Enterprise Management Study Text PDF

Enterprise Management (Study Text) Enterprise Management (Study Text) ALL RIGHTS RESERVED This book and material including write-up, tables, graphs, figures, etc., therein are copyright material and are protected under Copyright Laws of Pakistan. No part of this publication can be reproduced, stored in a retrieval system or transmitted in any physical photocopying, recording or otherwise without prior written permission or the ICMA Pakistan’s Head Office. Institute of Cost and Management Accountants of Pakistan Published by: Institute of Cost and Management Accountants of Pakistan Email : [email protected] Website : www.icmap.com.pk Phone : + 92-21-99243900 Fax : + 92-21-99243342 First Edition 2014 Contents developed by a consortium lead by KAPLAN. Second Edition 2020 Contents updated by the ICMA Pakistan. Disclaimer This document has been developed to serve as a comprehensive study and reference guide to the faculty members, examiners and students. 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Any deficiency found in the contents of study text can be reported to the Education Department at [email protected] Enterprise Management (Study Text) CONTENTS 1 ENTERPRISE MANAGEMENT 01 OPERATIONS MANAGEMENT AND ITS IMPORTANCE 2 FOR MANAGEMENT ACCOUNTING 07 3 PRODUCTION TECHNIQUES 14 PRODUCTION PLANNING AND CONTROL 4 20 PLANT MAINTENANCE 5 33 PRODUCTIVITY AND EFFICIENCY EVALUATION 6 49 7 HUMAN RESOURCE MANAGEMENT 87 Enterprise Management (Study Text) HUMAN RESOURCE PRACTICES 8 171 MARKETING AND BUSINESS STRATEGY 9 186 10 MARKETING PLANS, BRANDING AND COMMUNICATION 219 DEVELOPMENT IN MARKETING 428 11 263 ENTERPRISE PERFORMANCE MANAGEMENT 12 283 PERFORMANCE MEASUREMENT TOOLS 13 321 Enterprise Management (Study Text) HOW TO USE THE MATERIAL The main body of the text is divided into a number of chapters, each of which is organized on the following pattern:  Detailed learning outcomes. You should assimilate these before beginning detailed work on the chapter, so that you can appreciate where your studies are leading.  Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory text supported where appropriate by worked examples and exercises. You should work carefully through this section, ensuring that you understand the material being explained and can tackle the examples and exercises successfully. Remember that in many cases knowledge is cumulative; if you fail to digest earlier material thoroughly; you may struggle to understand later chapters.  Examples. Most chapters are illustrated by more practical elements, such as relevant practical examples together with comments and questions designed to stimulate discussion.  Self-Test question. The test of how well you have learned the material is your ability to tackle standard questions. Make a serious attempt at producing your own answers, but at this stage don’t be too concerned about attempting the questions in exam conditions. In particular, it is more important to absorb the material thoroughly by completing a full solution than to observe the time limits that would apply in the actual exam.  Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion to think that this provides the same benefits as you would gain from a serious attempt of your own. However, if you are struggling to get started on a question you should read the introductory guidance provided at the beginning of the solution, and then make your own attempt before referring back to the full solution. Enterprise Management (Study Text) STUDY SKILLS AND REVISION GUIDANCE Planning To begin with, formal planning is essential to get the best return from the time you spend studying. Estimate how much time in total you are going to need for each subject you are studying for the Managerial Level. Remember that you need to allow time for revision as well as for initial study of the material. This book will provide you with proven study techniques. Chapter by chapter it covers the building blocks of successful learning and examination techniques. This is the ultimate guide to passing your ICMA Pakistan written by a team of developers and shows you how to earn all the marks you deserve, and explains how to avoid the most common pitfalls. With your study material before you, decide which chapters you are going to study in each week, and which weeks you will devote revision and final question practice. Prepare a written schedule summarizing the above and stick to it. It is essential to know your syllabus. As your studies progress you will become more familiar with how long it takes to cover topics in sufficient depth. Your timetable may need to be adapted to allocate enough time for the whole syllabus. Tips for effective studying (1) Aim to find a quiet and undisturbed location for your study, and plan as far as possible to use the same period of time each day. Getting into a routine helps to avoid wasting time. Make sure that you have all the materials you need before you begin so as to minimize interruptions. (2) Store all your materials in one place, so that you do not waste time searching for items around your accommodation. If you have to pack everything away after each study period, keep them in a box or even a suitcase, which will not be disturbed until the next time. (3) Limit distractions. To make the most effective use of your study periods you should be able to apply total concentration, so turn off all Enterprise Management (Study Text) entertainment equipment, set your phones to message mode and put up your ‘do not disturb’ sign. (4) Your timetable will tell you which topic to study. However, before dividing in and becoming engrossed in the finer points, make sure you have an overall picture of all the areas that need to be covered by the end of that session. After an hour, allow yourself a short break and move away from your study text. With experience. You will learn to assess the pace you need to work at. (5) Work carefully through a chapter, note imported points as you go. When you have covered a suitable amount of material, very the pattern by attempting a practice question. When you have finished your attempt, make notes of any mistakes you make, or any areas that you failed to cover or covered more briefly. Enterprise Management (Study Text) Enterprise Management (Study Text) Chapter learning objectives  Understanding the nature of Enterprise management.  The challenges facing businesses in 21st century, including the impact of legal, ethical, political, social, economic, international and technological issues. Enterprise Management (Study Text) 2|Page 1. Enterprise Management Understanding the nature of Enterprise management The term enterprise management can be explained as a process which involves continuous planning, monitoring, analysis, and assessment all the aspects that are crucial for the attainment of the objectives and goals of the organization. It helps the business in identifying the issues or the future risks which can affect the performance of the business’ Traditionally: “Management accounting is the process of gathering, summarising, and reporting financial and non-financial information used internally by managers to make decisions” – Eldenburg et al 2010 More broadly, management control information has evolved to include a broader scope of information than a traditional management accounting definition. This information may include external information relating to processes, predictive information, as well as informal personal and social controls and may serve multiple roles and decision contexts. Essentially, management accounting and control is all about managing the organisation. For example, organisations might require management accounting and control information to:  Direct resources;  consider investment opportunities;  manage and improve production and/or  service delivery performance;  improve quality;  meet customer/client expectations;  evaluate customers and suppliers,  develop suitable incentives. Ultimately, management accounting and control information helps in the management of organisations through:  Directing behaviour, e.g. through the use of performance measures, incentives, bonuses and rewards.  Providing a mechanism for information provision and therefore facilitate decision- making (e.g. providing cost information for pricing decisions) and/or influence decision-making (e.g. advising on strategy)  Providing feedback on performance across the organisation, e.g. formally in performance appraisals  Facilitating learning, e.g. getting better at what we do Enterprise Management (Study Text) 3|Page 4 FUNCTIONS OF ENTERPRISE MANAGEMENT  Motivate decisions and actions consistent with organisational objectives and strategies  Integrate the efforts of several different parts of the organisation (Avoid too much  “silo-mentality” – one department does not know what the other department is doing)  Provide information about the results of operations and people’s performance  Facilitate the implementation of strategic plans Formal management accounting and control mechanisms might include:  Formal budgeting and planning processes  Cost system data for costing, pricing, product and customer profitability analysis  Activity-related analysis for improved process management  Strategic-related data collection to assist with decisions such as: outsourcing, capital investment, involvement in strategic alliances and collaborative ventures  Formal evaluation procedures of units and managers  Incentive programs and reward system structures Informal control mechanisms include:  Informal practices such as informal meetings and social work settings  Practices such as observation/copying and employee engagement that permeate the organisation  Recruitment and hiring practices that might result in seeking new employees most likely to suit existing organisational culture  Informal feedback processes which might include one-on-one consultations between  senior and subordinate managers and/or informal meetings  Employee development and organisational learning practices  Cultural and belief systems KEY INFLUENCES ON THE NATURE OF THE MANAGEMENT ACCOUNTING AND CONTROL SYSTEM  Strategy: both organisation (what businesses do we want to be in); and business-unit level (how do we best compete?) (Strategy? What is our unique position? What is our unique advantage?)  