OPERATION MANAGEMENT

CHAPTER 1
 Operation management: the planning and organising of the production of goods and delivery of
services. It is one of the essential functions inside an organization.
The challenge of OP is to balance the desire level of satisfaction with the needed efficiency cost.
The customers satisfaction is enhanced by: product variety, availability, features and benefits,
service and others, and the cost are increased by the same factors.

 Hayes and Wheelwright 4 stage model, what are the leading role and achievements for OM:
- Externally supportive, OM delivers competitive advantage through superior operations.
- Internally supportive: OM links operation with strategy.
- External neutrality, OM identifies and adopt the best practices.
- Internal neutrality, OM corrects the worst problem areas.

 OM involvement is to design and manage processes, due to the difficulty of designing an

effective process, the companies that succeed to manage it better will gain a competitive
advantage over their competitors. These processes are simultaneously influenced by the
organizational setting in which are executed and made up the organizational settings.
For instance:
OM.
HRM.
Process: complex requires
Highly trained professionals.
high level of training.

Responsibilities of operation managers:

- Very short term, operational activity within the factory, shop etc. on a minute-by-minute
basis.
- Very long term, the development and investment in processes that will lead the
organization’s future success.

 Four Vs, needed to help managers to undertake diagnosis on what is going good and what not
within the organization’s processes:
- Volume, the size or scale of the output.
- Variety, the size of product range or number of services offered.
- Variation, how the level of demand changes over time, thus affects the volume of outputs.
This may be short term (hourly or daily; lunchtime in a restaurant), as well as seasonal
(demand for umbrellas).
- Variability, the extent to which each product or service may be customized or not.

 4 features of services that make them deeply different from manufacturing goods:
- Intangibility, services do not physically exist but are directly experienced by consumers.
- Heterogeneity, the idea that consumers have unique experiences of services that are not
shared with, or are the same as, other consumers.
- Perishability, services cannot be inventoried or put into stock.
 - Simultaneity/Inseparability, services are produced at the same time (or place) as they are
consumed. A service depends on direct interaction between the consumer and the service
provider. The servuction model

 3 types of operation:

- Material processing operations MPO’s = manufacturing.

- Customer processing operations CPO’s = service.
- Information processing operations IPO’s = services.

Transformational inputs:

- The physical assets of the firm: building, machinery and equipment.

- The human assets: employees.

 Servuction model (service + production): when organizations deliver services and part of their
service is in a physical form. The operations which process customers can do so in two ways –
through their physical infrastructure, such as buildings, plant, and equipment, and/or through
their staff. This model shows that the experience of customer A is affected by the experience of
customer B, also called co-consumer. Customer satisfaction depend on 3 factors:
- The perceived quality of the product or service.
- The perceived quality of the service provided around the product or the physical aspects of
a service.
- The action of other customers.

Overtime changes in operations are connected to changes in society, economies, and technologies
at the level of global environment. Some are:
- Demographic, speed of population growth, ageing, and rapid urbanization.
- Economic: fiscal stress, climate change, emerging markets, and digitization of money.
- Societal, rise of social consciousness and the effect of pervasive corruption.
- Digital technology, social media, mobile, the cloud, analytics.
- Exponential technology, additive manufacturing, 3D printing, robotics and AI.
- Cyber technology, drones, internet of things, augmented reality.

CHAPTER 2
Value: the perception of the benefits associated with a good, service or bundle of goods and
services (i.e. the customer benefit package) in relation to what buyers are willing to pay for them.
3 things flow through operations: materials, customers, and information.

