chapter 7Managing Operations

McGraw-Hill/IrwinPrinciples of Management

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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Last Chapter

In the last chapter…we looked at Strategy as it applies to management.

• Superior Performance and Competitive Advantage• Distinctive Competency / Sustainable Comp. Advantage• Barriers to Imitation / Legacy Constraints• Low Cost vs. Differentiation Strategies• Market Segmentation• Value Chain• Business vs. Corporate Strategies• Etc.

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Learning Objectives

1. Explain how operational excellence can lead to competitive advantage.

2. Describe different operating strategies managers can pursue.

3. Explain the role of operations in an enterprise.

4. Outline how the design of production systems and strategies for asset utilization, improving product quality, managing inventory, managing supply chains, and developing products can all improve the efficiency of an organization.

5. Describe the methodologies for improving operating processes, and explain how improvements in processes over time can lead to competitive advantage.

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Operations

• Operations: The different activities involved in creating an organization’s products and services.

• Operations managers: People who manage operations.

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Efficiency Frontier

• In the chapter on Strategy, we saw that managers strive to reach the efficiency frontier in their industry.

• To do so requires operational excellence.• The key determinant of efficiency is the

productivity of:- Labor - Capital

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Productivity and Efficiency

• Productivity: The output produced by a given input.

• Productivity = Output/Input

• Productivity of labor: Unit output divided by some measure of labor input.

• Productivity of capital: Sales divided by the total capital (money) invested in a business.

• There are other meaningful measures of productivity depending upon the industry. Ie. Inventory, etc.

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U.S. Productivity

Third Quarter, 2006

•In manufacturing, revised productivity increases were:

- 6.7 percent in manufacturing, - 9.0 percent in durable goods manufacturing, and

- 3.1 percent in nondurable goods manufacturing

Source: Bureau of Labor Statistics, December 5, 2006

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Importance of Productivity

•Is Productivity important?- Examples…

Source: Bureau of Labor Statistics, December 5, 2006

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Production System

• Production system: How the flow of work is configured.

• Job shop: Production systems used when items are ordered individually.

• Small batch: Production systems used when customers order in small batches but when each order is different.

• Assembly-line production: Systems used to mass-produce large volumes of a standardized product.

• Continuous flow production: Production systems that continuously produce a standardized output that flows out of the system.

• Examples of each…

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Production Systems – Costs and Flexibility

Continuousflow

Assemblyline

Smallbatch

Jobshop

Newproduction

technologies

Low cost High cost

Inflexible/standardized

Flexible/standardized

Nat

ure

of te

chno

logy

/pro

duct

Which do you think is more productive?

Why?

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New Production Technologies

• Flexible production technology: A set of methodologies that allows enterprises to produce a wider range of end products from a given production system without incurring a cost penalty.

• Mass customization: The ability to customize the final output of a product to individual customer requirements without suffering a cost penalty.

• Examples

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Question

Mass customization is possible when an organization is small. As it grows in size, the organization must move to mass production. Do you agree? Explain.

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Mass Customization

• Unto This Last – Selling directly to customers, this European company manufactures the furniture to the customer’s measurement, in one week, at a mass customized price. The company utilizes the latest 3D modeling software to design and produce innovative and inexpensive furniture

• Design Your Own – Steve Madden, an American Shoe designer, has opened a customized shoe website, where customers can select the type of shoe, color, heel, etc to their preference and in total offers some 4,221 possible combinations

Source: www.madeforone.com

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In a workplace…

• …what do you think causes process inefficiency?

• In addition to inefficiency, what other problems can the things just mentioned cause?

• What organizations are traditionally poor at process efficiency?

Source: www.madeforone.com

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Principles of Reengineering

1. Physically place adjacent processes near one another, which can accelerate work flow.

2. Standardize procedures at each step in the work flow, which makes it easier for replacement workers to fill in for an absent individual.