Organisational culture and belief systems as well as national culture  Organisational structure  External environment  Size  Technology Enterprise Management (Study Text) 4|Page The challenges facing businesses in 21st century, including the impact of legal, ethical, political, social, economic, international and technological issues We live in rapidly changing times, especially for businesses. Consider that, in a single generation, businesses have had to adapt to entirely new marketing channels (web and social), decide how to invest in and utilise new technologies, and compete on a global stage — things that were barely imaginable to our parents’ and grandparents’ generations. One side effect of these rapid changes and growth is that no single CEO — or any employee, for that matter — can be an expert in everything. This was, perhaps, always true, but it has never been more apparent. A few of the challenges businesses facing include: Uncertainty about the future Being able to predict customer trends, market trends etc. is vital to a changing economic climate. Financial management Many CEOs are ideas people; that means they’re great at the big picture and disruptive thinking, but less good with things like cash flow, profit margins, reducing costs, financing, etc.. Monitoring performance Using a meaningful set of rounded performance indicators that provide the business with insights about how well it is performing is key. Most business people are not experts in how to develop KPIs, how to avoid the key pitfalls and how to best communicate metrics so that they inform decision-making. In most cases, companies rely on overly simple finance indicators that just clog up the corporate reporting channels. Regulation and compliance As markets and technologies shift, so do rules and regulations. Depending on industry, businesses should hire an expert to help with these areas to minimize the risk of fines or worse for non-compliance. Competencies and recruiting the right talent Again, a small or medium-sized business might not need full-time human resources or recruiting staff, but during peak growth periods, finding the right people and developing the right skills and competencies is the key to a sustainable future. Enterprise Management (Study Text) 5|Page Technology As technologies change practically at the speed of light, companies need to innovate or be left behind. Success can be ensured by integrating new technologies, in particular mobile, app development, and cloud computing. Exploding data Older generation certainly didn’t have to deal with terabytes of data or worry about what to do with it. 90% of the world’s data was created in the past two years and managing, keeping safe and extracting insights from the ever-increasing amounts of data a company produces needs to be in the hands of a qualified professional who can help get the most return from that data. Customer service In a world of instant gratification, customers expect instant customer service — and can take to the web to share their displeasure at less than satisfactory service just as quickly. Businesses need to find ways to improve customer service and bring it into the 21st century. Maintaining reputation In a similar vein, because customers can voice any displeasure so much more publicly and loudly than ever before, businesses have to monitor and maintain their online reputations. Knowing when to embrace change Not everything new is better, yet eschewing every change runs the risk of becoming obsolete.. We are living in an era of constant change for the foreseeable future: change is the new normal. Preparing for and embracing the right changes is the best way to stay competitive. Enterprise Management (Study Text) 6|Page Enterprise Management (Study Text) 7|Page Chapter learning objectives  Definition  Mintzberg 's Effective Organization  Strategic Importance Enterprise Management (Study Text) 8|Page 1 Introduction Operations – this involves the transformation of inputs to outputs in order to add value. Operations management – refers to the activities required to produce and deliver a product or a service. It includes purchasing, warehousing and transportation. Operations strategy – as with other aspects of running a business, there is a strategic context to operations management. An organisation can achieve significant competitive advantage over its rivals through superior operating capabilities of its resources, e.g. assets, workforce skills, supplier relationships. Competitive factors The objectives for operations should be consistent with the perceived requirements of customers. Various ‘competitive factors’ can be used to express customer requirements in terms of operational performance requirements. An organisation should establish its priorities for operational performance, and set target levels of achievement as a strategic objective.  When customers want a low priced product, the performance objectives in operational strategy should focus mainly on reducing costs and producing a low-cost output.  When customers want a product or service with certain quality characteristics, and are willing to pay more for better quality, the performance objectives in operational strategy should focus on achieving the required quality standards, subject to a constraint that costs should be kept within certain limits. Enterprise Management (Study Text) 9|Page  If customers want fast delivery of a product or service, the operational performance objective will concentrate on speed of operations or making the product or service more readily available.  If customers want reliability, the operational objective should be to set targets for reliability and ensure that these are met. For example, a courier service meets customer requirements by ensuring that packages are delivered within a particular time to their destination, and without loss or damage. The operational target should be to meet these requirements on 100% of occasions.  When customers want products or services to be designed to their own specification, the operational objective must be to achieve sufficient flexibility to handle the variations in customer requirements, and provide differing products or services accordingly.  When customers want to alter the timing or delivery of services they receive, the main operational objective will also be flexibility. For example, a training company might have to be sufficiently flexible to deal with changes in the location, timing and duration of the training programs required by their clients, and the number of delegates to be trained. Test your understanding 1 The O Company, founded in the early 1970s, manufactures electric pumps. Required: Describe the key activities in the operations function of an organisation such as O Company. Enterprise Management (Study Text) 10 | P a g e 2 Mintzberg's Effective Organisation Mintzberg suggested that an organisation is made up of five parts: 2.1 Operating core 'Operations' is the term covering the central core of the organisation. This central core is known as the 'operating core' and refers to those individuals who perform the task of rendering the product or service. 2.2 Strategic apex Those individuals who formulate and implement strategy in order to serve the owners of the organisation. 2.3 Middle line The hierarchy of authority from strategic apex to front line supervisors. 2.4 Technostructure Concerned with co-ordinating the work by standardising processes, outputs and skills. Includes human resource (HR) managers and accountants. 2.5 Support staff Provide assistance outside of operational workflow such as catering services, legal advice and press relations. Enterprise Management (Study Text) 11 | P a g e 3 Strategic Importance The operations strategy should be aligned with the overall corporate strategy. Illustration Hyperstar, a super market has a corporate strategy of cost leadership, i.e. competition through low prices. Its operations strategy has contributed to the achievement of its corporate strategy. For example:  Inventory levels are kept low which reduces the storage/ obsolescence costs.  Suppliers are located in focused locations, thus reducing delivery times and associated costs. Enterprise Management (Study Text) 12 | P a g e Strategic decisions in operations include: Enterprise Management (Study Text) 13 | P a g e Enterprise Management (Study Text) 14 | P a g e Chapter learning objectives  Job Method  Batch Method  Process / Flow Method Enterprise Management (Study Text) 15 | P a g e 1 Types of Production There are several different types of production process. These various methods are not related to volume of production, and various types of production can be used at different stages of overall production. (i) Job method: The complete task is performed by single worker or team. Milestones, dates and stages of job are clearly defined. Under this method peculiar, special or non-standardized products are produced in accordance with the orders received from the customers. As each product is non- standardized varying in size and nature, it requires separate job for production. The machines and equipment’s are adjusted in such a manner so as to suit the requirements of a particular job. Job production involves intermittent process as the work is carried as and when the order is received. It consists of bringing together of material, parts and components in order to assemble and commission a single piece of equipment or product. Ship building, dam construction, bridge building, book printing are some of the examples of job production. Third method of plant layout viz., Stationery Material Layout is suitable for job production. The job production possesses the following characteristics. 1. A large number of general purpose machines are required. 2. A large number of workers conversant with different jobs will have to be employed. 3. There can be some variations in production. 4. Some flexibility in financing is required because of variations in work load. 5. A large inventory of materials, parts and tools will be required. 6. The machines and equipment setting will have to be adjusted and readjusted to the manufacturing requirements. 7. The movement of materials through the process is intermittent. Job production has the following limitations: 1. The economies of large scale production may not be attained because production is done in short-runs. 2. The demand is irregular for some products. 3. The use of labour and equipment may be an inefficient. 