the firm’s internal and external environments. Available company resources will constrain many choices; the type of output desired will restrict others. Some decisions, such as location, represent long-term commitments, others are medium term (investment in equipment), and yet others are short term (purchasing decisions). Particularly when making major decisions, managers must bear in mind both the current circumstances and anticipated future developments. Changing major decisions, such as plant location and primary machinery layout, is always expensive and disruptive and can sometimes threaten the firm’s future. One of a university’s most important decisions is classroom design. Although people, courses, course materials, and teaching methods come and go, the concrete and walls tend not to be changed once they are in place. A classroom designed for lectures to 250 students is unsuitable for case teaching to classes of 70. Page 15 9B08D006 PROCESS AND TRADE-OFF ANALYSES: TWO BASIC ANALYTICAL TOOLS Process Analysis As much as possible, operations managers must ensure that the units of product proceed through the process as scheduled. In continuous- or line-flow processes, production is usually either on or off; when it is on, each unit moves along at essentially the same even or level rate. In job shops or batch operations, this is usually not the case. Flow is intermittent, and the rate of any one step can change frequently, leading to bottlenecks that keep changing. To determine the location of bottlenecks and the degree of balance in the process, we must perform the key operations tool of process analysis. Typically, it proceeds as shown in Exhibit 15. Depending on the questions you want to answer, the boundaries of your analysis might be the whole plant, a particular department, a specific machine, or a small sequence on that machine — making one of the many different parts, for example. The list of process steps should include relevant movement, storage (inventory), inspection, and transformation steps. The required output is often based on customer demand, either forecasted or known. Inefficiencies restrict process output. Some processes work at 100 per cent for a while and then stop completely, possibly for set-ups, preventive maintenance, or cleaning. Others work all the time but at only a fraction of theoretical capacity. The output of every process is limited by at least one step. Even so, how much excess capacity do the other steps have? How much inventory buffers them from other steps? How long will it be before adjacent steps (in each direction) are affected? How you improve the process depends on what types of questions you want to address. If you have a line-balancing problem, try to even out the outputs of each step. If you have an overall output problem, determine where to add resources. If the output problem is timing, find out where attention should be directed to smooth out the flow. Exhibit 17 shows an example of process analysis, including a partial process-flow diagram with the capacities for four of the steps and the required output. The process boundaries are set as the dishwashing operations in this department, excluding cutlery, and the rate is measured in dishes per day. Because of the hospital’s inventory of dishes, average rates are quite sufficient for our analysis. If it did not have this number of dishes, the exact timing of dish use and return would be much more important and we would have to analyze dishes processed per hour, or even per minute. Although we do not know of any machine inefficiencies, we do know that the workers work for only seven hours per day after breaks are accounted for. The process bottleneck is in the two machine operations (washing and drying) at 6,300 dishes per day (seven hours). In fact, because these two operations take place sequentially in the same machines with no human intervention, they might even be combined in this analysis — unless, of course, we were considering replacing one of them with two machines, one to wash and one to dry. Depending on how the work is scheduled and whether machines must be watched at all times when they are running, the effective workday for machines might be eight hours. With a required output (demand) of 6,304 dishes per day, we are really tight on overall capacity. Demand is close enough to capacity to warrant a close look at the accuracy of the figures. Although in this example working a small amount of overtime would be an attractive alternative, if capacity were to be increased, it is clear that the first place it should be added is to the washing machines — our bottleneck. The system is not balanced. The worker operations, particularly scraping, rinsing, and stacking (operation 1), have excess capacity. Could we get by with one fewer worker in this operation? Overall, we need five to six workers (5.57) at the stated work rates (Exhibit 17). Could we do this by sharing a person between the two worker operations? How good are the work rate and demand figures? How much slack do we want to have to cover contingencies? Is there something else that these workers could do? These and similar Page 16 9B08D006 questions should serve as a signal to management to look more closely. There might be enough money at stake to make more accurate answers worthwhile. Of course, changing or eliminating jobs would involve the human resources department. The answers to some of these questions will involve a second fundamental operations tool, trade-off analysis. Trade-off Analysis