OPERATIONS MANAGEMENT CBM 0011-4

CHAPTER 1
INTRODUCTION TO OPERATIONS MANAGEMENT

materials, performing work on

1.1 Operation Management products, and/or performing
services.
Operation Management
- Is part of the business organization
that is responsible for manufacturing
the goods and services.

Goods
- are tangible items sold to customers.

Service
- are tasks performed for the benefit of
the recipients.
Example of Supply Chain:
Finance Design - the design stage is where details of
- The ones that is responsible for fabrics, silhouettes, trims, and finishes are
securing the financial resources or the established.
budget of the organization. Producing Materials - the producing
materials stage where in buying materials
Marketing needed such as fabrics, yarn, etc.,
- Is the responsible for assessing Producing clothes - the clothing production
consumers needs and wants. phase involves the cutting, sewing, and
finishing of a garment.
According to the book the operation Distribution - at his stage the product will be
management is the CORE of the business delivered to the consumers, or the consumers
organization. will go to the tailoring shop to get their
clothes.
Supply Chain
- Is a sequence of activities and 1.2 Production of Goods and Services
organizations involved in producing
and delivering a good or service. It is
both external and internal.
- external parts of a supply
chain provide raw materials,
parts, equipment, supplies,
and/or other.
- internal parts of a supply
chain are part of the operations
function itself, supplying
operations with parts and

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 OPERATIONS MANAGEMENT
1.3 Why Learn about Operation
Management?
There are many career-related reasons for
wanting to learn about operations
management, whether you plan to work in the
field of operations or not. This is because
every aspect of business affects or is affected
by operations. The fact that many service jobs
are closely related to operations made it
interrelate to different functional areas in an
organisation.
Activities requiring a cooperation between
Finance and Operations:
1. Budgeting - Budgets must be
periodically prepared to plan financial
requirements. Budgets must
sometimes be adjusted, and
performance relative to a budget must
be evaluated.
2. Economic analysis of investment
proposals - Evaluation of alternative
investments in plant and equipment
requires inputs from both operations
and finance people.
3. Provision of funds - The necessary
funding of operations and the amount
and timing of funding can be
important and even critical when
funds are tight. Careful planning can
help avoid cash-flow problems.
The role of marketing in effective business
CBM 0011-4
operations management:
1. Assessment of customer's wants and
needs
2. Benchmarking
3. Informing design in consumer’s
preference
Other functional areas of the organisation
where operations also interact with:
1. Legal department - Operations
should consult the legal department on
contracts with employees, customers,
suppliers, and transporters, also with
the liability and environmental issues.
2. Accounting - Operations shall obtain
information from the accounting
department on costs of labour,
materials, and over-head, and may
provide reports on items such as
scrap, downtime, and inventories.
3. Management information systems
(MIS) - Operations shall be provided
by the MIS with the information it
needs to effectively manage. This
occurs mainly through designing
systems to capture relevant
information and designing reports.
MIS is also important for managing
the control and decision-making tools
used in operations management.
4. Personnel or Human Resources -
HR is concerned with recruitment and
training of personnel, labour
relations, contract negotiations, wage
and salary administration, assisting in
manpower projections, and ensuring
the health and safety of employees.
5. Public relations - this department has
responsibility for building and
maintaining a positive public image of
the organisation.
1.4 Career Opportunities and Professional
Societies
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 OPERATIONS MANAGEMENT CBM 0011-4

- Manage projects.
Operation Management Skills
Social Media Product Manager
Political Awareness Necessary for - Identify ways to increase consumer
Credibility engagement.
- Analyze the key performance
Mentoring Ability Good Decision indicator and recommend
Making improvements.
- Lead cross-functional teams to define
Collaboration Product/ Service product specifications.
Knowledge - Collaborate with design and technical
to create key product improvements.
Negotiation Process Knowledge - Develop requirements for new Web
site enhancements.
Communication Industry and Global
- Monitor the competition to identify
Skills Knowledge
need for changes.
Knowledge Skills Financial and
Accounting Skills Professional Societies
- Any association or other organization
Project Management of people practicing the same
Skills profession, occupation, or specialty.

Examples of job descriptions and careers

in operations management: International Local

Production Supervisor APICS, the IFPM International

- Manage a production staff of 10-20. association for Federation of
- Ensure the department meets daily Operation Professional
goals through the management of Managements Managers
productivity.
American Society PMAP People
- Enforce safety policy
for Quality (ASQ) Management of the
- Coordinate work between department
Philippines
- Have good problem-solving skills ,
and good wriiteen and orl Institute for Supply Management
communication skills. Management (ISM) Association of the
Philippines
Supply Chain Manager
- Have a general knowledge of
materials management, information
system and basic statistics. 1.5 Process Management
- Direct, monitor, evaluate, and
A key aspect of operations management is
motivate employee perfromance.
process management. A process consists of
- Be knowledgeable about shipping
one or more actions that transform inputs into
regulations.
outputs. In essence, the central role of all
- Manage budgetary accounts.