 Order qualifying factors: characteristics of a product or service that are required for it even to
be considered by a customer (holding a recognized quality standard, ability of direct delivery).
 Order winning factors: characteristics that directly contribute to winning customers (speed of
delivery, flexibility to increase or decrease production output to meet demand).
 5 dimensions of value:

- Cost, the ability to provide products or services at a price the customer is willing to pay
whilst remaining a profit for the organization is the essence of good cost control (value
added, selling price, running cost, service cost, manufacturing cost).
- Quality, the most important criteria for customers before and after the purchase (features,
performance, technical durability, aesthetics, value of money, perceived quality,
serviceability, conformance, consistency).
- Flexibility, the ability to change a product or service offering to suit customers’ needs has
become even more important to modern companies (material quality, new product,
deliverability, mix, resource mix, volume, modified product, output quality).
- Dependability, the ability of an organization to consistently meet its promises to the
customer (schedule adherence, price performance, safety, ability to keep promises delivery
performance).
- Speed, ability to deliver products or services as soon as possible after the customer’s order
is essential in many industries (quote generation, delivery frequency, new product
development speed, production speed, delivery speed).

 7 types of market structures:

- Perfect competition, many buyers and sellers, none being able to influence prices.
- Imperfect competition, many buyers and sellers, but due to buyers’ imperfect knowledge
of prices there are some opportunities for sellers to control prices.
- Oligopoly, several large sellers who have some control over market mechanism.
- Duopoly, two dominant sellers with considerable control over supply and prices.
- Monopoly, single seller with considerable control over supply and prices.
- Oligopsony, several large buyers with some control over demand and prices.
- Monopsony, single buyer with considerable control over demand and prices.

CHAPTER 3
 The craft era, before the industrial revolution and characterised by artisans making customised
goods usually from their own small businesses.
- Simple Project, a temporary customized initiative that consists of many smaller tasks and
activities that must be coordinated and completed to create a unique product, service or
result. It requires different kinds of resources and skill sets (house construction).
- Job shop, a setting in which a fixed set of resources is used to create various different
outputs but in which the work and type of output are similar and do usually not require a
lot of ‘invention’. the resources used and outputs are similar but the sequence of
processing steps can vary a lot (jewellery making).
- Batch process, producing or processing larger quantities of outputs in groups or batches.
Typical for batch processing is the process is handled by multiple operators who each will
perform the same activity multiple or many times until the whole batch of outputs has
been processed (wine making).
 The mass production era, after the industrial revolution:
- Complex project, involvement of outputs on a much larger scale and of more complexity
than could be achieved as a simple project (skyscrapers, nuclear energy plants).
- Batch production, the mechanization of some elements of a typical job shop process, along
with the use of some interchangeable parts, the batch production process type emerged (a
small engineering works making a wide range of products).
- Assembly line, the simplification of work tasks, and interchangeable parts linked to the
development of the moving assembly line, or in services replacement of the production
worker by the customer, self-service, (computer manufacturing).
- Flow process, the almost continuous production of commodity products (oil).
When to use which type of process.

Economies of scale: production in high volumes. Increasing the volume of production usually
drives the average price of each product down for several reasons: purchasing, marketing,
technical, financial, managerial.
 The strategic operation era, it covers the last 40years, alternative operation strategies.
- Lean production, agile manufacturing, mass customization, servitization, ubiquitination,
innovation and continuous improvement, low-cost competition, globalization.

 Fourth industrial revolution, a combination of web-based and digital technologies that have
transformed industrial and service processes. Such technologies include the “Internet of Things”,
robotics, AI, and 3D printing.

 Processes should be designed with the following characteristics:

- Each element is consistent with the overall purpose of the operating system.
- The whole process is user friendly, with easy to understand steps.
- The whole process is robust (i.e. can take small variations without affecting delivery).
- Consistency is easily maintained at every stage.
- There are effective links with other processes within the operating system.
- The whole process is cost effective.
 CHAPTER 5

 Supply chain, a sequence of business and information processes that links suppliers of products
or services to operations, and which then links those operations thought distribution channels and
end users. INBOUND OUTBOUND

Upstream: the supplier that are operating before the operation.

Downstream: the supplier that operate nearer to the final customers.
Intermediary organizations in supply chains are termed ‘tiers’ of supply, the nearest to the finished
process being a first-tire supplier, the next nearest a second-tier supplier, and so on.