Trade-offs arise when you must choose because you cannot have everything. Everyone makes trade-offs every day. For example, you might want to spend the evening with your friends at a popular pub, but because you also want to do well on your exam at the end of the week, you decide to spend the evening studying. You might like to study business and also medicine, but having to choose a limited number of courses forces you either to eliminate one option or to extend your academic studies. In some cases, the trade-off is black or white — medicine or business. In others, it is progressive — you could study for one, two, or three hours and then go to the pub — with varying costs and benefits. Trade-off analysis helps managers decide what the “best” compromise is. Like process analysis, trade-off analysis involves a logical sequence of steps that will not guarantee success but might prevent disaster. Exhibit 18 shows the steps. In Step 4 of Exhibit 18, although monetary units are particularly common and useful, output units and processing rates are also used. This step is not easy and will involve estimates. Although determining a monetary value for a qualitative benefit such as better customer service or happier workers is not always possible, it is a bigger mistake to ignore such factors. One way to begin is to perform a sensitivity analysis and to determine how large or small a value would have to be before it would make a difference to the decision. The answer will tell you how close your estimate has to be. The entire activity will necessarily involve a lot of sound managerial judgment because many of the costs and savings will be qualitative or uncertain. Our hospital dishwashing example demonstrates the trade-off process. Our process analysis of this operation revealed some idle labour time in two of the four steps (see Exhibit 17). We might ask, Is there a better way to process the dirty dishes, that is, can we make the process more efficient while maintaining our effectiveness in cleaning just over 6,300 dishes per day? Apparently, demand peaks are not a problem here, and outputs determine inputs as dishes are cycled through this process (6,300 clean dishes return as 6,300 dirty dishes — with occasional losses from breakage). For the purpose of illustration, we will consider only two of the many possible alternatives: 1. Leave the current system alone (that is, do nothing). 2. Reduce scraping, rinsing, and stacking staff by one; reassign workloads so staff perform all operations on a rotating basis; separate labour and machine operations by work-in-process dish inventory. Exhibit 19 summarizes estimates of the costs and benefits of these alternatives. The cost of the first alternative is the quantitative savings of the second alternative — the yearly wages plus benefits of one worker. However, laying off a worker and reassigning work does not come cost-free. Staff idle time gives an operation flexibility that might be useful if, for example, one of the machines breaks and washing dishes by hand becomes necessary, surprise menu changes for a special occasion require seven dishes per patient meal, or a worker is absent. How will the remaining workers react to the new workload? As a manager, you might judge the annual value of these costs at $24,000, $15,000, and $50,000, respectively. Making the second two estimates is obviously difficult and subjective. One way Page 17 9B08D006 might be to ask how much you would be prepared to pay for insurance to avoid the cost altogether. Depending on your judgment, you will choose one of the alternatives or continue to investigate others, along with their associated trade-offs. In this example, note that departments other than operations are, or should be, involved. Several questions increase substantially the complexities and challenges of managing this simple example:  What are the hospital’s policies to replace dishes that are broken, lost, or stolen?  What happens if a washing machine breaks down?  How are sudden increases or decreases in demand handled?  What is the best way to schedule the job of picking up dirty dishes from the wards?  Is too much or too little money invested in the inventory of dishes?  Should we replace one or both of the existing washing and drying machines? Performing a process analysis to gain a good understanding of how a process works and careful consideration of relevant trade-offs will put you in a good position to make operations decisions. The problems and cases at the end of this note will allow you to practise using these and other analytical tools to develop your managerial skills. RECENT DEVELOPMENTS IN OPERATIONS Like all fields, operations is constantly developing. The recent past has seen revolutionary changes in attitudes toward quality, inventory management, and timing, which affect all departments in an organization. Quality The changes in quality originate in how it affects an organization’s competitiveness, how it is defined, and how it is achieved. Industries go through phases in which one competitive factor or another dominates. From time to time it might be access — such as to a patented product or process or one requiring special skills or a secret recipe — the ability to produce at low cost, the ability to produce high quality, or the willingness and ability to provide superior service. Many organizations have been able to produce high quality goods and services, forcing participants in their industries to devote significant attention to this area to maintain their