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 OPERATIONS MANAGEMENT
management is process management.
Businesses are composed of many
interrelated processes. Generally speaking,
there are three categories of business
processes:
1. Upper-management processes
- These govern the operation of the
entire
organization.
- Examples include
organizational governance
and organizational strategy.
- includes individuals and teams that
are responsible for making the
primary decisions within a company.
Shareholders hold a company's upper
management responsible for keeping a
company profitable and growing.
- Examples of upper
management personnel include
CEOs, CFOs, and COOs.
Shareholders hold a company's
upper management responsible
for keeping a company
profitable and growing.
2. Operational processes
- These are the core processes that
make up the value stream.
- Examples include purchasing,
production and/or service,
marketing, and sales.
- are the “key activities or cluster of
activities which must be performed in
an exemplary manner to ensure a
firm's continued competitiveness
because it adds primary value to an
output.”
- Example: New product
development, manufacturing,
and logistics and distribution
are examples of operational
processes, while strategic
planning, budgeting, and
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performance measurement are
examples of administrative
processes. Operational and
administrative processes share
several characteristics.
3. Supporting processes
- These support the core processes.
- Examples include accounting,
human resources, and IT
(information technology).
- Supporting processes are those
processes that support the core
processes. In the manufacturing
example, a supporting process might
be to recruit production staff. There
may also be sub processes, decisions,
and activities.
- Examples of support processes
include provision of
information technology,
finance, and human resource
services, as well as the
provision of goods and
services to internal
customers.Business processes
form a sequence of
- suppliers and customers.
Business Processes from a Sequence of
Suppliers and Customers
Managing a Process to Meet Demand
- Demand management is a planning
methodology. Companies use it to
forecast and plan how to meet demand
for services and products. Demand
management improves connections
between operations and marketing.
The result is tighter coordination of
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strategy, capacity, and customer
needs.
Process Variation
- Process variation happens when
processes fail to follow a precise
pattern. It's a leading cause of quality
issues both in transactional and
production processes.
Four Basic Sources of Variation
1. The variety of goods or services
being offered.
- The greater the variety of goods and
services, the greater the variation in
production or service requirements.
2. Structural variation in demand.
- These variations, which include trends
and seasonal variations, are generally
predictable. They are particularly
important for capacity planning.
3. Random variation.
- This natural variability is present to
some extent in all processes, as well
as in demand for services and
products, and it cannot generally be
influenced by managers.
4. Assignable variation.
- These variations are caused by
defective inputs, incorrect work
methods, out-of-adjustment
equipment, and so on. This type of
variation can be reduced or
eliminated by analysis and corrective
action.
Benefits of Process Management
1. Streamlined Processes
- BPM restructures tangled operations
into smooth workflows, simplifying
operations and improving business
agility.
2. Increased Productivity
- BPM makes sure that resources and
capital are utilized properly. It also
improves business processes and
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working conditions to increase
overall productivity.
3. Minimized Risks
- By clearly defining responsibilities,
BPM demands higher accountability.
This minimizes risks due to human
error and reduces inefficiencies.
4. Reduced Costs
- BPM helps spot inefficiencies so they
can be corrected. It also tracks the
usage of resources. With fewer
inefficiencies and proper utilization of
resources, BPM can reduce costs and
expenditures.
1.6 The Scope of Operations Management
Operation management people are involved
in the following:
● Design of products and services
● Selection of processes
● Selection and management of
technology
● Design of work systems
● Planning of locations andfacilities
● Improvement of the quality of the
organization's goods and services.
Operation Function includes interrelated
activities such as:
1. Forecasting
2. Capacity
3. Planning
4. Scheduling
5. Managing inventories
6. Assuring quality
7. Motivating employees
8. Deciding where to locate facilities
Example: Airline Company
Managing the Supply Chain to Achieve
Schedule, Cost and Quality Goals
Example: Bicycle Factory
An operations manager's main responsibility
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 OPERATIONS MANAGEMENT CBM 0011-4

is decision-making. Certain considerations resources be allocated?

impact the following: System design and Who: Who will do the work?
system operation.
General approaches to decision making:
1. Models
Areas that are part or support operations 2. Quantitative methods
function: 3. Analysis of trade offs
1. Purchasing - responsible for 4. Establishing priorities
procurement of materials, supplies, 5. Systems approach
and equipment.
2. Industrial engineering - often Model
concerned with scheduling, - An abstraction of reality; a simplified
performance standards, work representation of something.
methods, quality control, and material
handling. Physical models look like their real-life
3. Distribution - involves the shipping counterparts.
of goods to warehouses, retail outlets, Schematic models are more abstract than
or final customers. their physical counterparts; that is, they have
4. Maintenance - responsible for less resemblance to the physical reality.
general upkeep and repair of Mathematical models are the most abstract:
equipment, buildings and grounds, They do not look at all like their real-life
heating, and air-conditioning; counterparts.
removing toxic wastes; parking; and 1. Quantitative Approaches
perhaps security. 2. Performance Metrics
Example: Online shops in the Philippines 3. Analysis of Trade-Offs
(Shopee, Lazada) 4. Degree of Customization

1.7 Operation Management and Decision A Systems Approach

Making System - A set of interrelated parts that must
work together.
Operations management professionals make a
number of key decisions that affect the entire The organization can be thought of as a
organization. system composed of subsystems
1. Marketing subsystem
These include the following: 2. Operations subsystem
What: What resources will be needed, and in 3. Finance subsystem
what amounts?
When: When will each resource be needed? Establishing Priorities
When should the work be scheduled? When - Recognizing this enables the
should materials and other supplies be managers to direct their efforts to
ordered? When is corrective action needed? where they will do the most good.
Where: Where will the work be done? Pareto phenomenon
How: How will the product or service be - A few factors account for a high
designed? How will the work be done percentage of the occurrence of some
(organization, methods,equipment)? How will event(s).

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- This concept is appropriately deeper context these are mechanical

applied to all areas and levels machines, product and three can have
of management. a major impact on costs, productivity,
and competitiveness.