A supply chain consists of many players that operate together in a supply network to provide a
final product to end customers. Supply chain management is the function that plans, designs,
organizes and controls the flow of information and materials along the supply chain.
 Procurement system, is concerned with ensuring the right suppliers are used and that the
purchasing process is itself controlled. It entails, selecting suppliers, negotiating contracts,
purchasing items, evaluating suppliers.

 Single sourcing, the case when there is just one single supplier, advantages:
- Higher level of quality with less variability.
- Ability to establish a partnership relationship.
- Making engaging in new product and service development easier.
- Able to vary delivery schedules more easily as only one supplier to deal with.
- Opportunities to achieve cost savings by ordering in larger quantities.
- Lower administration costs.
- Essential if volume and value of products are too small to divide between competitors.

 Multiple sourcing, the decision to purchase the same items but from more than one supplier.
The advantages of this approach are:
- Reduces the risk of supply disruption if one supplier is unable to deliver.
- Increases the flexibility if demand increases are significant.
- Creates competition between suppliers, so forces down prices.
- Essential if the volume or value required is too great for one supplier.
Disadvantages:
- Contractual arrangements.
- Time consuming.
- Switching cost and general cost.

2 ways of selecting suppliers:

- Rely on secondary sources, such as company websites, promotional material from
suppliers, trade association data sheets, and word of mouth from industry contacts.
- More professional approach is to gather primary data from potential suppliers and
systematically compare alternative suppliers on clearly established criteria.

 Methods for investigations:

- Request for information (RFI): suppliers are asked for general information about their
capabilities and performance (speed, reliability, price, ISO 14000 “the international
standard on environmental action”, ISO 9000 “the international standard on quality and
customer service).
- Request for proposal (RFP): the supplier might be asked to provide information about how
it would meet the needs of the customer.
- Invitation to tender: similar to RFP, a tender also requires the suppliers to provide a full
cost breakdown for their proposal.
- Request for quotation (RFQ): this is more specific than a tender and largely involves the
suppliers in quoting a price for supplying a product or service that is tightly defined by the
buying organization. This might also include meeting certain technical or quality
specifications.

 Types of strategic relationship:

1. The conventional relationship, an agreement between two organizations in which one is

the supplier and the other one is the buyer. The strength of the relationship is relatively
weak, as it might be only one time buying/selling.
2. The associated relationship, based on a long-term link between the two parties that
involves more sophistication in managing the interaction. Often suppliers will guarantee
quality of delivery, thereby reducing the buyer’s need to check all deliveries, both in terms
of the quality of what it is delivered and the time at which it is delivered.
3. A partnership, between buyer and seller is the strongest form of relationship; as well as
guaranteeing quality, partners typically work together on new product development,
jointly invest in new technology, and create a seamless logistics system between the two
parties.

 4 types of contractual relationships:

- Direct competition, a buyer deciding who to buy from on each occasion an order is placed.
- Contracts in direct competition, instead of competing for single orders, suppliers compete
against each for a contract to supply over a specified time period.
 - Operative contracts, based on supplier performance rather than on comparing one
supplier against another.
- Strategic contracts, likely to be relatively few suppliers in these arrangements, but the
value of their contracts is likely to be high.

 Supplier evaluation:
- Schedule adherence, dependability - Perceived quality
- Ability to keep promises - Response speed
- Volume or mix flexibility - Delivery speed
- Performance of product or service

 Purchase process:
- Purchase order, documents specifies items and its volume required.
- Order confirmation, an acknowledgement of the order from the suppliers confirming the
items are available and will be delivered on time.
- Delivery monitoring, the buyer may choose to monitor or track where in the supply chain
the items have got to.
- Delivery notification, confirmation from the supplier as to when the goods will be
delivered.
- Delivery reception, the process that buyers go through upon receipt of the goods.
- Returns, are items not accepted by the buyer and returned immediately upon delivery.
- Payment, systems will be put in place depending on the nature of the supplier/ buyer
relationship on the terms of payment, for example the number of days’ credit or penalties
for late payment.