4. The scientific assessment of costs is difficult. Enterprise Management (Study Text) 16 | P a g e (ii) Batch method: The task is divided into parts or operations. Each operation is completed through the whole batch before the next operation is performed. This method of productions results in labour efficiency but entity needs to ensure that plant is not idle. The main objectives of batch method of production are specialization and high utilization of plant. However, there might be the danger of significant “work in progress” as completed batch waiting for their turn for the next operation. Batch production pertains to repetitive production. It refers to the production of goods, the quantity of which is known in advance. It is that form of production where identical products are produced in batches on the basis of demand of customers’ or of expected demand for products. This method is generally similar to job production except the quantity of production. Instead of making one single product as in case of job production, a batch or group of products are produced at one time. It should be remembered here that one batch of products may not resemble with the next batch. Under batch system of production the work is divided into operations and one operation is done at a time. After completing the work on one operation it is passed on to the second operation and so on till the product is completed. Batch production can be explained with the help of an illustration. An enterprise wants to manufacture 20 electric motors. The work will be divided into different operations. The first operation on all the motors will be completed in the first batch and then it will pass on to the next operation. The second group of operators will complete the second operation before the next and so on. Under job production the same operators will manufacture full machine and not one operation only. Batch production can fetch the benefits of repetitive production to a large extent, if the batch is of a sufficient quantity. Thus batch production may be defined as the manufacture of a product in small or large batches or lots by series of operations, each operation being carried on the whole batch before any subsequent operation is operated. This method is generally adopted in case of biscuit and confectionery and motor manufacturing, medicines, tinned food and hardware’s like nuts and bolts etc. Enterprise Management (Study Text) 17 | P a g e The batch production method possesses the following characteristics: 1. The work is of repetitive nature. 2. There is a functional layout of various manufacturing processes. 3. One operation is carried out on whole batch and then is passed on to the next operation and so on. 4. Same type of machines is arranged at one place. 5. It is generally chosen where trade is seasonal or there is a need to produce great variety of goods. (iii) Process/ Flow method: This is same as batch method but idle production and batch queuing is eliminated here. In this method work on a task at one stage is completed then it is directly passed to next stage without waiting for the remaining stock in the batch. In next stage work is started immediately. In this way idle production capacity is controlled. This method involves a continuous production of standardized products on a large scale. Under this method, production remains continuous in anticipation of future demand. Standardization is the basis of mass production. Standardized products are produced under this method by using standardized materials and equipment. There is a continuous or uninterrupted flow of production obtained by arranging the machines in a proper sequence of operations. Process layout is best suited method for mass production units. Flow production is the manufacture of a product by a series of operations, each article going on to a succeeding operation as soon as possible. The manufacturing process is broken into separate operations. The product completed at one operation is automatically passed on to the next till its completion. There is no time gap between the work done at one process and the starting at the next. The flow of production is continuous and progressive. The mass or flow production possesses the following characteristics. 1. The units flow from one operation point to another throughout the whole process. 2. There will be one type of machine for each process. 3. The products, tools, materials and methods are standardised. Enterprise Management (Study Text) 18 | P a g e 4. Production is done in anticipation of demand. 5. Production volume is usually high. 6. Machine set ups remain unchanged for a considerable long period. 7. Any fault in flow of production is immediately corrected otherwise it will stop the whole production process. Suitability of flow/mass production: 1. There must be continuity in demand for the product. 2. The products, materials and equipment must be standardised because the flow of line is inflexible. 3. The operations should be well defined. 4. It should be possible to maintain certain quality standards. 5. It should be possible to find time taken at each operation so that flow of work is standardised. 6. The process of stages of production should be continuous. Advantages of mass production: A properly planned flow production method, results in the following advantages: 1. The product is standardised and any deviation in quality etc. is detected at the spot. 2. There will be accuracy in product design and quality. 3. It will help in reducing direct labour cost. 4. There will be no need of work-in-progress because products will automatically pass on from operation to operation. 5. Since flow of work is simplified there will be lesser need for control. 6. A weakness in any operation comes to the notice immediately. 7. There may not be any need of keeping work-in-progress, hence storage cost is reduced. Enterprise Management (Study Text) 19 | P a g e Enterprise Management (Study Text) 20 | P a g e Chapter learning objectives  Material Requirements Planning (MRP)  Manufacturing Resource Planning II (MRP ll)  Enterprise Resource Planning (ERP)  Optimized Production Technology (OPT)  Understanding of production as a process of converting or transforming resources in to products. Enterprise Management (Study Text) 21 | P a g e 1 Production Planning and Control A number of manufacturing systems have been developed in an attempt to improve the planning and control of operational capability. 1.1 Material requirements planning (MRP) MRP is a computerised system for planning the requirements for raw materials, work-in-progress and finished items. Functions include:  Identifying firm orders and forecasting future orders with confidence.  Using orders to determine quantities of material required.  Determining the timing of material requirement.  Calculating purchase orders based on stock levels.  Automatically placing purchase orders.  Scheduling materials for future production. Benefits of MRP  Improved ability to meet orders.  Reduced stock holding.  The MRP schedule can be amended quickly if demand estimates change since the system is computerised.  System can warn of purchasing or production problems due to bottlenecks or delays in the supply chain.  A close relationship tends to be built with suppliers. However, MRP will not be suitable if it is not possible to predict sales in advance. Enterprise Management (Study Text) 22 | P a g e 1.2 Manufacturing resource planning II (MRP II) MRP II is an extension of the MRP system. It integrates into the MRP system other processes that are related to materials planning. For example:  Financial requirements planning.  Equipment utilisation scheduling.  Labour scheduling. MRP II provides a central database that all functions will have access to, thus everyone is working from the same information. 1.3 Enterprise resource planning (ERP) ERP is an extension of MRP II. It integrates data from all operations within the organisation, e.g. operations, sales and marketing, human resources, purchasing.  As with MRP II it ensures that everyone is working off the same information.  Software companies like SAP and Oracle have specialised in the provision of ERP systems. Features of ERP systems Features of ERP systems include:  Allowing access to the system to any individual with a terminal linked to the system’s central server.  Decision support features, to assist management with decision-making.  In many cases, extranet links to the major suppliers and customers, with electronic data interchange facilities for the automated transmission of documentation such as purchase orders and invoices. Enterprise Management (Study Text) 23 | P a g e Pros and cons of ERP Advantages  Can easily share data between departments and across the organisation.  Better monitoring and forecasting.  Lower costs.  Improved customer service.  Processes can be streamlined. Disadvantages  Cost may be prohibitive.  May be too rigid to fulfil the needs of the organisation.  Technical support may be inadequate. 1.4 Optimised production technology (OPT) OPT is another approach to production planning. Production scheduling is based on the capacity of the bottleneck, i.e. the constraint within the system, and the pace of throughput that the bottleneck can handle. Management should focus on removing the constraint. However, having dealt with one constraint there will be another constraint for the OPT system to deal with. 2. Understanding of production as a process of converting or transforming resources in to products A company's conversion processes involve the activities related to the transformation of resources into goods or services. These resources include the following:  Materials, including raw materials inventory  Labor, namely, the human resources required for operations  Overhead, including fixed assets, indirect materials, indirect labor, and various other expenses necessary to run the operating facility Every organization—whether it produces goods or provides services as furnishing customers with quality products. Thus, to compete with other organizations, a company Enterprise Management (Study Text) 24 | P a g e must convert resources (materials, labor, money, information) into goods or services as efficiently as possible. The upper-level manager who directs this transformation process is called an operations manager. The job of operations management (OM), then, consists of all the activities involved in transforming a product idea into a finished product, as well as those involved in planning and controlling the systems that produce goods and services. In other words, operations managers manage the process that transforms inputs into outputs. Figure below "The Transformation Process" illustrates this traditional function of operations management. All manufacturers set out to perform the same basic function: to transform resources into finished goods. To perform this function in today’s business environment, manufacturers must continually strive to improve operational efficiency. They must fine- tune their production processes to focus on quality, to hold down the costs of materials and labor, and to eliminate all costs that add no value to the finished product. Making the decisions involved in the effort to attain these goals is the job of the operations manager. That person’s responsibilities can be grouped as follows: Enterprise Management (Study Text) 25 | P a g e  Production planning. During production planning, managers determine how goods will be produced, where production will take place, and how manufacturing facilities will be laid out.  