1.8 The Historical Evolution of Operation 1. Product and service technology refers to
Management the discovery and development of new
products and services.
19th Century 2. Process technology refers to methods,
Industrial Evolution procedures, and equipment used to produce
Craft Production: Highly skilled workers goods and provide services.
using simple, flexible tools to produce. 3. Information technology (IT) refers to the
science and use of computers and other
20th Century electronic equipment to store, process, and
Scientific Management send information. Information technology is
The introduction of mass production and heavily ingrained in today’s business
division of labor to automotive industry. operations.
1960 Internet
Human Relation Movement Advanced technologies enabled the creation
The Theory X and Theory Y of Douglas of the Internet in the modern period,
McGregor and the Theory of Z by William considerably enhancing our quality of life.
Ouchi. Companies today use the internet to compete
with one another, but we must also keep in
1915 mind that there are many risks involved in
Decision Models employing this kind of setup.
Mathematical model for inventory ordering.
E-Business
1960-1980 A lot of electronic business or e-business has
Management Science developed and has become commonplace for
The widespread use of personal computers all types of business owners, whether they run
and user friendly software in the workplace. small or large corporations. This became their
new way to interact with their consumers and
1980 to Present even to their suppliers. Next is the most
Japanese Manufacturers familiar to the public e-commerce, this is
Emphasis of quality consumer-to-business transactions and even
buying online or even asking for information.
1.9 Operations Today However, business-to- business transactions
such as e-procurement represent an increasing
Technology share of e-business. E-business is receiving
- Technology in general meaning is increased attention from business owners and
application to scientific discoveries to managers in developing strategies, planning,
the development and improvement of and decision making.
goods and technology, process
technology and information Management of Technology
technology (IT) and services. While in Management of technology is high on the list

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of major trends, and it promises to be high
well into the future. But this can create
Conflicting technologies that can exist that
make technological choices even more
difficult.
Competitive pressures and changing
economic conditions have caused business
organisations to put more emphasis on:
1. Operations strategy in their
corporate strategy. Some of them paid
dearly for that neglect. Now more and
more companies are recognizing the
importance of operations strategy on
the overall success of their business as
well as the necessity for relating it to
their overall business strategy.
2. Working with fewer resources due
to layoffs, corporate downsizing, and
general cost cutting is forcing
managers to make trade-off decisions
on resource allocation, and to place
increased emphasis on cost control
and productivity improvement.
3. Revenue management is a method
used by some companies to maximise
the revenue they receive from fixed
operating capacity by influencing
demand through price manipulation.
4. Process analysis and improvement
includes cost and time reduction,
productivity improvement, process
yield improvement, and quality
improvement and increasing customer
satisfaction. This is sometimes
referred to as a six-sigma process.
5. Agility refers to the ability of an
organisation to respond quickly to
demands or opportunities.
Lean Systems
They use much less of certain resources than
typical mass production systems use space,
inventory, and workers—to produce a
comparable amount of output. Lean systems
use a highly skilled workforce and flexible
CBM 0011-4
equipment. In effect, they incorporate
advantages of both mass production (high
volume, low unit cost) and craft production
(variety and flexibility). And quality is higher
than in mass production. This approach has
now spread to services, including health care,
offices, and shipping and delivery.
Lean Production
A new approach to production, emerged in
the 1990s. It incorporates severalthe recent
trends listed here, with an emphasis on
quality, flexibility, time reduction, and
teamwork. This has led to a flattening of the
organizational structure, with fewer levels of
management.
1.10 Key Issues for Today’s Business
Operations
Economic condition - The lingering
recession and slow recovery in various
sectors of the economy has made managers
cautious about investment and rehiring
workers who had been laid off during the
recession.
Innovating - Finding new or improved
products or services are only of the many
possibilities that can provide value to an
organisation.
Quality performance - The numerous
operations failures mentioned at the
beginning of the chapter underscore the need
to improve the way operations are managed
Risk Management - The need for managing
risk is underscored by recent events that
include the crisis in housing, product recalls,
oil spills. And natural and man-made
disasters, and economic ups and downs
Competing in global economy - Low labor
costs in third-world countries have increased
pressure to reduce labor costs
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intended to guide thinking and subsequent

Environmental Concerns
- Concern about global warming and
pollution has had an increasing effect
on how businesses operate.
- Business organizations are coming
under increasing pressure to reduce
their carbon footprint and to generally
operate sustainable processes.
Sustainability - refers to service and
production processes that use resources in
ways that do not harm ecological systems that
support both current and future human
existence.
Ethical Conduct
● The need for ethical conduct in
business is becoming increasingly
obvious.
● Many organization have developed
codes of ethics to guide employees ‘or
member’ conduct.
● Ethics is a standard of behaviour that
guides how one should act in various
situations.
1. The Utilitarian Principle - the good
done by an action or inaction should
outweigh any harm it causes or might
cause.
2. The Right Principle - is that actions
should respepct and protect the moral
right s of other.
3. Fairness Principle - is that equals
should be held to, or evaluated by, the
same standards.
4. The Common Good Principle - is
that actions should contribute to the
common good of the community.
5. The Virtue Principle - is that actions
should be consistent with certain ideal
virtue.
Ethical Framework
An Ethical Framework is a sequence of steps
decisions or actions.
1. Recognize an ethical issue by asking
if an action could be damaging to a
group or an individual.
2. Make sure the pertinent facts are
known, such as who will be impacted,
and what options are available.
3. Evaluate the options by referring to
the appropriate preceding ethical
principle.
4. Identify the best option and then
further examine it by asking how
someone you respect would view it.
5. In retrospect, consider the effect your
decision had and what you can learn
from it.
Ethical Issues
1. Worker safety
2. Product safety
3. Quality
4. The Environment
5. The Community
6. Hiring and firing workers
7. Closing Facilities
8. Workers’ rights
Recognizes Companies Worldwide for
their Ethical Leadership
1. Apparel: Gap
2. Automotive: Ford Motor Company
3. Business Services: Paychex
4. Cafe: Starbucks
5. Computer software: Adobe systems,
microsoft
6. Consumer Electronics: Texas
instrument, Xerox
7. E-commerce: eBay
8. General retail: Costco, Target
9. Groceries: Safeway, Wegmans, Whole
Foods
10. Health and Beauty: L’Oreal.
11. Logistics: UPS