Vertical integrations: when organizations decide to own a greater part of the supply network,
either upstream or downstream. Is not always wise integrate vertically due to factors such as the
relative size of the participating companies, location, or market segmentation. Alternatives:
- Acquisition of merger, the complete takeover of either suppliers or distributors.
- Joint venture, a collaborative agreement between two (or more) organizations to manage a
business activity.
- Strategic alliance, could be entered into to try and cement a relationship over the medium
to long term (high level of trust is needed).
- Virtual integration, with the use of the internet and e-business in general has led to
collaborations online in a process which has become known as virtual integration.

 The supply chain operation references, SCOR Model:

1. Plan: the development of a supply chain strategy which aligns requirements with the
resources available; making sure the plan is communicated to all the parties in the
network, and is being supported by a business plan and a financial plan.
2. Source: concerns meeting demand with effective procurement of goods and services by
selecting suppliers, scheduling deliveries, and managing inventories.
 3. Make: this concerns producing what is required by effective production scheduling,
manufacturing, testing, and packaging.
4. Deliver: this concerns managing and fulfilling orders and transporting goods to the
customer and providing an invoice.
5. Return: this concerns managing customer returns and the related processes required to
support them, including transportation, verification, repairs, disposal, or replacement, and
crediting the customer when necessary.

 Logistic: includes all of the physical movement involved in the procurement, movement,
storage and accounting for goods.
Logistic management: part of supply chain management
that plans, implements and controls the efficient
effective forward and reverse flow and storage of goods,
services, and related information between the point of
origin and the point of consumption in order to meet
customer requirements.

Material flow issues:

- How are where goods are stored: stock rooms, warehousing, and logistics centers.
- What mode of transport is used: fleet management.
- How goods are physically moved from large to small shipments closer to the delivery point:
cross docking.
Information flow issues:
- Shipment planning
- Traffic management
- Payment systems

 Alternative modes of delivering and storage:

- Batch delivery to stock: simplest form of delivery

pattern(any retail operation such as high street
clothing or books).
- Direct delivery to production: key element of so-called
just-in-time (JIT) operations; goods are delivered
directly to the production point where they are needed
without ever going into storage.
- Delivery through warehouse or logistics centre: a logistics centre is placed between the
supplier and the buyer.
- Supplier-managed delivery to store: the supplier determines the range and level of
materials to supply.
- Supplier-managed store facility: the supplier not only determines the amount of material
to supply; it also manages the stores facility on the buyer’s premises.
 - Direct delivery from supplier to buyer’s customer: materials go directly from the supplier to
the buyer’s customers; this is known as drop shipping.

 Trends in SCM:
- Third Party Logistics (3PL), specialist firms who operate an outsourced logistics service
- Fourth Party Logistics (4PL), the management of several 3PL’s by another provider
- Reverse logistics, return of products to source
- Disintermediation, ‘cutting out the middleman’
- E-Procurement, use of the internet to improve cost and time

Fleet management: to get materials from suppliers to holding warehouses or directly to process
plants the efficient usage of road, rail, or sea transport is required.
Cross-docking: when goods flow in an unbroken sequence from receiving to dispatching, thus
eliminating storage time and space, the technique is known as cross-docking. Also called flow-
through distribution in some industries, it enables organizations to consolidate and move large
quantities of goods via a distribution Centre into smaller vehicles loaded with the correct
sequencing of orders for onward delivery to business further down the chain.
Shipment planning: shipments of received raw materials or partially processed goods will be
organized either by a “milk around” pick-up by the materials processor, i.e. they will be picked up
by their own vehicles in a route that minimize waste, or they will be collected via third-party
logistics companies who use any available space in their delivery vehicles to service other
businesses.
Traffic management: the method of transportation must be agreed upon, in which the goods will
be collected and transported; more important is the route which has to be determined and for
accurate schedules to be produced.
Payment system: a very important flow is the payment for goods and services once delivered.
These can be vital to ensure a smooth cash flow, especially for small and medium-sized
enterprises, who often find themselves squeezed by larger suppliers for quick payment yet cannot
get the same terms from their customers.

