INTRODUCTION TO OPERATIONS 10 Strategic Operations Management Decisions
MANAGEMENT
Operations management has created industry giants. The
Ritz-Carlton Hotel Company’s mission is to provide an
outstanding customer experience through a complete focus
on quality management. LBC operates trucks that run for
20 years because their drivers care. Disney has made a
science of accurate forecasts and queuing theory. Frito-Lay
dominates the snack market by keeping fresh snacks on the
shelves with a production process that converts raw
materials into a bag of chips sitting in a grocery store in as
little as a day or two.
Functional Areas of Business
Marketing - Creation of Demand
Operations - Creation of Goods and Services
Finance - Creation of Money
Human Resource - Creation of Jobs
In all businesses, these areas are considered as important
functions to make sure that businesses or organizations are
constantly running.
What is Operations Management?
Production is basically the creation of goods and services.
While operations management is a (1) set of activities that
create values in the form of goods or services; and that (2)
activities that transforms inputs into outputs. It is also
interesting to point out that operation management
encompasses the aspects relating to production.
Introduction to Supply Chain
1. A global network of organizations and activities that
supplies a firm with goods and services.
2. The goal of supply chain is to create shared values
among the participating organizations.
question: Why is there a creation of shared values among
participants of the supply chain? What do we mean by
"shared value" to begin with?
Why study Operations Management?
1. We study how people organize themselves within the
context of an organization.
2. We want to know how goods and services are made.
3. We want to understand what operations managers do in
the workplace.
4. Operations management is considered as a costly part of
the whole organization, hence, we want to know how to
manage things right and how to do things right at the first
time.
Design of Products - Determines the lower limit costs and
upper limit capacity of quality, major implications and
human resources needed to produce the product.
Managing Qualities - Determines the customer's quality
expectations. It establishes the policies and procedures
needed to achieve the quality that the company promised.
Process and Capacity Design - Determines the way a
good or service is produced. It commits the management to
specific tasks to make things successful.
Location Strategy - Judgement regarding the nearness of
business to customers, suppliers, and talents in
consideration of costs, infrastructure, logistics, and
governmental policies.
Layout Strategy - Integration of capacity needs, personnel
levels, inventory requirements in order to determine the
efficient flow of the materials, people, and even
information.
Human Resource and Job Design - Determines how to
recruit, motivate, and retain personnel with right talents and
skills.
Supply Chain Management - Determines how to integrate
supply chain to firm's strategy. Determines from who,
where, and what to purchase.
Inventory Management - Considers the inventory and
how to optimize them while considering the customer
satisfaction and supplier capabilities, and production
schedule.
Scheduling - Determines the short-term and immediate
schedule that effectively and efficiently utilize both
personnel capacity and facility capacity.
Maintenance - Considers the facility capacity, production
demands, and personnel that is necessary for stable and
reliable process.
Heritage of Operations Management
Eli Whitney - Responsible for developing the
interchangeable parts and standardization of parts to make
things more efficient and of quality.
Frederick W. Taylor - (1) Father of Scientific
Management; (2) Contributed to personnel selection,
planning, and scheduling, motion studies, and ergonomics;
(3) He said that "management should be resourceful and
aggressive in improving working methods." Furthermore,
he also believed that (4) employees should match the right
job. (5) companies should provide proper training to its
employees. (6) provide proper work methods and tools. (7)
establish legitimate incentives for work so that the
employees are motivated.
Henry Gantt - Responsible for creating the Gantt Chart for Efficient: Doing the right things, which is to minimize
scheduling. waste resources.

Frank and Lillian Gilbreth - Systematically sought the

best way to produce different things.
Example for Productivity
Henry Ford - Moving assembly Lines

Walter Shewart - Quality Control with Statistics

W. Edwards Deming - Should improve work

environment. Worked with the Japanese to provide the p r o d u c t i v i t y = 1000 u n i t s 250 l a b o r h o u r s = 4
modern notions on quality and working with people. unitsperlaborhours

Timeline of Significant Development in Operations

Management
Single Factor Productivity - one ratio of input and output
Cost Focus - Due to the developments in the industrial
revolutions, people are starting to become aware that they Multifactor Productivity - ratio of many resources and
should incur less expenses in order to achieve higher output
profits. This can be achieved through labor specialization,
standardized parts, scientific way of managing things.

