Operations Management

Management of operations function that is responsible for processes that handle products/services
to customers from start to end.
Productivity
Labour cost = 1/Labour productivity
Material cost = 1/Material productivity
Asset cost = 1/Asset productivity
To match supply with demand, excess supply can be gotten rid off by implementing strategies that
increases periodic demand, e.h happy hours, sales to reduce perishables, delayed decision making
for Just-In-Time supplying
Factors for design/redesign of products & services
-Competitiveness
-Cost and Availability
-Technology (e.g patent)
-Economical (e.g growth)
-Social and Demographic
-Political. Liability or Legal
-Sustainability
Design Issues
-Product and service life cycles
-Standardization, absence of variety in a product or service
-Mass customization, giving some degree of customization to standardized goods
-Modular design
-Delayed Differentiation
-Product or service durability, reliability, aesthetics
-Degree of Newness
-Global design : cultural differences
-Sustainabiliy
Service Design Challenges
-Inventory cannot be kept
-Intangibility nothing to take home
-Inseparable cannot separate service from provider and customer
-Inconsistency based on person providing the service
Inputs -> Transformation Process -> Ouputs




Flow unit what is tracked through the process and generally defines the process output of interest
Activity Time how long does one worker spend on the task e.g Activity A = 10min
Resource Capacity no. of units that the worker can make per unit of time e.g Activity A = 1/10 unit
per minute
Bottle neck Step with the lowest Resource Capacity
Process Capacity no. of units of product that a process can produce, it is the Reousrce Capacity of
the bottleneck
Flow Time Time it takes a unit to get through whole process
Flow Rate/Throughput/Output Flow unit Rate of which units of inputs are being changed into
outputs, normally it equals to the bottleneck rate *assuming that demand and supply is sufficient. If
not take the demand rate given
Inventory turns 1/Flow time, where faster is better
Inventory average number of flow units in the process, Flow rate * Flow Time
Littles Law
Inventory = Flow rate * Flow time
Assuming system is in steady state with no start up and shut down activities, no build-up of
inventories
Resource utilization = Flow rate/Resource capacity
Process utilization = Flow rate/Process Capacity
Parallel process doing same activity
Process capacity = 1/X + 1/Y
Flow rate = (X+Y)/2 (average of 2 timings)
If faster process is before slower process


Littles law cannot be applied since system is not in steady state
There needs to be a buffer in the middle to gather the work in process or inventory will build up to
infinity
The process capacity of the system depends on the slower activity
Once buffer is filled up, the first process will slow down to the process capacity of the slower process
This occurs when 2
nd
machine is valuable and cannot be idle



Capacity Planning
Over-cap high operating costs?
Under-cap strained resources and loss of customers
Changes in demand, environment, technology, opportunities
Sunk, fixed and investments needed to build capacity
Capacity Strategy
-Design flexibility
-Life cycle issues
-Smoothen capacity requirements
-Dealing with capacity chunks" (build a lot or nothing)
-Big picture approach to capacity changes
-Identify optimal operating levels (volume vs. cost) i.e Economies of Scales
-Expansion strategies like anticipating future demands, building capacity when demand exceeds
capacity, or small increments in capacity to match growing demand

Examples of Capacity Strategy
Capacity cushion Extra capacity built to offset demand uncertainty
Capacity cushion = 100% Process Utilization (orgs with higher demand uncertainty normally have
greater capacity cushion, orgs with standard products/services have smaller capacity cushion)
Outsourcing
With the following factors to consider
-Available capacity
-Expertise
-Quality considerations
-Nature of demand
-Cost
-Risk
Process Layout
Activity time = Setup time + run time (setup time can be maintenance time as well)
Resource capacity = Batch size/ (Setup time + Batch size*Activity time)
To find the ideal batch size, look for the higher resource capacity and equate to equation above
Cycle time flow time at each station, should be synchronized in a highly automated production line
Cycle time = 1/process capacity
Inventory turnover = COGS/ average inventory
Line balancing process of assigning task to workstations such that each workstation have
approximately equal time requirements
Processes with setup time ( A->B )