CHAPTER 6
 Inventory: is any quantifiable item that is stored and used in an operation to satisfy a customer
demand. It can include raw materials for manufacturing, semi-finished and finished goods, office,
and maintenance supplies, and even the fuel to power the vehicles and equipment used by an
organization. It can be one of the most expensive assets of a company.
 Why to keep an inventory?
- Cost, buying in bulk can give cost advantages
- Quality, by always having excess material it is possible to sort it to obtain the best possible
material for each operation.
- Flexibility, having raw material or finished goods in stock can help with short-term
demands.
- Dependability, ensuing that there is a constant supply of raw materials to process or
finished goods in stock will help to get customers’ orders delivered in time.
 - Speed, the process will flow more smoothly if materials are always available at each
workstation and therefore a faster throughput rate will result.

 Types of inventory:
- Raw materials: essential ingredients, components, subassemblies etc. Usually ordered in
batches; storage space can be costly for companies; therefore, they are ordered in smaller
quantities and more often.
- Work in process (WIP) inventory: also called semi-finished stock. These are partially
completed products, that consist of a combination of raw materials.
- Finished goods inventory: once completed, products will be booked into finished goods
stock.
- Cycle inventory: if products are produced in batches and more than one type of product is
produced from an operation then in order to have sufficient of each type of product
available for passing on to the next process or dispatching to the customer, there needs to
be a build-up of inventory of each type of product in a cycle.
- Buffer inventory: also called safety stock; built if there is uncertainty in the supply chain.
- Anticipation inventory: large quantities requirements can be predicted: Christmas
decorations, Easter eggs, fireworks etc.
- Pipeline inventory: also known as inventory in transit; when goods have to travel either in
their semi-finished or finished state between factories, warehouses, or retail outlets over
large distances the inventory then is said to be in the pipeline, and unavailable for use on
any other orders.

 More reason to be kept in mind when keeping a storage:

- Additional cost that can be incurred for keeping stock
- Stock can become damaged if stored for too long or inappropriate
- Some items may become obsolete if technology or customer taste change.
- Inventory may be lost or difficult to access in warehouses
- Some items may be hazardous to store: flammable products, chemicals, or explosives.

Independent demand: ordering of this item does not influence any other item, so it can be
independently forecast and organized in the most appropriate manner; it is directly influenced by
customer demand.
Dependent demand: here there is a direct link between the ordering of a particular item and other
items. This is the basis for materials requirements planning (MRP). A list of materials will be set in
what is referred to as a bill of material (BOM). Most assembled goods follow this pattern.

 Inventory management: is the planning and controlling of inventories in order to meet the
competitive priorities of the operation. It will involve activities both within and outside an
organization to ensure that the correct quantity, quality, and type of inventory are delivered to the
right place, at the right time, and the right cost. Ordering models:
Inventory order models:
- Lot for Lot, exact quantities are ordered with no safety stock
 - Fixed Order Quantity, a material is ordered in the same quantity each time orders are
placed. The time interval between orders may vary and would be subject to demand
fluctuations but orders would be triggered automatically when a certain stock level is
reached, known as the reorder point (ROP).
- Fixed Order Period, here the time interval between ordering the material is fixed. However,
the quantity ordered can vary significantly with demand .
- Economic Order Quantity (EOQ), a calculation is made which aims to determine the most
cost efficient quantity of material to purchase. Based on annual demand, ordering cost,
holding cost and the cost per unit.

 Economic order quantity EOQ, this model assumes a stable demand. In that case we can
calculate the order quantity that minimizes the cost of holding and buying inventory.
Example: cost of holding inventory with fixed cost per unit of product (H), fixed cost of ordering
per order (S), order in fixed quantities (Q). The timing of the orders is so that inventory is
replenished every time it is sold.
The average inventory = ½ x Q
And if total demand is D, then Q = D / the number of
orders N.
(2 D × S )
EOQ= Q=
√ H
Where Q = economic order quantity
D = annual demand
S = annual ordering cost per unit
H = annual holding cost per unit
Assumptions and limitations:
- Annual and stable (constant) demand
- Linear quantity / cost relationship
- Constant delivery lead time
- Fixed ordering costs
In today trading conditions it is unlikely like that. Organizations will want to bring in all of their
requirements in one large consignment. In addition the use of Just in Time (JIT) scheduling has
further reduced the use of EOQ models.