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The Need to Manage the Supply Chain
Supply chain management is being given
increasing attention as business organization
face mounting pressure to improve
management of their supply chains.
The planning, marketing, production and
inventory management functions in
organizations in supply chains have often
operated independently of each other.
1. The need to improve operations -
efforts on cost and time reduction, and
productivity and quality improvement,
have expanded in recent years to
include the supply chain.
2. Increasing levels of outsourcing -
Organizations are increasing their
levels of outsourcing buying goods or
services instead of producing or
providing themselves.
3. Increasing transportation cost -
transportation cost are increasing, and
they need to be more carefully
managed.
4. Competitive pressures - Competitive
pressures have led to an increasing
number of new products shorter
product development cycles, and
increased demand for customization.
5. Increasing globalization - Increasing
globalization has expanded the
physical length of supply chains.
6. Increasing importance of e-business
- The increasing importance of
e-business has added new dimensions
to business buying and selling and has
presented new challenges.
7. The complexity of supply chains -
Supply chains are complex: they are
dynamic, and they have many inherent
uncertainties that can adversely affect
them, such as inaccurate forecasts,
late deliveries, sub-standard quality,
equipment breakdown, and cancelled
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or changed orders.
8. The need to manage inventories -
Inventories play a major role in the
success or failure of supply chain, so
it is important to coordinate inventory
levels throughout a supply chain.
Element of Supply Chain Management
1. Supply chain management involves
coordinating activities across the
supply chain.
2. Central to this is taking customer
demand and translating it into
corresponding activities at each level
of the supply chain.
The Major Decision
1. The Location Decision - relates to the
choice of location for both production
and distribution facilities.
2. Production and Distribution
Decisions - focus on what customers
want, when they want it, and how
much is needed.
3. Distribution Decisions - are strongly
influenced by transportation cost and
delivery times.
4. Inventory Decisions - relates to
determining inventory needs and
coordinating production and stocking
decisions throughout the supply chain
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CHAPTER 2
COMPETITIVENESS. STRATEGY AND PRODUCTIVITY

3. Advertising and promotion are ways

2.1 Competitiveness organizations can inform potential
customers about features of their
Competitiveness products or services, and attract
- the attribute of being superior to or on buyers.
par with others of a like kind.
Strategy How Operations Management Influences
- a strategy or program intended to the Competitiveness in the Market?
accomplish a key goal or broad
objective. 1. Product and service design should
Productivity reflect joint efforts of many areas of
- the process of creating something, the firm to achieve a match between
particularly crops. financial resources, operations
capabilities, supply chain capabilities,
Competitiveness and consumer wants and needs.
- Competitiveness is significantly Special characteristics or features of a
influenced by operations and product or service can be a key factor
marketing. Plans that determine how a in consumer buying decisions. Other
company pursues its objectives are key factors include innovation and the
referred to as strategy. In this context, time-to-market for new products and
operations strategy is especially services.
significant. Productivity has a direct 2. Cost of an organization’s output is a
bearing on competitiveness because it key variable that affects pricing
pertains to the efficient utilization of decisions and profits. Cost-reduction
resources. efforts are generally ongoing in
business organizations. Productivity is
How Marketing Influences an important determinant of cost.
Competitiveness? Organizations with higher productivity
rates than their competitors have a
1. Identifying consumer wants and/or competitive cost advantage. A
needs is a basic input in an company may outsource a portion of
organization’s decision-making its operation to achieve lower costs,
process, and central to higher productivity, or better quality.
competitiveness. The ideal is to 3. Location can be important in terms of
achieve a perfect match between those cost and convenience for customers.
wants and needs and the organization’s Location near inputs can result in
goods and/or services. lower input costs. Location near
2. Price and quality are key factors in markets can result in lower
consumer buying decisions. It is transportation costs and quicker
important to understand the trade-off delivery times. Convenient location is
decision consumers make between particularly important in the retail
price and quality. sector.