Production control. Once the production process is under way, managers must continually schedule and monitor the activities that make up that process. They must solicit and respond to feedback and make adjustments where needed. At this stage, they also oversee the purchasing of raw materials and the handling of inventories.  Quality control. Finally, the operations manager is directly involved in efforts to ensure that goods are produced according to specifications and that quality standards are maintained. Planning the Production Process The decisions made in the planning stage have long-range implications and are crucial to a firm’s success. Before making decisions about the operations process, managers must consider the goals set by marketing managers. Does the company intend to be a low-cost producer and to compete on the basis of price? Or does it plan to focus on quality and go after the high end of the market? Perhaps it wants to build a reputation for reliability. What if it intends to offer a wide range of products? To make things even more complicated, all these decisions involve trade-offs. Upholding a reputation for reliability isn’t necessarily compatible with offering a wide range of products. Low cost doesn’t normally go hand in hand with high quality. With these factors in mind, the specific types of decisions that have to be made in the production planning process are as follows: Production-Method Decisions The first step in production planning is deciding which type of production process is best for making the goods that a company intends to manufacture. In reaching this decision, the company should answer such questions as the following:  How much input do I receive from a particular customer before producing my goods?  Am I making a one-of-a-kind good based solely on customer specifications, or am I producing high-volume standardized goods to be sold later?  Do I offer customers the option of “customizing” an otherwise standardized good to meet their specific needs? Enterprise Management (Study Text) 26 | P a g e One way to appreciate the nature of this decision is by comparing three basic types of processes or methods: make-to-order, mass production, and mass customization. The task of the operations manager is to work with other managers, particularly marketers, to select the process that best serves the needs of the company’s customers. Make-to-Order At one time, most consumer goods, such as furniture and clothing, were made by individuals practicing various crafts. By their very nature, products were customized to meet the needs of the buyers who ordered them. This process, which is called a make- to-order strategy, is still commonly used by such businesses as print or sign shops that produce low-volume, high-variety goods according to customer specifications. Mass production By the early twentieth century, however, a new concept of producing goods had been introduced: mass production (or make-to-stock strategy) is the practice of producing high volumes of identical goods at a cost low enough to price them for large numbers of customers. Goods are made in anticipation of future demand (based on forecasts) and kept in inventory for later sale. This approach is particularly appropriate for standardized goods ranging from processed foods to electronic appliances. There’s a disadvantage to mass production: customers, as one contemporary advertising slogan puts it, can’t “have it their way.” They have to accept standardized products as they come off assembly lines. Increasingly, however, customers are looking for products that are designed to accommodate individual tastes or needs but can still be bought at reasonable prices. To meet the demands of these consumers, many companies have turned to an approach called mass customization, which (as the term suggests) combines the advantages of customized products with those of mass production. Mass Customisation This approach requires that a company interact with the customer to find out exactly what the customer wants and then manufacture the good, using efficient production methods to hold down costs. One efficient method is to mass-produce a product up to a certain cut-off point and then to customize it to satisfy different customers. The list of companies devoting at least a portion of their operations to mass customization is growing steadily. One of the best-known mass customizer is Nike, which has achieved success by allowing customers to configure their own athletic Enterprise Management (Study Text) 27 | P a g e shoes, apparel, and equipment through Nike’s ID program. The Web has a lot to do with the growth of mass customization. Levi’s, for instance, lets a woman find a pair of perfect fitting jeans by going through an online fitting process. Oakley offers customized sunglasses, goggles, watches, and backpacks, while Mars, Inc. can make M&M’s in any color the customer wants (say, school colors) as well as add text and pictures to the candy. Naturally, mass customization doesn’t work for all types of goods. Most people don’t care about customized detergents or paper products. And while many of us like the idea of customized clothes, footwear, or sunglasses from Levi’s, Nike, or Oakley, we often aren’t willing to pay the higher prices they command. Facilities Decisions After selecting the best production process, operations managers must then decide where the goods will be manufactured, how large the manufacturing facilities will be, and how those facilities will be laid out. Site Selection In choosing a location, managers must consider several factors:  To minimize shipping costs, both for raw materials coming into the plant and for finished goods going out, managers often want to locate plants close to suppliers, customers, or both.  They generally want to locate in areas with ample numbers of skilled workers.  They naturally prefer locations where they and their families will enjoy living.  They want locations where costs for resources and other expenses—land, labor, construction, utilities, and taxes—are low.  They look for locations with a favorable business climate—one in which, for example, local governments might offer financial incentives (such as tax breaks) to entice them to do business in their locales. Managers rarely find locations that meet all these criteria. As a rule, they identify the most important criteria and aim at satisfying them. Enterprise Management (Study Text) 28 | P a g e Capacity Planning After finalizing site location, company has to decide on the quantity of products that it’ll produce. It begins by forecasting demand for the product and forecasting isn’t easy. To estimate the number of units that are likely to sell over a given period, one has to understand the industry that they’re in and estimate their likely share of the market by reviewing industry data and conducting other forms of research. Once the company has forecasted the demand for product, it can calculate the capacity requirements of production facility—the maximum number of goods that it can produce over a given time under normal working conditions. In turn, having calculated the capacity requirements, it is ready to determine how much investment in plant and equipment it’ll have to make, as well as the number of labor hours required for the plant to produce at capacity. Like forecasting, capacity planning is difficult. Unfortunately, failing to balance capacity and projected demand can be seriously detrimental to the bottom line. If it sets capacity too low (and so produce less than it should), it won’t be able to meet demand, and it’ll lose sales and customers. If it sets capacity too high (and turn out more units than it should), it’ll waste resources and inflate operating costs. Enterprise Management (Study Text) 29 | P a g e 9 Practice Questions Question 1 The Technostructure: A is dedicated to the technical side of product and process development. B is the board of directors who decide on the financial structure and technicalities of a business. C are departments such as accounting and personnel which provide support for technical structures by co-ordinating and standardising work. D are functions to purchase materials and process them for distribution. (2 marks) Question 2 OPT stands for which of the following? A Output Production Technology B Optimised Planning Techniques C Optimised Production Technologies D Organising Planning Technology (2 marks) Question 3 Which of the following is an advantage of a flexible manufacturing system? A A firm can make bespoke products in response to differing customer needs. B The system allows management to identify and remove constraints within the system. C The number of employees can be increased or reduced to fit with existing needs. D It integrates data from all operations within an organisation. (2 marks) Question 4 MRP II: A integrates data from all operations within an organisation. B schedules production based on the capacity of the bottleneck. C is a computerised system for planning the requirements of material. D is a system that integrates all processes relating to materials planning. (2 marks) Enterprise Management (Study Text) 30 | P a g e Question 5 Distinguish strategic decisions from tactical decisions in the context of operations management. (4 marks) Test Your Understanding Answers Test your understanding 1 The operations function in manufacturing electric pumps is concerned with converting raw materials into a finished product and delivering them to the customer. Operations therefore covers the following areas:  Purchasing. The purchasing department are responsible for obtaining raw materials and parts from suppliers.  Production. The production function converts the raw materials and assembles parts and components into finished products. Without more information about the nature of the pumps that the company produces, it is not possible to suggest what type of production process the company uses.  Production planning and control. This function is concerned with scheduling production, and making sure that the materials, labour, machinery and other resources are available to manufacture the pumps. Production control involves monitoring production flow and dealing with any problems, hold-ups and bottlenecks that might arise.  Product design or engineering. There will probably also be a separate section within operations that provides technical expertise. These experts might be responsible for new product design.  Inventory management. Raw materials and finished goods inventory must be stored or warehoused.  