3. Eliminate loop backs in which work returns to a previous stage for further processing.

4. Balance work loads across different stages to make sure there are no bottlenecks and no stage has insufficient work.

5. Separate nonroutine complex and pass them to specialists so the flow of routine work is not slowed down by the need to deal with a complex transaction.

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Increasing Asset Utilization

Real-time

pricing

Assetutilization

Optimizecapacity

Efficientscheduling

Quickturnaround

Examples where asset utilization is important?

Rent/Buy Decisions

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Asset Utilization in European Airlines

• Since the terrorism scare of August 10, 2006, British low cost carrier EasyJet has cancelled 500 flights and Ireland’s Ryanair ahs cancelled more than one-third of its daily departures.

• These cancellations are not due to lack of business but due to new airport security rules at the British airports.

• An airline can loose as much as $190,000 a day in lost revenue if an aircraft were to sit on the ground

• The low cost airline business model calls for the planes to be in the air within 25-30 minutes of its landing

• Result – Significant underutilization of the assets.

Source: Business Week Online, August 16, 2006

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Superior Product Reliability

and Costs

Improvedproduct reliability

Increasedproductivity

Lower reworkand scrap costs

Lower warranty costs

Improvedreputation

Greatersales volume

Lower costs andhigher profitability

Scaleeconomies

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Quality Buzzwords and Concepts

• TQM or Total Quality Management• Six Sigma

- Quality Process will be 99.99966% accurate or 3.4 defects per million units

- Based on DMAIC• Define• Measure• Analyze• Improve• Control

• Make a difference? Why so few companies work on this?

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Deming’s Quality Improvement Steps

1. A company should have a clear business model to specify where it is going and how it is going to get there.

2. Management should embrace the philosophy that mistakes, defects, and poor materials are not accepted and should be eliminated.

3. Quality of supervision should be improved by allowing more time for supervisors to work with employees and giving them appropriate skills for the job.

4. Management should create an environment in which employees will not fear reporting problems and recommending improvements.

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Deming’s Quality Improvement Steps

5. Work standards should be defined not only as numbers or quotas but should also include some notion of quality to promote the production of defect-free output.

6. Management is responsible for training employees in new skills to keep pace with change in the workplace.

7. Achieving better quality requires the commitment of everyone in the company.

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Managing Inventory

• Inventory holding costs: The capital cost of money tied up in inventory and the cost of the warehouse space required to store inventory.

• Just in time: Inventory that enters a production process just in time to be used.

• Inventory turnover: The speed with which inventory is replaced.

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Just-In-Time

• Cost of restocking excess inventory: 20-25% of the value of the goods

• Retail industry looses $2.5 billion annually in obsolete inventory• Henceforth, the need for just-in-time system• Other options used by retailers – drop shipment, centralized

distribution centers, utilizing effective supply chain communication electronically (like Wal-Mart), and utilizing bricks and click model (what is this?)

• Example: While Barnes & Noble carries 100,000 titles in its store, its online offerings are over 2 million which requires a centralized distribution center

Source: Forbes, Leaner Shelves, Leaner Profits? November 15, 2006

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Economic Order Quantity

• EOQ = (2 X D X FC)/(VC X K)

• D = Annual demand• FC = Fixed costs of producing/procuring inventory• VC = Variable costs of inventory• K = Inventory holding costs

• Tells the manager the economical batch size of what should be held in inventory.

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Build to Order and Inventory

• Build-to-stock: Stocking a distribution channel in the anticipation that a customer will purchase those products.

• Build-to-order: Taking an order first, then building the product.

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Question

When Toyota put s more emphasis on manufacturing a larger proportion of their cars once the order is received or the car is actually sold, they are moving toward the model of

a. licensing.

b. build-to-order.

c. global standardization.

d. build-to-stock.

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Supply Chain Management and Information Systems

• Supply chain: The chain that provides raw materials, partly finished products, or finished products to an organization.

• Electronic data interchange (EDI): Coordinates the flow of materials into manufacturing, and out to customers.