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OPERATIONS MANAGEMENT
4. Quality refers to materials,
workmanship, design, and service.
Consumers judge quality in terms of
how well they think a product or
service will satisfy its intended
purpose. Customers are generally
willing to pay more for a product or
service if they perceive the product or
service has a higher quality than that
of a competitor.
5. Quick response can be a competitive
advantage. One way is quickly
bringing new or improved products or
services to the market. Another is
being able to quickly deliver existing
products and services to a customer
after they are ordered, and still another
is quickly handling customer
complaints.
6. Flexibility is the ability to respond to
changes. Changes might relate to
alterations in design features of a
product or service, or to the volume
demanded by customers, or the mix of
products or services offered by an
organization. High flexibility can be a
competitive advantage in a changeable
environment.
7. Inventory management can be a
competitive advantage by effectively
matching supplies of goods with
demand.
8. Supply chain management involves
coordinating internal and external
operations (buyers and suppliers) to
achieve timely and cost-effective
delivery of goods throughout the
system.
9. Service might involve after-sale
activities customers perceive as
value-added, such as delivery, setup,
warranty work, and technical support.
Or it might involve extra attention
while work is in progress, such as
courtesy, keeping the customer
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informed, and attention to details.
Service quality can be a key
differentiator; and it is one that is often
sustainable. Moreover, businesses
rated highly by their customers for
service quality tend to be more
profitable, and grow faster, than
businesses that are not rated highly.
10. Managers and workers are the people
at the heart and soul of an
organization, and if they are competent
and motivated, they can provide a
distinct competitive edge by their
skills and the ideas they create.
2.2 Reasons Why Business Organization
Fail
1. Neglecting operations strategy.
2. Failing to take advantage of strengths
and opportunities, and/or failing to
recognize competitive threats.
3. Putting too much emphasis on
short-term financial performance at the
expense of research and development.
4. Placing too much emphasis on product
and service design and not enough on
process design and improvement.
5. Neglecting investments in capital and
human resources.
6. Failing to establish good internal
communications and cooperation
among different functional areas.
7. Failing to consider customer wants
and needs.
“It’s not the plan that is important, it’s the
planning.”
Dr. Graeme Edwards
- The key to successfully competing is
to determine what customers want
and then directing efforts toward
meeting (or even exceeding) customer
expectations.
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 OPERATIONS MANAGEMENT
Two basic issues must be addressed
- First: What do the customers want?
(Which items on the preceding list of
the ways business organizations
compete are important to customers?
- Second: What is the best way to
satisfy those wants?
2.3 Missions and Strategies
Mission - the reason for the existence of an
organization.
Mission Statement - states the purpose of an
organization.
Goals - provide detail and scope of the
mission
Strategies - plans for achieving organizational
goals.
Organizational strategy is crucial because it
guides the organization by providing direction
for, and alignment of, the goals and strategy of
the functional units.
Three basic business strategies:
Low cost - a pricing strategy in which the
organization delivers its items at a low cost.
This method aids in increasing demand and
gaining a larger market share.
Responsiveness - Responsive strategy, also
known as MVBS, is a process that achieves
positive change by shifting the state of things
and the perception of the audience,
employees, or competition in a direction that
is strategically beneficial to the business,
allowing the company to smoothly execute
their policy.
Differentiation from competitors - A
differentiation strategy is a strategy developed
by organizations to provide customers with
something distinctive, different, and separate
from what their competitors may provide in
the market.
Strategies - provide a focus for
decision-making
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Tactics - The methods and actions taken to
accomplish strategies. It should be apparent
that the overall relationship from the mission
down to actual operations is hierarchical.
Example:
Jane is an incoming college student in
Pamantasan ng Lungsod ng Maynila. She
would like to be a manager in a firm and earn
enough income to support herself in the
future. A possible scenario for achieving her
goals might look something like this:
Mission: Support herself in the future
Goal: To be a manager in a firm and have
enough income
Strategy: Obtain a college degree
Tactics: Select Human Resources
Management as a major
Operations: Enroll, buy books, study
Some examples of different strategies an
organization might choose from:
Low cost.
- Outsource operations to third-world
countries that have low labor costs.
Scale-based strategies.
- Use capital-intensive methods to
achieve high output volume and low
unit costs.
Specialization.
- Focus on narrow product lines or
limited service to achieve higher
quality.
Newness.
- Focus on innovation to create new
products or services.
Flexible operations.
- Focus on quick response and/or
customization.
High quality.
- Focus on achieving higher quality than
competitors.
Service.
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 OPERATIONS MANAGEMENT
- Focus on various aspects of service
(e.g., helpful, courteous, reliable, etc.).
Sustainability.
- Focus on environmental-friendly and
energy-efficient operations.
Core Competencies - the special attributes or
abilities that give an organization a
competitive edge. Strategies and core
competencies need to be aligned.
Strategy Formulation
- is critical to the success of a strategy.
. - This includes the number and strength
This is sometimes referred to as the SWOT
approach which is the analysis of strengths,
weaknesses, opportunities, and threats.
Strengths and weaknesses have an internal
focus that is typically evaluated by operations
people while threats and weaknesses have an
external focus that is typically evaluated by
marketing people.
Order Qualifiers - characteristics that
customers perceive as minimum standards of
acceptability to be considered as a potential
for purchase.
Order winners - characteristics of an
organization’s goods or services that cause it
to be perceived as better than the competition.
Environmental scanning is the monitoring of
events and trends that present either threats or
opportunities for the organization.
Key External Factors
1. Economic conditions.
- These include the general health and
direction of the economy, inflation and
deflation, interest rates, tax laws, and
tariffs.
2. Political conditions.
- These include favorable or
unfavorable attitudes toward business,
CBM 0011-4
political stability or instability, and
wars.
3. Legal environment.
- This includes antitrust laws,
government regulations, trade restric
tions, minimum wage laws, product
liability laws and recent court
experience, labor laws, and patents.
4. Technology.
- This can include the rate at which
product innovations are occurring,
current and future process technology
(equipment, materials handling), and
design technology.
5. Competition.
of competitors, the basis of
competition (price, quality, special
features), and the ease of market entry.
6. Markets.
- This includes size, location, brand
loyalties, ease of entry, potential for
growth, long-term stability, and
demographics.
Various Internal Factors
1. Human resources.
- These include the skills and abilities of
managers and workers, special talents
(creativity, designing, problem
solving), loyalty to the organization,
expertise, dedication, and experience.
2. Facilities and equipment.
- Capacities, location, age, and cost to
maintain or replace can have a
significant impact on operations.
3. Financial resources.
- Cash flow, access to additional
funding, existing debt burden, and cost
of capital are important considerations.
4. Customers.
- Loyalty, existing relationships, and
understanding of wants and needs are
important.
5. Products and services.
14
 OPERATIONS MANAGEMENT
- These include existing products and
services, and the potential for new
products and services.
6. Technology.
- This includes existing technology, the
ability to integrate new technology,
and the probable impact of technology
on current and future operations.
7. Suppliers.
- Supplier relationships, dependability
of suppliers, quality, flexibility, and
service are typical considerations.
8. Other.
- Other factors include patents, labor
relations, company or product image,
distribution channels, relationships
with distributors, maintenance of
facilities and equipment, access to
resources, and access to markets.
Supply Chain Strategy
- A supply chain strategy specifies how
the supply chain should function to
achieve supply chain goals.
Sustainability Strategy
- The sustainability strategy establishes
a framework for focusing on
investment, driving performance, and
engaging internal and external
stakeholders.
Global Strategy
- A global strategy is an approach
developed by an organization to
expand into the worldwide market.
The goal of creating a global strategy
is to grow sales all around the world.
2.4 Operations Strategy
Organization Strategy vs. Operations
Strategy
“Organizational” refers to your business
structure, “operational” refers to how you
get things done. Knowing these definitions
isn’t critical to successfully running your
CBM 0011-4
business, but creating separate organizational
and operational strategies
Organizational - When you start a business,
you might begin with no employees or only a
few employee. As you grow, you assign
different tasks to different staff members, all
of whom report to you.
Operational - Maintaining a steady
workflow, whether for producing your product
or administration, requires operational
procedures. This is best achieved by writing
an operation manual with guidelines for each
activity of your employees.
Differences of the two
- The two concepts are related but
distinct. Organizational issues focus
on "who": assigning employees to
handle specific functions, setting up a
chain of command, assigning
supervisory roles and duties and
creating interdepartmental
communications.
Overlap of the two
- For operations to be effective, you
must have the right organizational
structure. This requires you to analyze
the operational needs you have,
function by function or department by
department, and create an organization
that helps your employees work
together efficiently.
Operations strategy
- The approach, consistent with the
organization strategy that is used to
guide the operations function.
- The organization strategy provides the
overall direction for the organization.
It is broad in Scope, covering the
entire organization.
- Operations strategy is narrower in
scope, dealing primarily with the
operations aspect of the organization.
- Operations strategy relates to
15
 OPERATIONS MANAGEMENT CBM 0011-4