market share. Some see quality as an inherent characteristic that cannot really be defined but is recognized when seen. For example, you might judge the quality of a car by its shape. Art, wine, and services that rely on interpersonal interactions are other examples. Others see quality as a measurable characteristic inherent in a product — more, or less, represents higher quality. Thus, you might judge the quality of a car by its horsepower rating, top speed, or acceleration. Others view quality as conformance to specifications — deviation from specifications means bad quality. A fleet manager might judge the quality of cars by the degree of similarity between units. Still others consider quality to be whatever the user or customer says it is. You and a friend might have radically different views about the quality of a course, car, or band. Your view might well depend on your circumstances. Underlying the whole notion of quality is a trade-off between quality and cost — extra quality is available, but only at a cost. Although different managers view quality differently, increasingly it is left up to customers to define it. Needless to say, this shift affects operations by placing extra emphasis on flexibility and communication. Page 18 9B08D006 Some organizations, such as artistic ventures and professional services, rely on artisans and craftspersons to build a high quality product or service. Others rely on objective measures and statistical rules to separate acceptable batches of product (or input) from unacceptable ones; the relevant factors include the costs of testing and of making errors — accepting bad units and rejecting good ones. However, ensuring high quality by inspecting and separating out unacceptable output is expensive. More advanced organizations use statistics to help build quality through statistical process control (SPC). This technique requires regular collection and analysis of relevant quality data. Even though quality problems show up in the products, the focus of controlling quality is on the processes that make them. Current thinking on quality focuses on a philosophy rooted in Japan known as total quality management (TQM), which builds on SPC in two ways. First, its real goal is to enhance competitive performance in all areas: costs, productivity, market share, and profits, as well as quality. Second, TQM is all-inclusive. It means improving an organization by eliminating waste in every activity — not only production, but also design, purchasing, inspection, marketing, sales, service, research and development, financial controls, personnel management, and the like. TQM treats every function as a process, which it sets out to analyze and improve. Although TQM uses several simple SPC tools to diagnose quality problems, TQM is not a set of techniques or even a state — it is a philosophy, an attitude, a never-ending journey. Exhibit 20 shows its philosophical bases. Exhibit 21 describes some of the significant implications of TQM. Because it concentrates on processes, TQM recognizes a series of supplier-operator-customer groups connected in chains, with attention focused on the links between activities. Almost everyone is simultaneously in all three roles. This environment requires effective and frequent cooperation and communication along the chains. Constantly seeking perfection leads organizations to search for and study the best possible examples of relevant processes (benchmarking), wherever they occur. They then use the information to redesign (improve) their own processes. TQM links processes and involves everyone, including top management, in managing quality. TQM requires dramatic change in many organizations. It is hard to establish a culture of cooperation when the traditional supplier-customer relationships, both internal and external, have been adversarial. However, the benefits — higher quality inputs and outputs, reduced variability, and delegated decision making — are real. To get results, organizations must invest in training, development, and technology and adopt an attitude that change is good. Managers often see this change as threatening because:  Their jobs change from gathering information, making decisions, and using incentives and punishments to manage the work force, to consulting and coaching, and  Organizations widen their spans of control and reduce layers of management. Above all, TQM is an integrating philosophy that focuses the whole organization’s attention on the single goal of satisfying customers. The changes are sufficiently sweeping to alter the very notion of why firms exist. The traditional model sees a firm’s overriding goal as maximizing shareholders’ wealth by maximizing profits. In contrast, TQM views satisfying customers as a firm’s prime goal; shareholder wealth is a logical outcome of customer satisfaction, not a goal in its own right. With reference to Exhibit 13, above, through reduced set-up times, TQM has shifted the attractive band of production from the rigid diagonal shown, toward the lower right-hand corner. It has allowed job shops and batching operations to operate more like line-flow or continuous-flow operations. It is an attractive, radical departure from traditional North American and European thinking. Page 19 9B08D006 TQM proficiency is now recognized by a number of well-known awards, such as the Deming Prize (Japan), the Malcolm Baldrige National Quality Award (United States), and the ISO 9000 family of standards (international). The goal of these awards is to promote