*note the last extra timing at the end*

High job shop of WIP is because of high setup time, or traffic jam in one area


Service Process
Flow Time = Waiting time (Wq) + Service time (1/ )
*Increase of servers do not reduce service time but only waiting time*
40minutes = service time + waiting time, but since service time is the same, can only change waiting time.
Trial and error with m values such that waiting time is within acceptable range.
Inter-arrival time/ Service time is exponentially distributed => CV = 1
Inventory = Queue Length + customers in service
Flow Rate = Customer arrival rate
Arrival rate must be < service rate for steady state
For the system to be stable, the long run/steady state average service rate (process capacity) must
be faster than arrival rate.
When that happens, we can apply Littles Law of
Inventory = Flow Time * Flow Rate

Arrival Service/Process
Rate (no. of customer arriving per
unit time)
(how many customers served
per unit time)
Time 1/ (average time between
each customer arriving)
1/ (how long needed for each
customer)
Coeff of Variation

Process utilization () = /
= /(m ) < 1, where m is number of servers
If system is not stable, use this equation


Ls = Total customers in system, customers in queue and work in progress
Pooling system is better than a separate queue system

Reasons for defects
Random variations due to Common Causes, process is in control
Assignable variations due to Special Causes, process is out of control
Good investigate, reinforce the change
Bad Investigate and fix the problem
Control Charts
Sample Mean : x bar (mean) graph
Sample Range : R graph = max(x) min(x)
Normal acceptable range
UCL = mean + 3SD
LCL = mean 3SD
Higher SD = flatter graph
Standard Normal Curve Z = (x-mew)/SD
Some signs that process has gone Out of Control
-point out of UCL and LCL range
-point very near UCL and LCL range, need to investigate
-consistent points of 7 that runs up or down in a row
-cycle or non-random patterns e.g sin cos shaped curve
-2/3 points in a row outside of either 2SD limit
-4/5 points in a row outside of 1SD limit
Type I error
Concluding a process is not in control when it actually is
Type II error
Concluding a process is in control when it is not
Process Capability
If process mean is centered between USL and LSL

If process mean is not centered between USL and LSL

Process is capable if Cp >= 1.33 or Cpk >=1.33 for non centered
USL and LSL are set by customer requirements or engineering design standards, therefore a process
that is in control =/= capable
When considering which process to choose, one has to consider
1. Is the process capable of meeting the requirements of the customers LSL and USL?
2. What is the addition cost per unit to increase the process capability?
3. Which process has a higher profit margin, can the profit margin increment offset cost to improve
process capability?
4. How much is the disposal cost since a lower SD will have lesser defects
The Inventory Problem
High inventory
-Salvage/Perish cost
-Holding cost
-Limited tangible storage space
-Fast economy, inventory may become irrelevant
Low inventory
-Shortage costs
-Lost production cost (idle time)
-Lost opportunity due to loss of sales and customers
Inventory Recording Mismatch
-Misplaced Inventories
-Mistakes during transactions
-Delays in system updating
-Perishable/out-dated goods kept in warehouse
-Theft
-Quality problems, defects, market situation
ABC Classification
A - 80% of cost, 20% in volume
+- 0.2%
B between A and C
+- 1%
C 10% of cost, 50% in volume
+- 5%
1. Find total unit value by using unit price x units
2. Arrange in order of total value
3. Find % of total unit value against total value of all inventory
4. Find % of units against total no. of units
5. Use % of units and chart out cumulative % of total no. of units
6. Divide into A B C






Economic Order Quantity (EOQ)
Holding cost H
Ordering cost S
Optimal order quantity Q
Total demand per year D
No of order per year N = D/Q
Min inventory cost occurs when,
Inventory holding cost = Inventory ordering cost
QH/2 = DS/Q (note period, yearly weekly monthly)

*Inventory is Q/2 for inventory holding cause we are taking average inventory, assuming demand
rate is constant*
*Cost of inventory itself is not a factor*
Assumptions of EOQ
-Only one product involved
-Demand is known and constant
-Demand is evenly consumed throughout the period involved
-Lead time is constant
-Orders arrive in one delivery regardless of size
-No quantity discounts
-Ordering cost is independent of Q
Reorder Point
Reorder Point = Lead Time * Demand rate = Lead Time * (Quantity per order/ Cycle Time)
ROP = (LT/CT) * Q
(LT/CT) is a ratio of remaining inventory when reodering against full inventory
*If LT/CT > 1, always make in a fraction* - reordering will be done in previous cycles