Logistics. Manufactured pumps must be distributed to customers. The customers for pumps will be industrial buyers, and the task of delivering them will probably be included within the operations function. Enterprise Management (Study Text) 31 | P a g e MCQs Answers Question 1 C Question 2 C Question 3 A Question 4 D Question 5 Strategy deals with how an organisation achieves its objectives. For example:  Where is the business trying to get to in the long term (direction)?  Which markets should a business compete in and what kind of activities are involved in such markets (markets; scope)?  How can the business perform better than the competition in those markets (advantage)?  What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete (resources)?  What external, environmental factors affect the business's ability to compete (environment)?  What are the values and expectations of those who have power in and around the business (stakeholders)? Tactics are the most efficient deployment of resources in an agreed strategy. Tactics follow on from strategy. Enterprise Management (Study Text) 32 | P a g e Enterprise Management (Study Text) 33 | P a g e Chapter learning objectives  Plant Maintenance Process Enterprise Management (Study Text) 34 | P a g e 1 Plant Maintenance Plant maintenance processes should be considered early during plant design. Plant maintenance should consider safety rules and environmental protection requirements to ensure that plan maintenance sequences are safe for the workers and protect the public from potential hazards. Entity should store and manage maintenance processes and best practices for reuse in future plants. This database can then be replicated and shared and new information should be added to support training. The benefit of maintaining and re-using this information throughout the lifecycle of the plant is obvious. Entity might need to have well-defined data for use in ongoing maintenance. In operating a complex plant, many well documented processes must be executed to satisfy different organizations, from safety to security to maintenance operations such as equipment overhaul or replacement. Objectives of Plant Maintenance: (i) The objective of plant maintenance is to achieve minimum breakdown and to keep the plant in good working condition at the lowest possible cost. (ii) Machines and other facilities should be kept in such a condition which permits them to be used at their optimum (profit making) capacity without any interruption or hindrance. (iii) Maintenance division of the factory ensures the availability of the machines, buildings and services required by other sections of the factory for the performance of their functions at optimum return on investment whether this investment be in material, machinery or personnel. Enterprise Management (Study Text) 35 | P a g e Importance of Plant Maintenance: (i) The importance of plant maintenance varies with the type of plant and its production. (ii) Equipment breakdown leads to an inevitable loss of production. If a piece of equipment goes out of order in a flow production factory, the whole line will soon come to a halt. Other production lines may also stop unless the initial fault is cleared. b. This results in an immediate loss in productivity and a diminution of several thousand rupees per hour of output. (iii) An un-properly maintained or neglected plant will sooner or later require expensive and frequent repairs, because with the passage of time all machines or other facilities (such as transportation facilities), buildings, etc., wear out and need to be maintained to function properly. (iv) Plant maintenance plays a prominent role in production management because plant breakdown creates problems such as: a. Loss in production time. b. Rescheduling of production. c. Spoilt materials (because sudden stoppage of process damages in-process materials). d. Failure to recover overheads (because of loss in production hours). e. Need for over-time. f. Need for subcontracting work. g. Temporary work shortages-workers require alternative work. Types of Plant Maintenance: Maintenance may be classified into following categories: (a) Corrective or breakdown maintenance, (b) Scheduled maintenance, (c) Preventive maintenance, and (d) Predictive maintenance. Enterprise Management (Study Text) 36 | P a g e (a) Corrective or Breakdown Maintenance: Corrective or breakdown maintenance implies that repairs are made after the equipment is out of order and it cannot perform its normal function any longer, e.g., an electric motor will not start, a belt is broken, etc. Under such conditions, production department calls on the maintenance department to rectify the defect. The maintenance department checks into the difficulty and makes the necessary repairs. After removing the fault, maintenance engineers do not attend the equipment again until another failure or breakdown occurs. This type of maintenance may be quite justified in small factories which: (i) Are indifferent to the benefits of scheduling; (ii) Do not feel a financial justification for scheduling techniques; and (iii) Get seldom (temporary or permanent) demand in excess of normal operating capacity. In many factories make-and-mend is the rule rather than the exception. Breakdown maintenance practice is economical for those (non-critical) equipment whose down-time and repair costs are less this way than with any other type of maintenance. Breakdown type of maintenance involves little administrative work, few records and a comparative small staff. There is no planned interference with production programs. Typical Causes of Equipment Breakdown: (i) Failure to replace worn out parts. (ii) Lack of lubrication. (iii) Neglected cooling system. (iv) Indifference towards minor faults. (v) External factors (such as too low or too high line voltage, wrong fuel, etc.) (vi) Indifference towards -equipment vibrations, unusual sounds coming out of the rotating machinery, equipment getting too much heated up, etc. Disadvantages of Breakdown Maintenance: (i) Breakdowns generally occur at inopportune times. This leads to poor, hurried maintenance and excessive delays in production. (ii) Reduction of output. (iii) Faster plant deterioration. (iv) Increased chances of accidents and less safety to both workers and machines. Enterprise Management (Study Text) 37 | P a g e (v) More spoilt material. (vi) Direct loss of profit. (vii) Breakdown maintenance practice cannot be employed for those plant items which are regulated by statutory provisions, for example cranes, lifts, hoists and pressure vessels. (b) Scheduled Maintenance: Scheduled maintenance is a stich-in-time procedure aimed at avoiding breakdowns. Breakdowns can be dangerous to life and as far as possible should be minimized. Scheduled maintenance practice incorporates (in it), inspection, lubrication, repair and overhaul of certain equipment which if neglected can result in breakdown. Inspection, lubrication, servicing, etc., of these equipment are included in the predetermined schedule. Scheduled maintenance practice is generally followed for overhauling of machines, cleaning of water and other tanks, white-washing of buildings, etc. (c) Preventive Maintenance: A system of scheduled, planned or preventive maintenance tries to minimize the problems of breakdown maintenance. It is a stich-in-time procedure. It locates weak spots (such as bearing surfaces, parts under excessive vibrations, etc.) in all equipment, provides them regular inspection and minor repairs thereby reducing the danger of unanticipated breakdown. The underlying principle of preventive maintenance is that prevention is better than cure. Preventive Maintenance (or PM) Involves: (a) Periodic inspection of equipment and machinery to uncover conditions that lead to production breakdown and harmful depreciation. (b) Upkeep of plant equipment to correct such conditions while they are still in a minor stage. Preventive maintenance is practiced to some extent in about 75% of all manufacturing companies, but every preventive maintenance programme is tailored as per the requirements of each company. The key to all good preventive maintenance programs, however, is inspection. Help can be taken of suitable statistical techniques in order to find how often to inspect. Enterprise Management (Study Text) 38 | P a g e Objectives of PM: (i) To minimize the possibility of unanticipated production interruption or major breakdown by locating or uncovering any condition which may lead to it. (ii) To make plant equipment and machinery always available and ready for use. (iii) To maintain the value of equipment and machinery by periodic inspections, repairs, overhauls, etc. (iv) To maintain the optimum productive efficiency of the plant equipment and machinery. (v) To maintain the operational accuracy of the plant equipment. (vi) To reduce the work content of maintenance jobs. Elements (or Procedure) of Preventive Maintenance: (i) There is no ready-made, on-the-shelf, preventive maintenance programme for any industry. It must be tailor-made-measured and cut to fit the requirements of individual industry or plant; this is because all industries differ in size, age, location, machinery, resources, layout, and construction. (ii) A well-conceived preventive maintenance programme contains the following elements, features or steps: 1. Who should do PM? Preventive maintenance may be taken care by: (a) Production department. (b) Maintenance department. (c) A separate division of inspectors, crafts and supervisors. The choice depends upon, again, the conditions (such as size, age, location, machinery, etc.) of the plant. However, a perfect coordination between production department and PM personnel is highly essential for the success of the preventive maintenance practice, because PM personnel can carry out (preventive) maintenance only when production department releases the machinery for the same. For this reason, certain industries keep PM under production department. But as the work load of PM increases, PM is transferred either to maintenance department or to a separate division of inspectors, crafts and supervisors. Approximate size of preventive maintenance force: Enterprise Management (Study Text) 39 | P a g e 2. Where to start PM? One should not apply PM to the entire plant at once. PM programme should be built up in pieces; when one piece is finished, start the next. It is better to tackle one section (or department) at a time or one type of machinery over the entire plant. The entire PM programme hangs on inspections and their related duties of adjustments and repairs. 