Quality Focus - Since the companies have achieved some

stability in their processes and procedures, consumers
clamored for good quality products. This gave rise to changeinproductivity(Δ)=newprod
different procedures such as computer-aided design (CAD) uctivity−oldproductivityoldprodu
and even the Total Quality Management (TQM). ctivity
Customization Focus - In the new millennia, people are
now starting to have their own identities that will make the
products or service that the consumer as 'theirs'. This notion
of mass customization was due to the explosion of internet
and e-commerce. percentagechangeinproductivity
(Δ%)=newproductivity−oldproduct
Globalization Focus - With the rise of e-commerce as well
as the heavy usage of the internet, everything became i v i t y o l d p r o d u c t i v i t y x 100
accessible within a click.

PRODUCTIVITY
4 Ways in Computing Single Factor Productivity

1.)
Productivity is the ratio of outputs divided by the inputs

valueofoutputvalueofinput

2.)
productivity=ratioofinputsoutputs

valueofoutputunitofinput
Improving Productivity
3.)
1. Reduce inputs; keep the outputs constant.

2. Increase outputs; keep the inputs constant.

unitofoutputvalueofinput

4.)
Effectivity and Efficiency

Effective: Doing the things right unitofoutputunitofinput


2 Ways in Computing Multi Factor Productivity
1.)
valueofoutputvalueofinput
2.)
unitofoutputvalueofinputs
cool tip! value = price x quantity ; unit = quantity of that
certain thing
Test Problems
1. Student tuition at Boering University is $ 100 per
semester credit hours. The states supplement school
revenue by matching student tuition, dollars per dollars.
Average class size for typical three credit course is 50
students. Labor costs are $4000 per class, material costs are
$20 per student, and overhead cost are $25,000 per class.
2. The Cool-Tech Company produces various types of fans.
In May, the company produced 1,728 window fans at a
standard price of $40.00. The company has 12 direct labor
employees whose compensation (including wages and
fringe benefits) amounts to $21.00 per hour. During May,
window fans were produced on 9 working days (of 8 hours
each), and other products were produced on other days.
Determine the labor productivity of the window fans.
3. The Cool-Tech Company also produces desk fans at a
standard price of $25.00. During May, 1,872 desk fans
were produced on 11 working days (of 8 hours each). On
one day, two employees called in sick. Determine the labor
productivity of the desk fans.
4. A local university is considering changes to its class
structure in an effort to increase professor productivity. The
old schedule had each professor teaching 5 classes per
week, with each class meeting an hour per day on Monday,
Wednesday, and Friday. Each class contained 20 students.
The new schedule has each professor teaching only 3
classes, but each class meets daily (Mon.-Fri.) for an hour.
New classes contain 50 students.
● Calculate the labor productivity for the
initial situation (students/hour).
● Calculate the labor productivity for the
schedule change (students/hour).
● Suppose that each teacher also is required to
have 2 hours of Office Hours each day
he/she taught class. Is the schedule change a
productivity increase?
5. An industrial plant needs to make 100,000 parts per
month to meet demand. Each month contains 20 working
days, each of which allows for 3 separate 8 hour shifts.
● (a) If a worker can produce 10 parts/hour,
how many workers are needed on each
shift?
● (b) If each shift has 100 workers, what is the
productivity of an individual worker?
● (c) If material costs are $10/part, capital
costs are $100,000 and labor costs are
$10/hour, what is the multifactor
productivity of the plant from part (a)?
FORECASTING
Definition of Forecasting
● Process of predicting a future event
● Underlying basis of all business decisions
○ Production
○ Inventory
○ Personnel
○ Facilities
Time Horizons in Forecasting
Short-range forecast
● Up to 1 year, generally less than 3 months
● Purchasing, job scheduling, workforce
levels, job assignments, production levels
Medium-range forecast
● 3 months to 3 years
● Sales and production planning, budgeting
Long-range forecast
● 3+ years
● New product planning, facility location,
research and development
What are the Differences of Forecasting Range?
1. Medium/long range forecasts deal with
more comprehensive issues and support
 management decisions regarding planning
and products, plants and processes
2. Short-term forecasting usually employs
different methodologies than longer-term
forecasting
3. Short-term forecasts tend to be more
accurate than longer-term forecasts
Types of Forecast
Economic forecasts
● Address business cycle – inflation rate,
money supply, housing starts, etc.
Technological forecasts
● Predict rate of technological progress
● Impacts development of new products
Demand forecasts
● Predict sales of existing products and
services
● This is the most useful for Operations
Managers since it looks into the production
side of how much to produce given the
demand in the market.
Seven Steps in Forecasting
1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the forecast
4. Select the forecasting model(s)
5. Gather the data needed to make the forecast
6. Make the forecast
7. Validate and implement the results
Forecasting Approaches
Qualitative Approach
● Used when situation is vague and little data
exist
○ New products
○ New technology
● Involves intuition, experience
○ e.g., forecasting sales on
Internet
Types of Qualitative Forecast
1. Jury of Executive Opinion
● Involves small group of high-level experts
and managers
● Group estimates demand by working
together
● Combines managerial experience with
statistical models
● Relatively quick
● ‘Group-think’ disadvantage
2. Delphi Method
● Iterative group process, continues until
consensus is reached
● Three types of participants
○ Decision makers
○ Staff
○ Respondents
3. Sales Force Composite
● Each salesperson projects his or her sales
● Combined at district and national levels
● Sales reps know customers’ wants
● May be overly optimistic
4. Market Survey
● Ask customers about purchasing plans
● Useful for demand and product design and
planning
● What consumers say and what they actually
do may be different
● May be overly optimistic
Quantitative Approach
● Used when situation is ‘stable’ and
historical data exist
○ Existing products
○ Current technology
● Involves mathematical techniques
○ e.g., forecasting sales of
color televisions
Components of Quantitative Approach
1. Trend - the upward or downward movement of data
based on various factors
2. Cyclical - the economic cycles that happen in the
environment (inflation, deflation, recession, etc.)
3. Seasonal - factors such as availability of certain products
due to weather, seasons, culture, etc.
4. Random - factors that are unexpected; force majeure,
acts of God, etc.
Types of Quantitative Approach
 1. Naive approach ○ Weights decline
2. Moving averages exponentially
3. Exponential smoothing ○ Most recent data weighted
4. Trend projection most
5. Linear regression ● Requires smoothing constant (α)
○ Ranges from 0 to 1
Associative Model - use another variable to predict the
○ Subjectively chosen
values of another variable
● Involves little record keeping of past data
Time Series Model - use data points that are collected in a
same period of time