Products, processes, methods, 9. Scheduling Flexibility,

operating resources, quality, costs, efficiency
lead times, and scheduling.
10. Supply Cost, quality, agility,
Chain shortages, vendor
relations

11. Projects Cost, new products,

services, or
Strategic Operations Management Decision operating system
Areas

Operations management people play a Factors to Consider when Developing

strategic role in many strategic decisions in a Strategies
business organization.
1. Articulate a vision and a mission.
2. Identify your stakeholders.
Decision Area What the Decisions 3. Scan your internal environment.
Affects 4. Assess your external environment.
5. Combine the strengths, weaknesses,
1. Product and Cost, quality, opportunities,and threats (SWOT) assessment
Service liability, and into a single analysis.
Design environmental issue 6. Define your competitive advantage.
7. Make SMART goals.
2. Capacity Cost structure, 8. Account for your personal and business
flexibility goals.

3. Process Cost, flexibility, skill 2.5 Quality and Time Strategies

Selection and level needed,
Layout capacity Quality-based strategy
- Focuses on maintaining or improving
4. Work Design Quality of work life, the quality of an organization's
employee safety, products or services.
productivity - Quality at the source
Time-based strategy
5. Location Cost, visibility - Strategy that focuses on reduction of
time needed to accomplish tasks
6. Quality Ability to meet or
exceed customer Organizations have achieved time
expectations reduction in some of the following:
7. Inventory Cost, shortages
Planning time:
8. Maintenance Cost, equipment The time needed to react to a competitive
reliability, threat, to develop strategies and select tactics,
productivity to approve proposed changes to facilities, to