quality and productivity, which are essential to successful business. In general, the focus of these awards is on management systems, rather than on product specifications; thus, although extremely unlikely, an awarded organization could produce low quality products. The awards promote process standards in all departments and functions to help organizations continuously achieve quality for their customers. Just-in-Time Manufacturing TQM arose from a more fundamental Japanese movement, just-in-time (JIT) or zero inventory (ZI) manufacturing, which is largely responsible for Japan’s striking post–World War II success. JIT has at least two distinct meanings. On a micro level, the term literally is taken to mean that something arrives just as it is needed — no sooner and no later. Factories manage to achieve this goal by using an effective information system. Despite the widespread use of computers in production, the system used is low-tech: a visible signal (kanban) authorizes a worker to do something, for example, work on one or a few more parts or move one or a few parts to the next work centre. The rules are simple — no kanban, no action. When a machine breaks or production flow stops for any reason, the flow of kanban, and thus production, stops. Because there are only a few kanban between any two work centres, the system is very responsive to disruptions. The 2011 Japanese earthquake and consequent tsunami quickly disrupted many manufacturing operations worldwide with parts suppliers in the affected zone. In contrast, traditional North American and European systems expect workers to work on the next part, if at all possible, and these systems will not stop until workers run out of parts to work on. Because the systems are designed to keep workers occupied, there are always lots of parts and it takes a long time for the system to stop. Stopping production quickly would lead to lost efficiency if nothing else happened. But, in Japanese eyes, stopping work allows workers to identify and solve real production problems and prevents the accumulation of costly inventories, which hide opportunities for improvement. If work was stopped because of a poor quality part produced in an earlier operation, it is hardly wise to keep producing more just to keep workers occupied. The advantages of JIT production have to be balanced against the need for demand stability. On a macro level, JIT means eliminating waste — the TQM philosophy of continual improvement. Non- TQM plants often believe that operations, once debugged, are running optimally and that changing things will only cause problems. TQM recognizes that no matter how well something is running, it is never perfect. Under this philosophy, everyone, including managers, tries to find operations problems (waste) and eliminate them. A useful start is to reduce inventory, which mostly just sits around, costing a lot of money and adding no value of any kind. As described earlier in this note, JIT operators have found ways to eliminate the reasons for having inventory. Flexibility and Operations Control In the past few years, customers have started to demand exactly what they want from manufacturers. Typically, they want something different — perhaps colour, size, flavour, or shape — and they want it fast without a price penalty. This phenomenon, termed “mass customization,” is more common in some industries than others. In some markets — such as those for commodities — customers place little value on the possible custom features. Other markets might be restricted by law from customizing. Although Page 20 9B08D006 mass customization can be expected to increase production costs, there are significant advantages to producers that can manage it, especially if they can charge a price premium. For example, one small Japanese bicycle manufacturer can produce several million different variations based on model, frame size, colour, and so on. The company’s electronic communications connect the store, where customers are measured, with the factory. Its computer-aided design (CAD) system designs the product. The plant itself, however, is not extensively automated. Although the company promises delivery of custom bicycles within two to three weeks, it can complete them in only 150 minutes (compared with 90 minutes for its standard lines). The custom bicycles sell at a considerable premium above the standard models. The company can use the skill it has developed in responding rapidly to market demands to help sell all its products and keep inventory levels low. Mass customization differs from providing variety in one important respect: it means economically manufacturing in response to a customer’s order instead of trying to meet customer needs through inventory. The requirements of mass customization are both a major challenge and a significant opportunity for manufacturers. The task is simultaneously to obtain both low cost and flexibility. With reference to Exhibit 13 the question becomes: How can manufacturers combine the traditional scale of line- and continuous-flow processes with the nimbleness of job shops? There are various ways to deal with this problem. First of all, it pays at the design stage to plan products and processes so that customized versions can be built from standard modules (held in an electronic database) from which the product can be rapidly created. It also helps to keep customer orders moving as quickly as possible from product design, through process planning, to creation and delivery of the product or service