Naive Approach New forecast = Last period’s forecast + α (Last period’s

actual demand – Last period’s forecast)
● Assumes demand in next period is the same
as demand in most recent period
○ e.g., If January sales were
68, then February sales will
be 68
Ft=Ft−1+α(At−1−Ft−1)
● Sometimes cost effective and efficient
● Can be good starting point where Ft = new forecast

Ft – 1 = previous period’s forecast

Moving Averages α = smoothing (or weighting) constant (0 ≤

α ≤ 1)
● MA is a series of arithmetic means
● Used if little or no trend At – 1 = previous period’s actual demand
● Used often for smoothing
○ Provides overall impression
of data over time
Measures of Errors

There are times that our forecasts of demand (or other

things) are inaccurate due to various factors (due to effects
of the components in quantitative approach) So we use the
movingaverage=demandintheprevious following methods to measure the errors or deviations in
nperiodsn forecasts.

Weighted Moving Averages (WMA) Mean Absolute Deviation (MAD)

● Used when some trend might be present

○ Older data usually less
important
● Weights based on experience and intuition ∑|Actual−Forecast|n

Mean Squared Error (MSE)

WMA=∑((weightforperiodn)
(demandforperiodn))∑weigh
ts ∑(ForecastErrors)2n

Mean Absolute Percentage Error (MAPE)

Exponential Smoothing

● Form of weighted moving average

PRODUCTION OF GOODS AND SERVICES
 o Process modification and enhancement

GOODS AND SERVICES SELECTION o Supplier development

Product – may often refer to tangible goods, also refers to
services
Product decision – selection, definition, and design of
products
2. Growth Phase
- Product design begins to stabilize
- Effective forecasting of capacity is necessary

Objective of product decision - to develop and implement a - Adding/enhancing capacity is necessary

product strategy that meets the demands of the market with
a competitive advantage.
3. Maturity Phase
Product Strategy Options
- Competitors are now established
1. Differentiation
- High volume. Innovative production may be needed
2. Low cost
- Improved cost control, reduction in options, paring down
3. Rapid Resource
of product line

4. Decline Phase
Product design manifests itself in:
- Unless product makes a special contribution to the
a. Concepts organization, must plan to terminate the offering

b. Technology

c. Packaging GENERATING NEW PRODUCTS

Product Life Cycles How do we generate or conceptualize for new products?