16
 OPERATIONS MANAGEMENT
adopt new technologies, and so on.
Product/service design time:
The time needed to develop and market new
or redesigned products or services.
Processing time:
The time needed to produce goods or provide
services. This can involve scheduling,
repairing equipment, methods used,
inventories, quality, training, and the like.
Changeover time:
The time needed to change from producing
one type of product or service to another. This
may involve new equipment settings and
attachments, different methods, requipment,
schedules, or materials.
Deliver time:
The time needed to fill orders. Response time
for complaints: These might be customer
complaints about quality, timing of deliveries,
and incorrect shipments. These might also be
complaints from employees about working
conditions (e.g., safety, lighting, heat or cold),
equipment problems, or quality problems.
2.6 Productivity
Productivity
- A measure of the effective use of
resources, usually expressed as the
ratio of output to input.
Productivity Growth
- growth is the increase in productivity
from one period to the next relative to
the productivity in the preceding
period.
Computing Productivity
- Productivity measures can be based on
CBM 0011-4
a single input (partial productivity), on
more than one input (multifactor
productivity), or on all inputs (total
productivity).
Productivity in the Service Sector
- Productivity in the service sector is
more challenging than in the
manufacturing sector. Because it
involves intellectual processes and has
a high degree of variability, it is
frequently harder to evaluate and
regulate.
2.7 Factors that Affect Productivity
1. Capital
2. Quality
3. Management
4. Technology
Other factors that affect productivity
include the following:
1. Standardizing processes and procedures
wherever possible to reduce variability can
have a significant benefit for both productivity
and quality.
2. Quality differences may distort
productivity measurements. One way this can
happen is when comparisons are made over
time.
3. Use of the Internet can lower costs of a
wide range of transactions, thereby increasing
17
 OPERATIONS MANAGEMENT
productivity.
4. Computer viruses can have an immense
negative impact on productivity.
5. Searching for lost or misplaced items
wastes time, hence negatively affecting
productivity.
6. Scrap rates have an adverse effect on
productivity, signaling inefficient use of
resources.
7. New workers tend to have lower
productivity than seasoned workers.
8. Safety should be addressed. Accidents can
take a toll on productivity.
9. A shortage of technology-savvy workers
hampers the ability of companies to update
computing resources, generate and sustain
growth, and take advantage of new
opportunities.
10. Layoffs often affect productivity. The
effect can be positive and negative.
11. Labor turnover has a negative effect on
productivity; replacements need time to get up
to speed.
12. Design of the workspace can impact
productivity. For example, having tools and
other work items within easy reach can
positively impact productivity.
13. Incentive plans that reward productivity
CHAPTER 3
FORECASTING
3.1 Forecasting
Forecast
- Estimate a variable's potential value,
such as the demand.
- The primary goal of operations
management is to match supply to
demand.
- Businesses make plans for future
operations based on anticipated future
CBM 0011-4
increases can boost productivity.
Improving Productivity
1. Develop productivity measures for all
operations.
2. Look at the system as a whole in deciding
which operations are most critical.
3. Develop methods for achieving
productivity improvements, such as soliciting
ideas from workers, studying how other firms
have increased productivity, and reexamining
the way work is done.
4. Establish reasonable goals for
improvement.
5. Make it clear that management supports
and encourages productivity improvement.
6. Measure improvements and publicize them.
Efficiency is a narrower concept that
pertains to getting the most out of a fixed set
of resources; productivity is a broader
concept that pertains to effective use of
overall resources.
demand. (derived from two possible
sources, actual customer orders and
forecasts.)
- Used by companies to estimate
earnings or the other data for
subsequent periods.
Two aspects of forecasts
Expected level of demand can be a function
of some structural variation, such as a trend or
seasonal variation
18
 OPERATIONS MANAGEMENT
Degree of accuracy that can be assigned to a
forecast (i.e., the potential size of forecast
error).
Forecast accuracy is a function of the ability
of forecasters to correctly model demand,
random variation, and sometimes unforeseen
events.
Forecasts are made with reference to a
specific time horizon.
● Short-term forecasts pertain to ongoing
operations. .
● Long-term forecasts pertain to new
products or services, new equipment, new
facilities, or something else that will require a
somewhat long lead time to develop,
construct, or otherwise implement.
Two uses for forecasts.
1. To help managers plan the system.
- Planning the system generally involves
long-range plans about the types of
products and services to offer, what
facilities and equipment to have, where
to locate, and so on.
2. To help them plan the use of the system.
- Planning the use of the system refers to
short-range and intermediate-range
planning, which involve tasks such as
planning inventory and workforce
levels, planning purchasing and
production, budgeting, and scheduling.
3.2 Features Common to all Forecasts
1. Forecasting techniques generally assume
that the same underlying causal system that
existed in the past will continue to exist in the
future.
2. Forecasts are not perfect; actual results
usually differ from predicted values; the
presence of randomness precludes a perfect
forecast. Allowances should be made for
forecast errors.
3. Forecasts for groups of items tend to be
more accurate than forecasts for individual
CBM 0011-4
items because forecasting errors among items
in a group usually have a canceling effect.
Opportunities for grouping may arise if parts
or raw materials are used for multiple products
or if a product or service is demanded by a
number of independent sources.
4. Forecast accuracy decreases as the time
period covered by the forecast—the time
horizon —increases. Generally speaking,
short-range forecasts must contend with fewer
uncertainties than longer-range forecasts, so
they tend to be more accurate.
3.3 Elements of a Good Forecast
1. The forecast should be timely. Usually, a
certain amount of time is needed to respond to
the information contained in a forecast. For
example, capacity cannot be expanded over
night, nor can inventory levels be changed
immediately. Hence, the forecasting horizon
must cover the time necessary to implement
possible changes.
2. The forecast should be accurate, and the
degree of accuracy should be stated. This will
enable users to plan for possible errors and
will provide a basis for comparing alternative
forecasts.
3. The forecast should be reliable; it should
work consistently. A technique that some
times provides a good forecast and sometimes
a poor one will leave users with the uneasy
feeling that they may get burned every time a
new forecast is issued.
4. The forecast should be expressed in
meaningful units. Financial planners need to
know how many dollars will be needed,
production planners need to know how many
unitswill be needed, and schedulers need to
know what machines and skills will be
required. The choice of units depends on user
needs.
5. The forecast should be in writing. Although
this will not guarantee that all concerned are
using the same information, it will at least
increase the likelihood of it. In addition, a
19
 OPERATIONS MANAGEMENT
written forecast will permit an objective basis
for evaluating the forecast once actual results
are in.
6. The forecasting technique should be simple
to understand and use. Users often lack
confidence in forecasts based on sophisticated
techniques; they do not understand either the
circumstances in which the techniques are
appropriate or the limitations of the
techniques. Misuse of techniques is an obvious
consequence. Not surprisingly, fairly
simple forecasting techniques enjoy
widespread popularity because users are more
comfortable working with them.
7. The forecast should be cost-effective: The
benefits should outweigh the costs.
3.4 Forecasting and Supply Chain
How does forecasting help the supply
chain?
- Supply chain forecasting helps you
make the best decisions for your
business, whether it's stock inventories,
cargo booking, budget planning, or
expanding into new markets, by
combining data from the historical
supply with insights and
understandings about demand.
- It gives the ability to make informed
business decisions and develop
data-driven strategies.
- Strategic planning
- Staying on top of inventory
- Improved customer experience
3.5 Steps in Forecasting Processes
1. Determine the purpose of the
forecast.
How will it be used and when will it be
needed? This step will provide an
indication of the level of detail
required in the fore cast, the amount of
resources (personnel, computer time,
dollars) that can be justified, and the
CBM 0011-4
level of accuracy necessary.
2. Establish a time horizon.
The forecast must indicate a time
interval, keeping in mind that accuracy
decreases as the time horizon
increases.
3. Obtain, clean, and analyze
appropriate data.
Obtaining the data can involve
significant effort. Once obtained, the
data may need to be “cleaned” to get
rid of outliers and obviously incorrect
data before analysis.
4. Select a forecasting technique.
5. Make the forecast.
6. Monitor the forecast errors.
The forecast errors should be
monitored to determine if the forecast
is performing in a satisfactory manner.
If it is not, reexamine the method,
assumptions, validity of data, and so
on; modify as needed; and prepare a
revised forecast.
3.6 Forecast Accuracy
Forecast accuracy is a significantfactor when
deciding among forecasting alternatives.
Accuracy is based on the historical error
performance of a forecast.
Forecast error is the difference between the
value that occurs and the value that was
predicted for a given time period.
- Positive errors result when the forecast
is too low
- Negative errors when the forecast is
too high.
Summarizing Forecast Accuracy
Three commonly used measures for
summarizing historical errors are the mean
absolute deviation (MAD) , the mean
squared error (MSE) , and the mean
absolute percent error (MAPE). MAD is
the average absolute error, MSE is the average
20
 OPERATIONS MANAGEMENT
of squared errors, and MAPE is the average
absolute percent error.
The formulas used to compute MAD, 1 MSE,
and MAPE are as follows:
Example 1 illustrates the computation of
MAD, MSE, and MAPE.
3.7 Approaches to Forecast
Two General Approaches to Forecasting
Qualitative methods
- consist mainly of subjective inputs,
which often defy precise numerical
description.
- permit inclusion of soft information
(e.g., human factors, personal opinions,
hunches) in the forecasting process.
Those factors are often omitted or
downplayed when quantitative
techniques are used because they are
difficult or impossible to quantify.
Quantitative methods
- involve either the projection of
historical data or the development of
associative models that attempt to
CBM 0011-4
utilize causal (explanatory) variables to
make a forecast. consist mainly of
analyzing objective, or hard, data.
They usually avoid personal biases that
sometimes contaminate qualitative
methods.
In practice, either approach or a combination
of both approaches might be used to develop a
forecast.
Variety of Forecasting Techniques
Judgmental forecasts use subjective inputs
such as opinions from consumer surveys, sales
staff, managers, executives, and experts
Time-series forecasts simply attempt to
project past experience into the future. These
techniques use historical data with the
assumption that the future will be like the past.
Forecasts that project patterns identified in
recent time-series observations.
Associative models use equations that consist
of one or more explanatory variables that can
be used to predict demand.
3.8 Qualitative Forecasts
Qualitative Forecasts
- Relies solely on judgment and opinion
of experts to make forecast.
Executive Opinions
- A small group of upper-level managers
may meet and collectively develop a
forecast.
Salesforce Opinions
- Members of the sales staff or the
customer service staff are often good
sources of informa tion because of
their direct contact with consumers.
Consumer Survey
21
 OPERATIONS MANAGEMENT CBM 0011-4