 Demand fluctuation, the Bullwhip effect: customer demand is variable but in most cases a
calculation of safety stock can accommodate this. However, in some instances a
disproportionately large fluctuation in demand at the supply end can be caused by a relatively
small change in demand at the customer end of the supply chain.

= is an upstream demand is disproportionally increased

as a result of a relatively small demand change from the
customer. Based on the premise that for an even flow of
materials through a supply network it is best practice for
all parties to agree to hold one order unit’s worth of
materials in inventory, any change from the customer
end to the agreed level will have an increasing knock-on
effect, as you travel back along the supply chain.
 A way to categorize items by their cost and usage:
- Class A items have the highest value, 20% by Quantity, 80% by Value e.g. motor car engines
or gearboxes
- Class B items would have less value, 25 -30% by Quantity, 10 - 15% by Value e.g. motor car
seats or wheels
- Class C items would have least value, 50-55% by Quantity, 5 -10% by Value, e.g. motor car
electrical fixings, cables, switches etc.

 When there is a dependent demand, 4 production planning system become are needed:
- MRP systems are software-based production planning and inventory control system.
- MRPII systems extended the original MRP to other areas, such as finance, sales and
marketing, and human resources, all on one database to offer an integrated business
solution.
- ERP systems generally use web-enabled software to provide real-time data and visibility at
all points in the supply network.
- Theory of constraints, TOC.

 Trends in inventory management:

- Just-in-time: a method of optimizing manufacturing processes by eliminating all extraneous
waste, such as excess material, excess inventory, or excess movement of personnel or
materials.
- Radio frequency identification (RFID): this refers to tracking devices which enable suppliers,
operations, and customers to know precisely where their shipment of goods are, and
therefore increase the accuracy of raw materials supply forecasting and ultimately
customer service or the final product.
- Electronic data interchange (EDI): information transfer between suppliers, operations, and
customers using the internet or secure computer networks to reduce the time taken in the
procurement process to input material requirements and create shipping documents.
- Just-in-time II (JIT II): this relates to the vendor having a representative in the client’s
manufacturing plant, engaged in ordering the right amount or materials to fit with the
client’s production schedule.
 MPS master production schedule, Forward-looking, demand-based approach for planning the
production of manufactured goods and ordering materials and components. To minimize
unnecessary inventories and reduce costs.
Decision to be made in MPS: time phasing and lot sizing.
 Time phasing, Time-phased report that gives:
- Schedule for obtaining raw materials and purchased parts for purchasing department.
- Detailed schedule for manufacturing the product and controlling manufacturing
inventories for production managers.
Dependent demand requirement are time-phased in:
- MRP explosion: process of using the logic of dependent demand to calculate the quantity
and timing of orders for all subassemblies and components that go into and support the
production of finished goods.
- Time buckets: time period size used in the MRP explosion process and are usually one
week in length.
 Lot sizing, process of determining the appropriate amount and timing of ordering to reduce
costs:
- Lot for lot LFL, ordering schedule that covers the gross requirements for each week.
- Fixed order quantity FOQ, uses a fixed order size for every order or production run.
- Periodic order quantity POQ, orders a quantity equal to the gross requirement quantity in
one or more predetermined time periods minus the projected on-hand quantity of the
previous time period.

CHAPTER 7
 Capacity management, operations need to know the likely customers demand for goods or
services on any given day, week, year, to ensure that they have sufficient resources to fulfill the
demand in time.
- Forecasting demand.
- Providing resources to meet the demand.
Too much capacity: there will be idle staff, machinery or facilities, costing extra money.
Too little capacity, may leads to loss of orders.
 Capacity, the maximum possible output of an operation or process at any given time.
Different operations will use different units:
- Manufactures often use number of products they can produce over a period of time.
- Service organizations use the number of customers they can serve or the maximum
revenue they can generate.
 Capacity 2.0, total available resources in a given period.
- Manufactures often use machine hours, labor hours.
- Hospitals use the number of available beds.