These are some of the steps that we can do in order to
- May be any length from a few days to decades create good products in the long run.

- The operations function must be able to induce new 1. Understanding the customer
products successfully
2. Economic change

3. Sociological and demographic change

4. Technological change

5. Political and legal change

6. Market practice, professional standards, suppliers,

distributors

Product Development Stages

1. Conceptualization

2. Feasibility Study

3. Customer Requirements
Life Cycle and Strategy 4. Functional Specification
1. Introductory Phase 5. Product Specs
- Fine tuning may warrant unusual expenses for: 6. Design Review
o Research 7. Test the Market
o Product development 8. Introduce the Product to the Market
9. Evaluation of the Product
Quality Function Deployment (QFD)
- Process for determining customer requirements and
translating them into the attributes that each functional area
can understand and act on.
House of Quality
Part of the QFD process that utilizes a planning matrix to
relate customer “wants” to “how” the firm is going to meet
those “wants”
Steps of House of Quality
1. Identify customer wants
2. Identify hoe the product will satisfy the customer wants
3. Relate customer wants to product hows
4. Identify relationships between the firm’s hows
5. Develop customer importance ratings
6. Evaluate competing products
7. Compare performance to desirable technical attributes
4 Approaches to Organizing for Product Development
1. Traditional
- Distinct departments
- Duties and responsibilities are defined
- Difficult to foster forward thinking
2. Champion
- Product manager drives the product through the product
development system and related organizations
3. Team
- Cross-functional
- Product development teams, design for manufacturability
teams, value engineering teams, etc.
4. Japanese “whole organization”
- No organizational divisions
- Kaisha
Manufacturability & Value Engineering
- Activities that help improve a product’s design,
production, maintainability, and use
Benefits:
o Reduced complexity of the product
o Reduction of environmental impact
o Additional standardization of components
o Improvement of functional aspects of the product
o Improved jib design and job safety
o Improved maintainability of the product
o Robust design
ISSUES FOR PRODUCT DESIGN
1. Robust design
- Design are produced to requirements even with
unfavorable conditions in the production process
- Products are designed so that small variations on
production or assembly do not adversely affect the product
- Typically results in lower cost and higher quality
2. Modular design
- Design in which parts or components of product are
subdivided into modules that are easily interchanged or
replaced
- Adds flexibility to both production and marketing
- Improved ability to satisfy customer requirements
3. Computer-aided Design (CAD)
- Interactive use of a computer to develop and document a
product
Extensions of CAD:
o 3D object modeling or printing – useful for small
prototype development
4. Computer-aided Manufacturing (CAM)
- Use of specialized computer programs to direct and
control manufacturing equipment/machineries
Benefits of CAD and CAM:
o Product quality
o Shorter design time
o Production cost reductions
o Database availability
o New range of capabilities
5. Virtual Reality Technology
- Visual form of communication in which images substitute
for reality and typically allow the user to respond
interactively
- Computer technology used to develop an interactive 3D
model of a product from the basic CAD data
- Allows people to see the finished design before a physical
model is built
- Very effective in large-scale designs such as plant layout
6. Value Analysis
- A review of successful products that takes place during
the production process
- Focuses on design improvement during production
- Seeks improvements leading either to a better product or a
product which can be produced more economically with
less environmental impact
PRODUCT DEFINITION
- First definition is in terms of functions
- Rigorous specifications are developed during the design
phase
Engineering drawing – shows the dimensions, tolerances,
materials, and finishes of a component
Bill of material (BOM) – a list of components, their
description, and quantity of each required to make one unit
of a product
Group Technology
- a product and component coding system that specifies the
type of processing and the parameters of the processing;
allows similar products to be grouped
Benefits:
o Improved design
o Reduced raw material and purchases
o Simplified production planning and control
o Improved layout, routing, and machine loading
o Reduced tooling setup time, and work-in-process and
production time
DOCUMENTS FOR PRODUCTION
1. Assembly drawing
- An exploded view of the product
- Details relative locations to show how to assemble the
product
2. Assembly chart
- Graphic means of identifying how components flow into
sub-assemblies and final products
3. Route sheet
- Listing of the operations necessary to produce a
component with the material specified in the BOM
4. Work order
- An instruction to make a given quantity of a particular
item, usually to a schedule
5. Engineering Change Notice (ECN)
- A correction or modification of an engineering drawing or
BOM