by linking all the processes needed to plan, manufacture, and deliver a product. A third way to increase flexibility is to ensure that all the steps from suppliers through to delivery to the customer (the supply chain) are as short as possible. It doesn’t make much sense to be able to design a product and a process to make it within hours of receiving a customer order if it takes weeks to get the material or to free up capacity in the supply chain. Typically, responsive supply chains have relatively few steps, low set-up times, and excess capacity. Many mass customizers dedicate a team to design, produce, and deliver a customer’s order. Flexibility requires that such teams be established quickly and work together from the start, implying a cooperative organizational culture. It also helps to seek and capture customer feedback about both the product and the process. An enterprise can use such information for its own planning, particularly in deciding how to deal with a specific customer in the future. Lastly, computers can help improve flexibility by capturing data in an electronically retrievable and editable form, which can be transferred across the world instantaneously. Thus, product design can be accomplished much more quickly. It is common for designs created in North America to be transferred to manufacturers in Southeast Asia, who immediately start manufacture. Computers are vital to the operating steps themselves as both their physical and mental aspects are increasingly automated. Computers are also being used in operations planning and control in a technique known as manufacturing resource planning (MRP). The main notion behind MRP is that the needs for materials and other resources are interconnected rather than independent. Once a fast-food restaurant manager has a forecast of hamburger sales, he or she no longer has to estimate how many hamburger buns (or meat, relish, worker hours, watts of electricity, and so on) will be needed and when to order them. These demands can be calculated because fast-food restaurants do not sell these components except as complete hamburgers. MRP’s goals are to have the right amount of the right part, in the right place, at the right time, every time; to minimize inventories, especially work in process; and to improve customer service by avoiding stock- Page 21 9B08D006 outs. MRP allows a way around the conflict between minimizing inventories and improving customer service. By connecting manufacturing to accounting, purchasing, marketing, and other functions, advanced MRP systems are information systems that integrate all functional areas of the organization. MRP and TQM use quite different means toward the same ends. In production controlled by kanban, problems quickly stop the flow — production is pulled through the system. Think about a string attached to a toy; stop pulling, and the toy stops instantly. In production controlled by MRP, production is pushed through the system. MRP production is thus relatively insensitive to stoppages in flow unless the MRP program is recalculated. Try stopping a rolling toy by pushing on the string. MRP’s aim is to control the current system using computer programs and databases as tools. In contrast, TQM’s aim is to discover problems in the existing system so that the system can be improved by eliminating the problems. Referring to Exhibit 13, computerization in manufacturing can increase flexibility. It can reduce set-up costs per run, making production of small lots of mature products viable (the lower right-hand corner). SUMMARY This note was designed to broaden your knowledge of operations situations by discussing five aspects of operating systems: 1. The input-transformation-output notion and the basic transformation components of equipment, labour, materials, and energy; 2. The key operations tasks of function, quality, quantity, price, and service; 3. The basic process types (continuous-flow, line-flow, batch, job shop, and project processes) and their management requirements; 4. The two basic operations analysis tools of process and trade-off analysis; and 5. Recent developments in quality, inventory management, and timing. This note also emphasized that operations is all around us, all the time. Each of us is involved in operations daily in our professional and personal lives. Operations cannot meaningfully be dealt with in isolation from the other functions in the organization, nor can these functions ignore operations. Although operations problems vary in their difficulty and scope, we believe that understanding the points discussed in this note will help you to make a significant start in dealing with the complexities and accepting the challenges. Page 22 9B08D006 Exhibit 1 A MODEL OF OPERATIONS Page 23 9B08D006 Exhibit 2 Examples of Operating Systems Organization Inputs Transformation Process Outputs Drilling, blasting, Iron oxide concentrate, Iron mine Iron ore separating, crushing, waste rock concentrating Smelting, pouring, Iron oxide pellets, lime, Steel mill oxygenating, rolling, Steel ingots, slabs, sheets coal, scrap steel forming Pressing, punching, Parts manufacturer Sheet steel machining, painting, Parts ready to assemble polishing Automotive assembly Welding, bolting, riveting, Parts Finished automobile plant painting, testing Seating, order taking, Foodstuffs, hungry preparing drinks and food, Satisfied customers, waste Restaurant customers serving, cleaning-up, food setting table Analyzing, sorting, writing, teaching, Skilled and knowledgeable