 Managing capacity in MPO’s:

 - Design capacity: the theoretical maximum capacity of an operation. In most cases, it is
accepted that design capacity is rarely met, and managers instead seek to achieve effective
capacity.
- Effective capacity: is the potential capacity that can be achieved on a typical day, taking
into account planned maintenance and product changeovers = design capacity - planned
downtime.
- Achieved(actual) capacity: on any given day, the actual output of an operation may be less
than effective capacity as there may be further avoidable downtime due to unplanned
events such as machinery breakdowns or staff shortages = effective capacity – unplanned
downtime.
 2 key measurement of any operations:
- Utilization, the proportion of the design
capacity that is actually achieved in any
operation = actual capacity / design
capacity.
- Efficiency, the proportion of effective
capacity that is actually achieve in any
operations = actual capacity / effective
capacity.

 Overall equipment effectiveness OEE, this measure includes an assessment of the quality
aspects of an operation in addition to those traditionally used to calculate efficiency, to provide an
effectiveness value.
Utilization and efficiency should be as high as possible, however they do not take one factor into
consideration, which is the quality of the output. OEE does it = availability * performance * quality.
- Run rate, the number of products per time unit.
- Availability, is the ratio of achieved capacity to design capacity (in other words the same as
machine utilization). Achieved capacity/design capacity
- Performance, is the ratio of actual run rate to ideal run rate. Actual run rate / maximum
run rate
- Quality, is the ratio of good production output to total pieces made. Actual number of
good products / theoretical number of products given the achieved capacity and
performance.

 Managing capacity in CPO’s:

Matching supply and demand in this system is challenging because:
- Services are used at the same time they are produced.
- Infrastructure is inflexible so that capacity is fixed.
- Demand is too difficult to predict.
- Difficulty in predicting the flow through the system if there is a variety of services with
variable service times.
 4 types of activities to match capacity and demand:
 - Reservation system, designed to ensure a smooth flow of customers into the operation
(appointment at the hairdresser, pre-booking at restaurants). Problem with reservations is
‘no-shows’, customers who pre-book but cancel at the last minute or simply do not turn
up. Some services now charge for this to compensate for lost business
- Forecasting, where it is not possible to reserve a service, such as a retail shop or a fast food
restaurant, the likely demand still needs to be predicted (quantitative techniques: simple
moving average, weighted moving average, exponential smoothing).
- Revenue Yield management, a system for managing advanced reservations through pricing
to maximize profitability. Commonly used in many sectors with fixed capacity, such as
hotels and airlines. Shift and stimulate demand (= vary the price of goods or services,
provide customers with information, advertising and promotion, add peripheral goods
and/or services, provide reservations).
- Short term capacity management, done by adjusting short-term capacity levels, (Add or
share equipment, sell unused capacity, change labor capacity and schedules, change labor
skill mix, shift work to slack periods).

 Long term capacity strategy, is closely tied to the strategic direction of the organization.

Complementary good and services: produced

or delivered using the same resources
available to the firm. Balance seasonal
demand cycles and use the excess capacity
available.
Capacity expansion strategy: how to expand

CHAPTER 8
 Service encounter: the interaction between the customer and service provider.
In CPO’s this interaction can be challenging due to the fact that CPOs employees will routinely
come into contact with many customers (unlike in MPOs where it is mainly sales-related staff).
Success of service encounter:
- Staff attitude
- Recruitment and selection of suitable employees
- Appropriate induction and training of employees
- Empowering front-line workers
 - Systems for optimizing the service encounter
- Monitoring service encounter performance
- Communication effectiveness
- Control and efficiency of the service encounter
To manage online encounters the operation must consider how to create traffic and convert
visitors to the site into paying customers. The achieve this, website design must incorporate
speed, ease of navigation and checkout, and aesthetic appeal to create trust, credibility, and
security for customers.

