Operations Primer – 2017

A Brief Introduction to the Basics of

Operations Management

Prepared by Club Kaizen in association with Placement Preparation Committee

 Contents

• Introduction
• Important Terminologies
• Theory of Constraints
• Supply Chain Management
• Inventory Management
• Project Management
• Quality Management System
• Service Operations
• Assignments

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 Introduction

Operations Management (OM):

• OM is concerned with converting Inputs (materials & labor) into Outputs (goods
& services) as efficiently as possible to maximize the profit of an organization.
• It involves planning, organizing, coordinating, and controlling all the resources
that are needed to produce a company’s goods and services.
• Operations Management also involves managing people, equipment, technology,
information, and all the other resources needed in the production of goods and
services.

The objective of the Operations Management is ‘to produce goods and services of Right Quality and Quantity at the Right time and Right
manufacturing cost’:
Right Quality : The quality of product is established based upon the customers need. The right quality is not necessarily being the best
quality. It is determined by the cost of the product and the technical characteristics as suited to the specific requirements.
Right Quantity : The manufacturing organization should produce the products in right number. If they are produced in excess of demand,
the capital will block up in the form of inventory and if the quantity is produced in short of demand, leads to shortage of products.
Right Time : Timeliness of delivery is one of the important parameter to judge the effectiveness of production department. So, the
production department has to make the optimal utilization of input resources to achieve its objective.
Right Cost : Manufacturing costs are established before the product is actually manufactured. Hence, all attempts should be made to
produce the products at pre-established cost, so as to reduce the variation between actual and the standard (pre-established) cost.

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 Important Terminologies

Waiting Room Cured Patients Room

Let us consider the following situation to better under the terminologies related to process analysis.
Situation: A hospital with a waiting room for patients, treatment room, and a room for cured patients
Cycle time: The average successive time between completions of successive units. Reciprocal of Cycle Time is Throughput.
In the above example, cycle time is the average time for a patient in treatment room to get treated and join the ‘cured patients' group. In other words, if for every 10
minutes one patient gets treated and joins ‘cured patients’ group then cycle time is said to be 10 minutes. Throughput is 0.1 unit per minute or 6 units per hour.
Utilization: Is the ratio of the time that a resource is actually activated relative to the time that it is available for use
Example – If the doctor works for 8hrs. a day but uses the stethoscope for only 2 hrs. then the stethoscope utilization is = (2/8) = 0.25 = 25
Setup Time: Time required to prepare an instrument/pre-requisites to carry out an operation.
Example: If the doctor takes 5 minutes. to setup the instruments in his room to operate a patient. It is considered as the setup time
Operation Time: Sum of the setup time and run time for a batch of parts
Example: Here, the setup time(5 minutes.)+ time to treat a patient or run time (10 min.) = 15 minutes is the operation time.
Waiting Time: Time spent waiting to be taken up for operation
Example: Time spent by the patients in the waiting room before consulting the doctor.
Throughput Time: It is the average time for a unit to move through the system. Sum of operation time and waiting time. Example: It is the total time a patient
spends in the hospital (waiting time + setup time + operating time), If waiting time is 3 min => Throughput time = 3 min +5 min + 10min = 18min. (>Cycle Time)
Lead time: The total time it takes a customer to receive an order (includes time to process the order, throughput time and delivery time)

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 Theory of Constraints

Context: A B C D E F Framework for Implementing ToC:

A B C D E F 1. IDENTIFY the system’s constraint.
Current Capacity (Per Hour) 40 36 30 38 42 39
2. Decide how to EXPLOIT the system’s constraint.
3. SUBORDINATE everything else to the above decision.
Investment per unit Capacity
Enhancement (Rs.)
5,000 4,000 20,000 4000 5,000 10,000 4. ELEVATE the system’s constraint.
5. If in the previous step the constraint has been broken, go back to Step 1.
A product X is being manufactured in an assembly line through 6 sequence of
Operations (A,B,C,D,E,F) as depicted above. Consider current capacities: Application of above Framework to Scenario 1: (Final O/P = 35 units/Hr.)
Scenario 1: Assuming you have no budget constraints but you can only increase Step 1 – System’s constraint is Operation C.
each machine’s capacity by not more than 5 units/hr. Which all machines’ Step 2 – We can increase the capacity as there is no budget constraints.
capacity will you enhance? Step 3 – Operate all other machines at 30 units per hour.
Scenario 2: Assuming that you have only Rs.20,000/- with you. Which Step 4 – Increase the capacity of C by 5 units, by investing Rs. 1,00,000/-
combination of capacity enhancement is best for the above system? Step 5 – Since the new Capacity is 35 units/hour, still the capacity is not broken
Theory of Constraints (ToC): i.e Operation C is still the bottleneck. Now the only solution is to operate all
Theory of Constraints is a methodology for identifying the most important other Operations at 35 units/hour, so as to keep minimum WIP Inventory.
limiting factor (i.e. constraint) that stands in the way of achieving a goal and then
Application of above Framework to Scenario 2: (Final O/P = 31 units/Hr.)
systematically improving that constraint until it is no longer the limiting factor. In
manufacturing, the constraint is often referred to as a bottleneck. Step 1 – System’s constraint is Operation C.
In production and project management, a bottleneck is one process in a chain of Step 2 – We can increase the capacity as there are no other options mentioned.
processes, such that its limited capacity reduces the capacity of the whole chain. Step 3 – Operate all other machines at 30 units per hour.
Overall capacity of the System will be determined by the bottleneck. So, for Step 4 – Increase the capacity of C by 1 unit, by investing the available money.
the above system bottleneck is C and the System’s capacity is 30 units/hour. Step 5 – Same case as Step 5 in Scenario 1, but C’s new capacity is 31 units/hr.

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 Supply Chain Management

Supply Chain Management (SCM): Effect of GST on SCM in General:

SCM is the management of a network of all business processes and activities Taxes that are applicable with current tax structure:
involving procurement of raw materials, manufacturing and distribution • Excise Duty for Manufacturers
management of Finished Goods. SCM also involves transfer of information, • VAT and CST for intrastate and interstate sale of goods respectively
money & reverse logistics. SCM is an art of management of providing the Right • In addition to above taxes, import duty is applicable for imported goods
Product, At the Right Time, Right Place and at the Right Cost to the Customer.
With the advent of GST, all the above taxes (except import duty) will be
Important Decision Points: • Network Design subsumed into a single tax uniform across the country
• Inventory Management • Information Technology
• Demand Forecasting • Implementation & Exploitation Effect of GST on the Supply Chain of E-Commerce industry:
• Procurement Management • Production Planning & Control • E-Commerce companies are expected to have high growth trajectory.
• Material Management • Distribution Management • E-Commerce companies operates on Marketplace Model,
• Transportation Management • Make Vs. Buy Decisions Warehousing Model and Mixed Model. Current Indirect Tax laws
Framework for Decision Making: were not able to recognize its flaws to accommodate these models.
One should understand the tradeoff and dynamics of all the decision parameters • Some offerings are still hard to be categorized either as ‘goods’ or
discussed above. When you try to enhance one performance parameter, there ‘services’, so as to levy appropriate tax (i.e. Service tax for services and
might be a chance that another parameter’s performance might deteriorate. For VAT/CST for goods). For example, sale of digital content.
example, if you want to maintain low inventory levels through JIT, you might • Requirement of statutory forms, way-bills, road-permits etc., for inter-
have to increase the number of deliveries you have to make, which increases state movement of goods are another hiccup for the ecommerce players
your transportation cost. Objective is to identify the right combination of the Once when GST is introduced, it is expected to rectify some of above
above mentioned parameters, which results in lower possible cost for operation. complexities and irregularities.