3. What to inspect in PM? Preventive maintenance is costly, therefore one should strike a favourable balance between this cost and the cost of not utilizing PM. Application of PM to all the items in a plant may be uneconomical. In almost all industries, there are certain key items which are more essential for continuing the production than others. In other words, a breakdown of key items would seriously interrupt production and badly affect production schedule, etc. 4. What to inspect for? After listing the equipment requiring PM, the next step is to decide-what physical parts of each piece of equipment need attention. These parts can be identified by the craftsmen and supervisors who maintain these equipment; they, by their experience, know the items liable to wear or equipment maladjustments taking place under normal conditions. Another guide in this matter can be the service manual issued by the equipment manufacturer. After making the list of machines and their parts needing PM, i.e., their inspection points, one’ makes, a CHECK-LIST to ensure that no inspection point has missed. 5. How often to inspect-frequency? The decision-how often to inspect is made, (i) In the light of past experience. For example, if annual inspection keeps a key-item in perfect running condition, one may not think of inspecting the same every six months. However, one may try to see if the same key-item will work well if instead annually is inspected after every 18 months. Enterprise Management (Study Text) 40 | P a g e (ii) Also, on the basis of costs and savings of the PM programme. If the cost of PM is greater than the savings, one may go for reducing the frequency of inspections. The exception is safety standards-they must always take precedence over financial considerations. Over-inspection is needless expensive and may involve more productive downtime than an emergency breakdown. Under-inspection results in (frequent and) more breakdowns and earlier replacements. A good balance between the two is very essential to bring optimum saving. Frequency of inspections may be decided depending upon the following equipment conditions: (i) Severity of service and hours of operation, i.e., whether an equipment runs in one shift, two shifts or for all the 24 hours. (ii) Age, condition and value of the equipment. (iii) Safety requirements and health hazards (associated with equipment breakdown). (iv) Exposure (of equipment) to dirt, friction, fatigue, stresses, corrosion, i.e., the susceptibility (of the equipment) to wear. (v) Exposure to vibrations, overloading etc., i.e., susceptibility (of the equipment) to damage. (vi) Susceptibility to lose adjustments and the effect of misalignments in the equipment on production jobs. 6. When to inspect—schedules? Scheduling involves determining calendar inspection dates that will fulfill the frequency requirements in the most efficient way. In setting up schedules one must ensure to keep production going at lowest overall cost. Schedules should be set in consultation with production department and as per the production needs, as far as possible. PM inspection and service functions can be classified into three following groups: (i) Routine up-keep, i.e., adjustment, lubrication and cleaning of equipment. (ii) Periodic inspections, i.e., visual inspections, tear down inspections, overhauls, scheduled replacement of parts, etc. (iii) Contingent work, e.g., inspection of oil burners while relining a furnace. Enterprise Management (Study Text) 41 | P a g e Routine upkeep or periodic inspections may be scheduled as follows: (i) Do them in the day-shift (to reduce over-time). (ii) Spread them over the year to even up the total work load of maintenance. (iii) Plan them when equipment is not producing, i.e., during set up time, etc. (iv) Ensure that PM consumes least productive time. Fig. 13.2 shows a PM schedule: 7. Preventive maintenance records: It is very necessary to keep records because they are the only reliable guides for measuring the effectiveness of the preventive maintenance programme. Only records tell us, what is the situation at present and where it is going. Good updated records, proper filing equipment and adequate clerical help are the backbone of PM programme. Record keeping is also necessary: (i) When budgeting for major overhauls. (ii) When budgeting for general maintenance costs. (iii) For finding equipment reliability. (iv) For determining frequency of inspections. (v) For preparing maintenance schedules. (vi) For predicting equipment life. (vii) For designing maintenance cost control systems. (viii) For equipment replacement analysis. (ix) For carrying out cost reduction studies (e.g., value analysis). Enterprise Management (Study Text) 42 | P a g e Guidelines to good PM records: (i) Minimize the number of forms and entries. (ii) Integrate PM system with other maintenance paper work systems in order to reduce administrative costs. (iii) Account for costs of all primary PM inspection activities in order to show what exact costs are and how far the PM programme is justified. (iv) Arrange for a periodic control report (weekly or monthly) to check on PM performance. Records should show: (i) Type of equipment and its description. (ii) Whether it is a key item? (iii) Name of the manufacturer. (iv) Cost and date of purchase of the equipment. (v) Location of the equipment in the factory. (vi) Equipment identification (e.g., chassis) number. (vii) Inspection of job specification reference number. (viii) Estimated cost of inspection and the cost and data of planned repairs. (ix) Breakdowns, their dates and reasons. (x) Cost of breakdowns and other associated implications. 8. Storage of spare parts: Spare parts are stored in order to reduce the loss of production time. What spare parts to keep and how much to keep depends upon: (i) The past experience. (ii) Advice from plant manufacturers. (iii) The cost of buying and storing the spares. (iv) The cost of having idle plant waiting for spare parts in case of a breakdown or at the time of need. (v) The ease or difficulty with which the spare parts can be made available when required. (vi) Whether spare parts are standard or not. Enterprise Management (Study Text) 43 | P a g e Spare parts once procured should be stored adequately in order to locate them immediately at the time of need for this: (i) Spare parts should have stamped code number. (ii) The stock card may be identified by this number. (iii) The bin or rack, in which the part is lying, should have its location reference number recorded on the stock card. (iv) Spare parts for an equipment may be grouped together and referred to by their plant number. (v) For locating a part, the storekeeper would first check the stock card bearing the plant number and take down the bin (or storage rack) reference number. Then, by the code number of the part, he will identify the required spare part from the many parts lying in that bin. 9. Control and evaluation of PM: A PM programme be coordinated and must remain under control at all times. To maintain control of the PM programme, the following measures should be take: (i) Periodic review of PM programme with the operating department. (ii) Review of monthly reports of PM inspections. (iii) Analytical approach to the evaluation of PM. Analytical approach makes use of following relations: (a) Inspections incomplete/ Inspections scheduled x 100 = 10% Max. (b) Job resulting/Inspections completed x 100 = 20 to 30%. (c) Hours worked as forecast jobs/Total hours worked x 100 = percentage of performance. When plotted, percentage of performance should have a trend either increasing or stabilized above 80%. Advantages of PM: 1. Reduced breakdowns and connected down-time. 2. Lesser odd-time repairs and reduced overtime to the maintenance work-force. 3. Greater safety for workers. 4. Fewer large-scale and repetitive repairs. 5. Low maintenance and repair costs. 6. Less stand-by or reserve equipment, and spare parts. 7. Identification of equipment requiring high maintenance costs. 8. Lower unit cost of manufacture. Enterprise Management (Study Text) 44 | P a g e 9. Better product quality and fewer product rejects. 10. Increased equipment life. 11. Better industrial relations because production workers do not face involuntary lay- offs or loss of incentive bonus because of breakdowns. (d) Predictive Maintenance: It is comparatively a newer maintenance technique. It makes use of human senses or other sensitive instruments such as: Audio gauges, Vibration analyzers, Amplitude meters, Pressure, temperature and resistance strain gauges, etc., to predict troubles before the equipment fails. Unusual sounds coming out of a rotating equipment predict a (coming) trouble; an electric cable excessively hot at one point predicts a trouble. Simple hand touch can point out many unusual (equipment) conditions and thus predict a trouble. In predictive maintenance, equipment conditions are measured periodically or on a continuous basis and this enables maintenance men to take a timely action such as equipment adjustments, repair or overhaul. Predictive maintenance extends the service life of an equipment without fear of failure. Schedule of Plant Maintenance: Maintenance scheduling follows a similar procedure to that outlined for production. It is required to know that how long a job will take, when it should be done and if resources are available. Scheduling means determining calendar inspection dates that will fulfill the frequency requirements in the most efficient way. Scheduling: (1) System should be clear, precise and easy to operate, (2) Should be based upon accurately determined time standards, (3) Should be finalised in consultation with production department so that the equipment for maintenance purposes can be spared, (4) Should aim at creating a balanced work load on each trade section in the department, that is, each section should be evenly loaded. Maintenance schedule should be flexible. Enterprise Management (Study Text) 45 | P a g e Maintenance schedule should: (1) Be such that, the maintenance work can be carried out during lunch hours, between shifts or at weekends etc., (2) Take advantage of planned machine stoppages such as tool changes, loading and unloading of job etc., (3) Plan major repairs and overhauls during holidays, (4) Make use of reserve plant if the need arises. Procedure: The scheduling of maintenance work involves essentially two steps: 1. Preparation of master maintenance schedule. 