 Little’s law: you are in control of your operations: how much inventory you have, what is the
queue time of your customers and what is the throughput of your process. It gives a quantitative
relationship between 3 important process parameters: (WIP = R x T)
- Throughput R, the number of units moving through a process in a time period.
- Flow / cycle time T, the time it takes to pass through a process.
- Work in process WIP, the number of units that are being processed during one time period.
Average inventory = throughput * average queue time (Little’s Law).

 Queue, is a situation in which the customer is passively engaged with the process, waiting for
action to be taken in some way. Queuing theory comprises mathematical models of various
queuing systems that analyze data such as arrival pattern, queue length, system capacity, and
queuing discipline in order to design more efficient and effective queues. Such modelling is
typically a trade-off between reducing the length of time that customers wait (in order to increase
customer satisfaction) and the cost of doing so.
Queuing discipline:
- FIFO, first in, first out = FCFS, first come first serve (= most common).
- LIFO, last in, last out.
- SPF, shortest processes first.
- SIRO, serve in random order.
Alternative queuing system:
- Single line queue, fair perception from the customers (banks, post offices).
- Multiple channels, fast food, supermarkets.
- Diffuse queue, take a ticket system.
- Priority queue, airports when provide a fast track for business passengers.
Psychology of queuing:
- Unoccupied time feels longer than occupied time - Solo waiting feels longer than group
- Pre-processed waits feel longer than in-process waits waiting.
- Anxiety makes waiting feel longer - Uncomfortable waits feel longer than
- Uncertain waits feel longer than certain waits comfortable waits
- Unexplained waits seem longer than explained waits - New and infrequent users feel they
- Unfair waits seem longer than equitable waits wait longer than frequent users.
- The more valuable the service, the longer people will wait
 Theory of constraints TOC, every process has a process stage that defines the maximum
throughput. This is known as the ‘bottleneck’.
Improve the process -> find the bottleneck -> increase the throughput at the bottleneck.
The bottleneck: the prescription filling station. The throughput can be improved at the filling
station, by have more filling stations, train employees better, implement automated medicine
retrieval system.

 Service failure and recovery: is any deviation in the service delivery from the specified service.
Due to the inherent variability of services, service failure is almost inevitable.
Probability of service failure is increased by:
- New employees.
- Technological breakdown.
- First time customers.
 Service recovery: is the action taken in response to a service failure with the aim of restoring
customer confidence and satisfaction.
Recovering a failure service can take several form:
- Provision of an apology.
- Rectifying the original service breakdown.
- Providing an explanation for the service failure.
- Providing compensation in some form.

 Presumption: the role that customers play in the co-creation and co-production of services. This
means that customers play a significant role in the operation and can have roles such as end user,
co-producer, co-consumer, and inspector.

CHAPTER 9

Quality is not absolute from an operation

perspective, it is relative and it should be
compare to similar thing.
 Quality: the totally of features and
characteristics of a product or service that
bear on its ability to satisfy a given need”.

 The quality gap model.

The positioning gaps develops when:
- The products or service concepts diverges from the requirement of the customers (the
marketplace is influenced by fashion or demographic change).
To fix it: the long term control can be achieved by regular top level reviews of the product or
service (done by qualitative and quantitative researches undertaken to identify customers wants
and needs). Also take into account the competitors activities.

The specification gap:

- The difference between the actual standards made by the management compare to the
management understanding of customer’s needs (lower standards compare to the
customer’s expectations).

The delivery gap:

- When employees can’t deliver a service or make a product according to the standard
required (the daily activity of managers is focused on managing processes).

The promotional communication gap:

- when marketing, advertising and promotion doesn’t describe the reality and so disappoint
the customer’s expectations.

The perception gap:

- is the gap between what the consumer expected and what they perceived they got.
* Process flowcharting: typically every process has the same basic flow, one or more inputs is
used in a transformation process to create one or more outputs. Through the entire process, are
present decision points, where must be decided to pass yes or not.

Input(s) transformation Output(s)