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 Inventory Management

Inventory:
• Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization in its custody awaiting
packing, processing, transformation, use or sale in a future point of time.
Examples : Manufactured cars in warehouse waiting to be sold, Software Engineer who is waiting for allocation of work, etc.
Inventory = Cycle Stock + Safety Stock:
Cycle Stock – Average inventory resulting due to production or purchases to satisfy day to day operations. Average demand, Ordering Cost & Holding
Costs of material in context are determinants of Cycle Stock.
Safety Stock – Amount of inventory that has to be kept, to safeguard against uncertainties so as to be able to fulfill the customer demands. Uncertainty
in Lead time and Uncertainty in Demand are determinants of Safety Stock.
Costs Associated with Inventory:
• Ordering Costs – Includes all fixed costs i.e. components that do not vary with the size of the order. For example, admin cost & transportation costs.
• Holding Costs – Costs pertaining to Working Capital held up with inventory, Storage and Handling, Deterioration, Obsolescence, Shrinkage etc.,
• Stock-out Costs – Costs due to running out of stock. Lost sales Cost when company looses potential sales. Backorder Cost additional costs (admin,
transportation, expediting, etc.,) when customer is willing to wait for his/her order to be fulfilled.
Framework for Decision Making:
How Much To Order? Objective is to optimize the ordering quantity, while minimizing the combination of Ordering Cost, Holding Cost & Stock-out
cost. For example, if an item has high holding cost and low ordering/stock out costs, it makes sense to order in less quantity with more no. of orders.
When To Order? Objective is to minimize the total costs, while considering the uncertainty in lead time. For example, if you order too early, holding
costs might increase or if you order too late stock-out (uncertainty in lead time) costs will increase. If stock-out costs are significantly more than holding
costs, it would be wise to order a little earlier and vice versa.

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 Inventory Management

Major Types of Inventory Raw Material Inventory, Work In Bullwhip Effect:

Process Inventory & Finished Goods Inventory
Inventory Management Technique – ABC Analysis:
• ABC analysis is an inventory categorization method which consists of
dividing items into three categories (A, B, C): A being the most
valuable items, C being the least valuable ones.
• This categorization helps the managers to prioritize their time towards
managing Critical items pertaining to Category A. However, it should
be noted that for the completion of a particular activity, a C-Category
item is as important as an A-Category item.

• The phenomenon of increasing demand variability as one moves up

the supply chain from Retailer to Manufacturer is called Bullwhip
Effect.
• Due to this effect, a small change in consumer demand will result in
large variations in order placed by upstream players.
• Lack of Coordination, Lack of Communication, Inefficient
information flow among supply chain players & Demand forecasting
inaccuracies are some of the main reasons for Bullwhip effect.

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 Project Management

What is a Project? An assignment which is temporary with a defined beginning and end in time, and is unique in nature with a specific set
of activities to accomplish a singular goal.
Examples : Development of software for an improved business process, the construction of a building or bridge, the relief effort after a natural
disaster, the expansion of sales into a new geographic market
What is Project Management? It is the application of knowledge, skills, tools, and techniques to project activities to meet the project
requirements.
Life Cycle of a Project:
Initiating – At this stage, scope of the project is perfectly defined with the help of many discussions and clarifications from the client. For
Planning - With help of Work Breakdown Structure (WBS), Project Schedule Plan for all the activities & sub-activities is prepared which
will be the reference for executing the project. The duration of activities, sub-activities and their interdependence will determine the critical
path for completion of project, which is detrimental for the duration of project.
Executing - All requisite resources (Human Resources, Plant & Machinery etc.) are deployed and the work is carried out w.r.t Project Schedule
Plan.
Monitoring and Controlling – At regular intervals current work is compared with the Project Schedule Plan, and necessary actions are taken
wherever there are backlogs with the formulation and implementation of Catch-Up Plan.
Closing - In this stage, it is necessary to ensure everything has been completed as per scope and all payments are made and also transfer of
ownership has taken place. Meticulous documentation plays a major role for smooth project closure formalities.