2. Preparation of Detailed weekly or daily schedule. Master maintenance schedule indicates the nature and magnitude of each repair and construction task segment of maintenance for a specified time span. Considering total man hours needed for each task segment and the manpower available, the distribution of jobs (that will give reasonable man loadings, and can be accomplished) is done. A master schedule is flexible and a cushion always exists to accommodate, unanticipated tasks and jobs which are lagging behind schedule. Detailed schedules are prepared by breaking overall time spans allocated under master schedule. Detailed weekly work schedule provides information to each craft and shop regarding the task to be carried on each job for each day in the coming week. Detailed scheduling requires records of work capacity of each section of the maintenance department and of the maintenance department as a whole. Like master schedule, the detailed schedule should also be flexible and able to accommodate emergency jobs. Detailed schedule may be issued to concerned persons every day or near the week-end. Maintenance schedule of each machine may be prepared and it will indicate the list of works which must be carried out (together with the frequency) and will contain servicing, adjustments, lubrication details and particulars of replacement work. Fig. 13.3 shows the schedule of maintenance. Enterprise Management (Study Text) 46 | P a g e Scheduling Tools (Devices): They are classed as: 1. Visual charts. 2. Scheduling boards. 3. Individual cards. As compared to scheduling board, individual cards contain more written details and can be used for historical records. Some Recent Developments in Plant Maintenance: In recent years there has been a tendency to use a variety of management techniques for plant maintenance. These techniques have led to: (i) An increase in maintenance efficiency. (ii) Reduced maintenance costs. (iii) Improved services. (A) Use of Work study: Work study can improve maintenance scheduling and eliminate a great deal of frustration and anxiety on the part of production supervision. (B) Use of Network Planning Techniques: (i) CPM has enabled some firms to cut their downtime by 20 to 30%. (ii) Maintenance costs have been cut down. (iii) Plant utilization has been raised. Enterprise Management (Study Text) 47 | P a g e (iv) CPM is very useful for planning and control of large maintenance projects. (v) Dramatic reductions in time (about 70%) were experienced with the overhaul of generating plant by Central Electricity Generating Board in Great Britain, by using network planning techniques. (vi) When applied to the maintenance and overhaul of a refinery, PERT reduced its shutdown time from 18 to 16 days and thus added 90,000 barrels to its production volume. (C) Use of Operations Research: Operations Research handles maintenance problems such as the economic level of spare parts or when to replace an item, etc. (D) Use of Computers: Computers when used for managing maintenance problems provide more efficient operation and control. Computers can prepare maintenance work orders giving accurate work order descriptions and job timing. The following improvements over manual systems of PM have been claimed by using a computerized system of preventive maintenance: (i) Eliminated human error in preparing work order, etc. (ii) Reduced cost of keeping records of equipment, etc. (iii) Reduced premature replacement of parts. Enterprise Management (Study Text) 48 | P a g e Enterprise Management (Study Text) 49 | P a g e Chapter learning objectives In this chapter you will learn:  Methods of Managing Operational Capacity  Quality Management  Understanding the concept of ‘Quality’ and ‘Quality Management’  The Scope of Quality Management  Quality Management Approaches  Total Quality Management (TQM)  Managing Quality using TQM  Continuous Improvement (Kaizen)  Lean Production  Total Productive Maintenance (TPM)  The TQMEX Model  Service Quality Approaches  International Organization for Standardization (ISO) Enterprise Management (Study Text) 50 | P a g e 1 Methods of Managing Operational Capacity Capacity planning aims to balance customer demand with production capability. There are three possible approaches to capacity planning:  Level capacity plan - maintains production activity at a constant rate. A simple approach but can result in a buildup of inventory or in stock outs.  Chase demand plan - matches production with demand. Will require a flexible approach to production and a good forecasting system.  Demand management planning - aims to stabilise demand, e.g. supermarkets may offer discounted ice-cream during the winter period in order to keep demand stable. A number of methods can be used to help manage operational capacity: 1.1 Flexible manufacturing systems A FMS is a highly automated manufacturing system, which is computer controlled and is capable of producing a large number of parts in a flexible manner. The main benefit is that output can be produced quickly in response to specific orders. Enterprise Management (Study Text) 51 | P a g e The main features include:  The ability to change quickly from one job to another.  Fast response times.  Small batch production. 1.2 Queuing theory Queuing theory is a technique designed to optimise the balance between customer waiting time and idle service capacity.  It applies in situations where obvious queues form, e.g. shops and bus stops, but it is also applicable in other areas, e.g. call centers, planes that circle before they land and in computing where web servers and print servers are now common.  Queuing theory concludes that throughput improves and customer satisfaction increases if one long queue is used instead of separate lines.  The frustrations of getting in a ‘slow line’ are removed because that one slow transaction does not affect the throughput of the remaining customers.  Many banks, airport check-ins and large post offices have implemented this system. 2 Introduction Quality management involves planning and controlling activities to ensure the product or service is fit for purpose, meeting design specifications and the needs of customers. Enterprise Management (Study Text) 52 | P a g e What is quality? In order to control and improve quality it must first be defined. Most dictionaries define quality as ‘the degree of excellence’ but this leaves one having to define what is meant by ‘excellence’. Who defines what is excellent and by what standards is it measured? In response to this problem, a number of different definitions of quality have been developed. In an industrial context, quality is defined in a functional way. Here, quality means that a product is made free from errors and according to its design specifications, within an acceptable production tolerance level. Such an approach also emphasises that every unit produced should meet the design specifications, so the idea of consistency becomes important. Note that consistency is a key aspect of quality standards such as BS5750. This still leaves a problem, however. How should standards and specifications be set? Who decides what an ‘acceptable’ tolerance level should be? An alternative approach to defining quality is thus to focus on the user.  Japanese companies found the definition of quality as ‘the degree of conformance to a standard’ too narrow and consequently started to use a new definition of quality as ‘user satisfaction’.  Juran defines quality as ‘fitness for use’ (1988). In these definitions, customer requirements and customer satisfaction are the main factors. If an organisation can meet the requirements of its customers, customers will presumably be satisfied. The ability to define accurately the needs related to design, performance, price, safety, delivery, and other business activities and processes will place an organisation ahead of its competitors in the market. Taking these definitions together, Ken Holmes (Total Quality Management) has defined quality as ‘the totality of features and characteristics of a product or service which bears on its ability to meet stated or implied needs’. Quality is also normally seen in relation to price, and customers judge the quality of a product in relation to the price they have to pay. Customers will accept a product of lower design quality provided that the price is lower than the price of a better quality alternative. Enterprise Management (Study Text) 53 | P a g e Test your understanding 1 Explain the reasons why quality may be important to an organisation. Quality-Related Costs British quality standard 6143 defines four types of quality cost:  Prevention costs – cost of preventing defects before they occur. For example: – Designing products and services with built in quality. – Training employees in the best ways to do their job.  Appraisal costs – the cost of quality inspection and testing.  Internal failure costs – the costs arising from a failure to meet quality standards. Occurs before the product/ service reaches the customer. For example: – Cost of re-working parts. – Re-inspection costs. – Lower selling prices for sub-quality goods. Enterprise Management (Study Text) 54 | P a g e  External failure costs – the costs arising from a failure to meet quality standards. Occurs after the product/ service reaches the customer. For example: – Costs of recalling and correcting products. – Cost of lost goodwill. Scope of Quality Management Quality Management has become extremely important because customers expect quality, because organisations function in an extremely competitive global environment. To survive they need to have not only competitive advantages, but distinctive competencies – and quality can be that distinctive competency. Quality Management is also important because costs are lowered when work is done right the first time; there is no rework and no correction of mistakes. Buzzell and Gale (1987) have documented many instances that show a strong relationship between excellent quality and profitability. Higher perceived quality leads to  stronger customer loyalty;  more repeat purchases;  less vulnerability to price wars;  ability to command higher relative price without affecting market share;  lower marketing costs; and  an improvement in share prices (relative to other companies and the economic environment). 3 Traditional Approach To Quality Management Traditional quality management was associated with the inspection of finished output of goods inward. Illustration 1 The chocolate manufacturer, Cadbury, had a traditional approach to quality management:  Inspection costs – chocolate was inspected and tested as it came off the production line. Enterprise Management (Study Text) 55 | P a g e  Internal failure costs – any sub-quality goods were sold at a lower price. Mis-shapes were odd shaped chocolates that could not be used in a box of Roses or Milk Tray chocolates.  External failure costs – arose when sub-standard products reached the customer. For example, in 2006 more than one million Cadbury chocolate bars were recalled in the UK after salmonella was found in some Cadbury products. The traditional approach to quality management allows for built in waste. However, waste reduces profitability. 