University Knowledge, students counseling, evaluating, graduates, new knowledge planning, gathering data Organizing activities into a Available dates, necessary network, marshalling Project completed on time Planning rock concert activities and required resources, scheduling, and on budget order, estimated times monitoring progress Interest rates, trends, Analyzing data, matching Investment management yields, client preferences, client and portfolio, Wealthier, satisfied clients network of contacts transactions Scheduling, analyzing Staff records, performance Staff development plan, data, interviewing, Personnel department evaluations, department enhanced resources, discussing strengths and needs satisfied staff weaknesses Records of customer Market research, analyzing Market plans and incentive orders and inventory, Marketing data, discussing strengths systems, successful production schedule, new and weaknesses product launch products department Page 24 9B08D006 Exhibit 3 Some Conclusions About Operating Processes 1. Different organizations process (transform) different types of input. 2. Operations extends to all departments of the enterprise, not just the factory; the operations process for such departments can be a significant factor in the organization’s competitiveness. 3. One organization’s outputs often become another’s inputs. 4. Operations links suppliers and customers by adding value for which customers will pay. 5. Virtually every process has a number of steps. 6. Information about inputs, outputs, and the process itself is required; this information must also flow to allow managers to control and evaluate the operation. Exhibit 4 Types of Capacity Volume Speed Beer-brewing kettle 7,000 L Bottle capper 40 bottles per minute Classroom 90 students Airliner 1,000 km per hour Car 5 people (including driver) Computer 100,000 operations per second Elevator 900 kg Hamburger grill 12 patties every 3 minutes Worker 3 forms per hour Baseball pitcher 100 pitches per game Page 25 9B08D006 Exhibit 5 Costs and Benefits of Holding Inventory Costs of Having Inventory Financing Cost of invested working capital Obsolescence Risk of loss of value before sale Shrinkage Damage, theft, or spoilage during storage Holding Cost of maintaining storage facilities Scrap and rework Cost of errors detected long after manufacture Management Cost of managing the resource Costs of Not Having Inventory Stock out Opportunity cost of lost sales, present and future, to a customer Idle resources Opportunity cost of resources idled by lack of inventory Expediting Cost to rush an order through For example, consider a company that makes a standard line of computer memory products. The question might be: What are the costs of having (and not having) finished goods inventory of a particular product? Although the result might be expressed in monetary units, it is commonly stated as a percentage of the cost of the item, which, although convenient, is less correct, as not all costs vary with changes in the item cost. The table below shows the results. Note that the numbers are inevitably rather soft estimates and that they are relevant only for this product. Cost Amount (%) Source Comments Financing 15 Finance Company’s opportunity cost of capital Frequent introduction of new models increases Obsolescence 8 Marketing risk Product has high street value and is easily Shrinkage 3 Accounting damaged Holding 5 Accounting Holding area must be tightly secured Products are tested extensively immediately Scrap and rework 0 Operations after production Management 1 Total Operations 32% Customers value reliability; stock-outs will also Stock-out 25 Marketing affect future purchases Finished goods inventory leaves no resources Idle resources 0 Operations idle Expediting 5 Operations Cost of overtime and estimate of probability Total 30 % In this case, the cost of having inventory (32 per cent) is estimated to exceed the cost of not having it (30 per cent). Thus, this company should adopt a policy of carrying low amounts of finished goods inventory of this product. However, because the two values are very close and based on far from precise estimates, a careful re- examination is warranted. Page 26 9B08D006 Exhibit 6 Functions of Inventory Functions Rationale Key Feature Examples Pipeline or Materials must be It is moving Oil in a pipeline transit transported between two Ore on a ship between mine and smelter points Parts moving between two work centres on forklift truck or moving belt Buffer or Buffer operation from External Piles of ore, coal and limestone at steel mill safety stock external uncertainty disruption likely Finished hamburgers and fries at McDonald’s Material between adjacent machines Decoupling Isolate steps that operate at Operations work Chassis between body welding shop (75 cards per different rates or patterns at different speeds hour) and final assembly (60 cars per hour) McDonald’s hamburgers between cooking (batches of 12) and customer arrival (reasonably steady stream at much shorter intervals) Seasonal Production or use has well- Business activity Harvested apples for sale during winter defined season or has definite, Salads prepared for lunch peak anticipated event predicatable peaks and valleys Texts in book store awaiting start of classes Cycle Allow operations or Something is Truckload of goods for sale transport to function in produced, used, or Boatload of iron ore for smelting economical lots shipped in a “batch” Exhibit 7 Some Ways to Eliminate Inventory Function Techniques