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 Quality Management System

Quality Management System:

• A quality management system (QMS) is a formalized system that documents processes, procedures, and responsibilities for achieving
organizational objectives. A QMS helps coordinate and direct an organization’s activities to meet customer and regulatory requirements and improve
its effectiveness and efficiency on a continuous basis.
• Main purpose of QMS includes - 1. Improving processes; 2. Reducing waste; 3.Lowering costs; 4.Facilitating and identifying training opportunities;
5. Engaging staff & 6.Setting organization-wide direction

Important Terminologies:
• Quality Assurance (QA) – A way of preventing mistakes or defects in manufactured products with necessary measures in the system.
• Quality Control (QC) – A process by which entities review the quality of all factors involved in production.
Lean Six Sigma: (Equivalent to Lean Philosophy & Six Sigma Philosophy)
• Lean is achieved by removing “Waste,” which is an activity not required to complete a process i.e Non-Value Adding Activity.
• Six Sigma is named after a statistical concept where a process produces not more than 3.4 defects per million opportunities (DPMO).
• Six Sigma can therefore be also thought of as a goal, where processes not only encounter less defects, but do so consistently (low variability).
Framework/Sequence of activities to carry out for achieving Lean Six Sigma level of Quality in a process – DMAIC
Define : Define the problem and what is required to satisfy your customer. Measure : Map the current process to collect data.
Analyze : Investigate and identify what causes the problem. Improve : Implement a fix that will solve the problem.
Control : Sustain the improved results.
Simply put, Lean Six Sigma helps you identify the cause of a problem and implement a fix based on facts, rather than assumptions.

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 Service Operations

Service Operations:
• The objective of Service Operations is to make sure that services are delivered effectively
and efficiently. This includes fulfilling user requests, resolving service failures, fixing
problems, as well as carrying out routine operational tasks.
• With advancements in competitive landscape across industries, as a strategy to retain and
acquire customers through customer satisfaction, service operations is playing a vital role.
• In recent years, this is evident in the improvement of customer care services provided by
firms of ecommerce, telecom operators, banks & financial institutions, etc.
Waiting Line Management:
• Deals with reducing the waiting time for a customer & reducing queue length in a system. Framework for Understanding:
• Important Parameters: (Refer the block diagram ‘Queuing System’) Objective – To optimize the Queue length while
• Arrival Rate of People – Number of people that are entering into the system minimizing the investment in the system.
• Service Rate of Server – Number of people that can be served by each server Constraints:
• Number of Phases – Number of sequential Queuing Systems 1. Increasing the number of servers will increase the
• Number of Servers & Number of Channels service rate of whole system thus reducing the
• The aim of the management is to work on the right combination of above parameters while queue length, but increases the cost of salary that
understanding the tradeoff w.r.t cost i.e Cost Benefit Analysis of all possible combinations. has to be paid to new servers.
Application Areas: 2. Increasing the quality of servers by training, will
• Banks have customers in line to get service of teller, cars queue up for re-filling, aero-planes improve the service rate and reduce the queue, but
waiting in sky for landing, customer waiting to get connected to customer care executive etc. increases training costs.

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 Assignments

1. Understand the SIPOC framework from the following link (http://bit.ly/2o7RDXz). And develop the SIPOC
model for the processes at,
• Retail Shop nearby your home.
• Barber Shop nearby your home.
Talk to both Retail Shop owner & Barber Shop owner and understand the processes in the framework of Suppliers,
Inputs, Processes, Outputs & Customers. You need to mention the names & mobile numbers of both the owners’
in your assignment submission. (Mandatory)

2. Read the book ‘The Goal’ by Eliyahu M. Goldratt and send a write-up of maximum 500 words explaining the
crux of the topic discussed in the book. (Optional)

Ø Few Pointers :
• Send your submissions in pdf file to our club ID – clubkaizen@iimidr.ac.in
• Naming Convention of the file should be Assignment_No._Name_Mobile No._CAT ID
• For example, if your name is Abhinay Singh and you’re sending Assignment 1; Naming Convention is
‘Assignment_1_Abhinay_Singh_9898989898_500084’
• Deadline – 25th June 2017, 11:59 PM.
• Winners will be announced in our Facebook Page (Web address is in the next slide)
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 Thank You!
Club Kaizen is Looking Forward to Meet You At IIM, Indore!!

Team Club Kaizen

Afreen Mohammed Ashraf
Connect with us for latest happenings in Operations & Strategy
BVS Pavan Kumar (Secretary)
Kritika Kapoor https://www.facebook.com/clubkaizeniimindore/
Kunal Mehta
clubkaizen@iimidr.ac.in
Nirmal Srinivasan

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