4 Contemporary Thinking In Quality Management - TQM 4.1 Introduction Total quality management (TQM) is a philosophy of quality management that originated in Japan in the 1950s. TQM is the continuous improvement in quality, productivity and effectiveness obtained by establishing management responsibility for processes as well as outputs. In this, every process has an identified process owner and every person in an entity operates within a process and contributes to its improvement. Deming 14 points on TQM Deming gave a core concept on implementing TQM through following 14 points: 1 Create constancy of purpose for improving products and services. 2 Adopt the new philosophy. 3 Cease dependence on inspection to achieve quality. 4 End the practice of awarding business on price alone; instead, minimize total cost by working with a single supplier. 5 Improve constantly and forever every process for planning, production and service. 6 Institute training on the job. 7 Adopt and institute leadership. 8 Drive out fear. 9 Break down barriers between staff areas. 10 Eliminate slogans, exhortations and targets for the workforce. 11 Eliminate numerical quotas for the workforce and numerical goals for management. Enterprise Management (Study Text) 56 | P a g e 12 Remove barriers that rob people of pride of workmanship, and eliminate the annual rating or merit system. 13 Institute a vigorous program of education and self-improvement for everyone. 14 Put everybody in the company to work accomplishing the transformation. Illustration 2 A TQM Success Story Corning Inc is the world leader in specialty glass and ceramics. This is partly due to the implementation of a TQM approach. In 1983 the CEO announced a $1.6 billion investment in TQM. After several years of intensive training and a decade of applying the TQM approach, all of Corning's employees had bought into the quality concept. They knew the lingo - continuous improvement, empowerment, customer focus, management by prevention and they witnessed the impact of the firm's techniques as profits soared. An Example of TQM Failure British Telecom launched a total quality program in the late 1980s. This resulted in the company getting bogged down in its quality processes and bureaucracy. The company failed to focus on its customers and later decided to dismantle its TQM program. This was at great cost to the company and they have failed to make a full recovery. 4.2 Fundamental Features of TQM Prevention of errors before they occur The aim of TQM is to get things right first time. This contrasts with the traditional approach that less than 100% quality is acceptable. TQM will result in an increase in prevention costs, e.g. quality design of systems and products, but internal and external failure costs will fall. Continual improvement Quality management is not a one-off process, but is the continuous examination and improvement of processes. Enterprise Management (Study Text) 57 | P a g e Real participation by all The ‘total’ in TQM means that everyone in the value chain is involved in the process, including:  Employees – they are expected to seek out, identify and correct quality problems. Teamwork will be vital.  Suppliers – quality and reliability of suppliers will play a vital role (TQM and JIT often go hand in hand).  Customers – the goal is to identify and meet the needs of the customer. Commitment of senior management Management must be fully committed and encourage everyone else to become quality conscious. 4.3 TQM Tools Quality Circles A quality circle is a small group of employees, with a range of skills from all levels of the organisation. They meet voluntarily on a regular basis to discuss quality issues and to develop solutions to real problems. Enterprise Management (Study Text) 58 | P a g e Advantages include:  Improvements in quality, leading to greater customer satisfaction and improved productivity.  A culture of continuous improvement is encouraged.  Employees at operational level will form part of the quality circle. They often have a better understanding of quality problems than their superiors/ managers.  The group approach helps to foster organisational unity. Encouraging the Development and Use of Quality Circles Putting the idea of quality circles into practice can be very difficult. There are a number of ways in which firms can encourage the development of the use of quality circles:  Ensuring that there is high profile executive commitment to support the initiative.  Ensuring that staff members have the training in problem solving and analysis which they need to identify problems and develop workable solutions.  Ensuring that staff members who are involved in quality circles are free to spend the time necessary away from their day-to-day responsibilities to take part in meetings and activities.  Reviewing the information system in the organisation to identify the information needs of quality circles and to ensure that any data required assessing performance and identifying problems is available to them.  Demonstrating that the senior management of the organisation takes the process seriously and takes any action to resolve problems which is identified as necessary by quality circles.  Developing a culture in the organisation that allows possible changes to be tested out, allowing for the possibility of mistakes.  Providing training for all staff to increase awareness of the importance and value of quality circles. Kaizen Kaizen is a Japanese term for the philosophy of continuous improvement in performance in all areas of an organisation’s operations. Enterprise Management (Study Text) 59 | P a g e Features include:  Involves all levels of employees.  Everyone is encouraged to come up with small improvement suggestions on a regular basis.  Suggestions are not limited to a particular area, such as production or marketing, but look at all areas of the business.  Kaizen involves setting standards and then continually improving those standards.  Training and resources should be provided for employees in order for them to meet the standards set. Illustration 3 Many Japanese companies have introduced a Kaizen approach:  In companies such as Toyota and Canon, a total of 60-70 suggestions per employee per year are written down and shared.  It is not unusual for over 90% of those suggestions to be implemented.  In 1999, in one US plant, 7,000 Toyota employees submitted over 75,000 suggestions, of which 99% were implemented. Continuous improvement can be described as a never ending cycle. Deming called this the Plan-Do-Check-Act (PDCA) cycle:  Plan: Plan activities  Do: Implement the plan  Check: Check the results  Act: Improve the process Enterprise Management (Study Text) 60 | P a g e 5-S Practice The 5-S practice is an approach to achieving an organised, clean and standardised workplace.  The 5-S practice is often part of a Kaizen approach.  The 5Ss are Japanese words but can be translated as follows: Word Meaning Example Seiri Structurise Eliminate unnecessary items, e.g. old, unwanted files. Seiton Systemise A structured filing system - 'a place for everything and everything in its place'. Seiso Sanitise Clean work station regularly Seiketsu Standardise Alphabetic filing system Shitsuke Self-Discipline Do not slip back into old habits. The principle may appear simple, obvious common sense but until the advent of 5-S many businesses ignored these basic principles. Six Sigma This quality management programme was pioneered by Motorola in the 1980s. The aim of the approach is to achieve a reduction in the number of faults that go beyond an accepted tolerance limit. The sigma stands for standard deviation. For reasons that need not be explained here, it can be demonstrated that, if the error rate lies beyond the sixth sigma of probability, there will be fewer than 3.4 defects in every one million. This is almost perfection. Customers will have a reason to complain fewer than four times in a million. Enterprise Management (Study Text) 61 | P a g e Statistical Process Control is the method used to continually monitor and chart a process whilst it is operating, to warn when the process is moving away from the predetermined limits.  As per six sigma, the upper and lower limits will be three standard deviations away from the expected value (mean).  All points outside the control limits should be investigated and corrective action taken. For example, the following statistical control chart shows the size of a product (this may be an important aspect of product conformance) against time. Enterprise Management (Study Text) 62 | P a g e 4.4 Key Writers on TQM Writer Main contribution Deming · Credited with the development of TQM in Japan. · Developed '14 points' to guide companies in quality improvement. Juran · Defined quality as 'fit for purpose', i.e. does product/ service fulfil the customer's needs? · Stated that 85% of quality problems are due to the systems that employees work within rather than the employees themselves. Feigenbaum · Believed that 'prevention is better than cure'. · Design of systems and procedures should enhance quality. Crosby · Introduced the concept of 'zero defects'. · Believed that prevention is free and that the importance of quality is measured by the cost of not having quality. Ouchi  Showed how American companies could be as successful as Japanese companies.  Key tool is a highly effective management style.  Recommended certain Japanese management practices such as: – Group interaction and consensus decision making. – Less hierarchy and more devolved authority/ responsibility. – More participative management styles with free flow of information. Enterprise Management (Study Text) 63 | P a g e 4.5 TQM and External Quality Standards  TQM is considered to be a management philosophy rather than a set of management practices.  However, advocates of TQM support the concept of setting standards and monitoring actual performance against these standards.  In addition to internal quality standards, voluntary external quality standards may be set for an industry.  The most widely used external quality standards are those published by the International organisation for standardisation (ISO). Introduction to ISO quality standards.  The ISO 9000 series of quality standards is the most recent set of ISO standards (published in 2000). Main ISO Standards ISO 9001: contains the quality management standards. Organisations should follow these standards if they want to become registered. ISO 9000 and 9004: contains guidelines which help organisations to implement quality standards.  A company registering for ISO 9000 certification is required to submit its quality standards and procedures for external inspection.  Requirements include: – A set of procedures that covers all key business processes. – Keeping adequate records. – Checking output for defects. – Facilitating continuous improvement.  If the company receives a certificate it can claim to be ISO registered/ certified and will be subject to continuing audit.  In addition, ISO 14001 is of g

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