to Reduce Level Pipeline or transit Locate operations as close to each other as possible Move items between operation steps as fast as possible Buffer or safety stock Reduce pipeline inventories (and thus pipeline uncertainty) Establish close, long-term working relationships with suppliers Ensure high quality material Decoupling Ensure careful machine design and worker training Accept idle time or use it creatively (possibly for cleaning, job analysis, education or special projects) Seasonal Work to develop sources of supply and demand that, collectively, extend seasons Develop processing capacity to meet peaks Cycle Work hard to reduce set-up times Page 27 9B08D006 Exhibit 8 Customer Needs and Some Implications for Operations Need Implications Function Will the product do what the customer needs and wants it to do? Quality Will the product perform reliably and with sufficient precision? Quantity How much product should we make and when? Price How much should we charge for the product? Service What services will we provide to accompany the product? Exhibit 9 Effectiveness and Efficiency Effectiveness Doing the right thing: the extent to which an objective is realized Railroad Delivering all goods to a destination, within a designated amount of time, without damage, while remaining flexible to changes in future demand Restaurant Stocking sufficient goods to meet the published menu, taking customer orders accurately and promptly, preparing the meal as described or asked for by the customer, delivering it within a reasonable period of time, and performing all the necessary service functions politely so that the customer feels welcome and comfortable Automobile Assembly Plant Producing cars to design specifications (high quality) in a reasonable time after the order is placed Retail Store Clerk who, on his or her own initiative, hires a cab to deliver a forgotten parcel to a customer’s home Efficiency Doing things right: producing effectively while minimizing waste (cost, effort, time, etc.) Page 28 9B08D006 Exhibit 10 Operations Process Types Project Job Shop Batch Flow Line Flow Continuous Flow Large construction Small metal Clothing Bottle‐filling Oil refineries projects working shops manufacture operations Chemical plants Repair of large Management Beer brewing Bottle making Pulp mills machinery consultancies plants Telecommunications (dedicated lines) Staging a rock Automobile body University Letter‐sorting Stock quote systems concert shops classes plants Organizing a Automobile wedding assembly lines Page 29 9B08D006 Exhibit 11 Process Characteristics Project Job Shop and Batch Line and Continuous Flow Product Characteristics Mix Special, small range of Special to many Standard standards Designed by Customer Customer and Company Company Range Wide Wide Narrow to very narrow Order size Small Small Large to very large Company sells Capability Capability Products Order-winning criteria Delivery, quality, design Delivery, quality, design Price capability capability Qualifying criteria Price Price Quality, design Process Characteristics Technology General purpose Universal to specialized Dedicated Flow pattern No pattern, often no flow Jumbled to dominant Rigid (movement) Linking process steps Loose Loose to tight Tight to very tight Inventory Mostly work in process Raw materials, work in Mostly raw materials and process and finished goods finished goods Notion of capacity Very vague Vague, measured in Clear, measured in dollars physical units Flexibility High High Low to inflexible Volumes Very low Low High to very high Key operations tasks Meet specifications and Meet specifications, Low cost production, price delivery dates, scheduling, quality, flexibility in materials management output volume Source: Adapted from: R.W. Schmenner, Production/Operations Management: Concepts and Situations, 4th ed., 1990, New York: Macmillan, Chapter 1; and T.J. Hill, “Processes: Their Origins and Implications,” Operations Management Review, 8 (2), 1‐7 (1991). Page 30 9B07D006 Exhibit 12 An Example of an Unbalanced Line Suppose you and some friends are on a camping trip and are washing dishes. The table below shows two scenarios: A, in which one person washes, one dries, and one puts the dry dishes away; and B, in which one person washes, two dry, and one puts the dry dishes away. Scenario A: Scenario B: One washer, one dryer, and one stacker One washer, two dryers, and one stacker Average production rates (seconds per dish): Average production rates (seconds per dish): Washing 10 Washing 10 Drying 15 Drying 7.5 (15 seconds for each dryer) Stacking 5 Stacking 5 Inventory capacity: Inventory capacity: One or two dishes between each pair of steps One or two dishes between each pair of steps Pace of the system: Pace of the system: 4 dishes per minute (because drying is the slowest 6 dishes per minute (washing is now the slowest step) operation in the sequence, the rate is 60 sec/min ÷ 15 sec/dish = 4 dishes/min). With a slow dryer and limited space, the stacker will run out of work and the washer will run out of space to put washed dishes. Consequently, both will be idle for part of the time. Time usage (assuming continuous 15-second cycles) Time usage (assuming continuous 10-second cycles) Work Idle Total Work Idle Total Washer 40 20 60 Washer 60 0 60 Dryer 60 0 60 Dryer 90 30 120 Stacker 20 40 60 Stacker 30 30 60 Total 120 60 180 Total 180 60 240 Idle time: 60/180 = 33% Idle time: 60/240 = 25% Capacity utilization: 120/180 = 67% Capacity utilization: 180/240 = 75% Page 31