- Consumers determine demand, so

organizations seeking consumer input
commonly use consumer surveys to
sample consumer opinions.
Delphi Method
- An iterative process in which managers
and staff complete a series of
questionnaires, each developed from
the previous one, to achieve a
consensus forecast.

3.9 Forecasts Based on Time-Series Data

What are Time Series?

- A time-ordered sequence of
observations taken at regular intervals.

Forecasting techniques based on time-series

data are made on the assumption that future
values of the series can be estimated from past
values.

Behaviors of the Time-Series Forcast Data

1. Trend
- A long-term upward or downward
movement in data. Techniques for Averaging Moving average
2. Seasonality
- Short-term regular variations related to - Technique that averages a number of
the calendar or time of day. recent actual values, updated as new
3. Cycle values become available.
- Wavelike variations lasting more than
one year.
4. Irregular variation
- Caused by unusual circumstances, not
reflective of typical behavior.
5. Random variations
- Residual variations after all other
behaviors are accounted for.

Naive forecast
- A simple, but widely used approach to
forecasting is the naive approach, it
uses a single previous value of a
timeseries as the basis of a forecast.
A moving average forecast tends to smooth
and lag changes in the data.

22
 OPERATIONS MANAGEMENT CBM 0011-4

Other Forecasting Methods

The more periods in a moving average, the
greater the forecast will lag changes in the
data.
Focus Forecasting
- Using the forecasting method that
demonstrates the best recent success.
Diffusal Model
- When new products or services are
introduced, historical data are not
generallyavailable on which to base
forecasts. Instead, predictions are
based on rates of product adoption and
usage spread from other established
products, using mathematical diffusion
Techniques for Trend

Weighted Moving Average Linear Trend

- Similar to a moving average, except that it
typically assigns more weight to the most
recent values in a time series.
Exponential Smoothing
- A weighted averaging method based on
previous forecast plus a percentage of the
forecast error.

Non- Linear Trend

The quickness of forecast adjustment to error

is determined by the smoothing constant. The
closer its value is to zero, the slower the
Linear Trend Equation
forecast will be to adjust to forecast errors
- used to develop forecasts when trend is
(i.e., the greater the smoothing). Conversely,
present
the closer the value of is to 1.00, the greater
Ft = a + bt
the responsiveness and the less the smoothing.

23
 OPERATIONS MANAGEMENT
Trend-Adjusted Exponential Smoothing
- Variation of exponential smoothing
used when a time series exhibits a
linear trend.
Techniques for Seasonality
Seasonal Variations
- In time-series data are regularly
repeating upward or downward
movements in series values that can be
tied to recurring events.
- Seasonality may refer to regular annual
variations.
CBM 0011-4
Seasonality: the additive and multiplicative
models compared using a linear trend
Seasonal Relative
- Percentage of average or trend.
- Seasonal relatives are used in two
different ways in forecasting.
● To deseasonalize data;
- To deseasonalize data is to remove the
seasonal component from the data in
order to get a clearer picture of the
nonseasonal components.
Deseasonalizing datails accomplished
by dividing each data point by its
corresponding seasonal relative
● To incorporate seasonality in a forecast.
- Incorporating seasonality in a forecast
is useful when demand has both trend
(or average) and seasonal components.
- Incorporating seasonality can be
accomplished in this way:
1. Obtain trend estimates for desired periods
using a trend equation.
2. Add seasonality to the trend estimates by
multiplying (assuming a multiplicative model
is appropriate) these trend estimates by the
corresponding seasonal relative.
Computing Seasonal Relatives Using
Simple Average Method
- The simple average (SA) method is an
alternative way to compute seasonal
24
 OPERATIONS MANAGEMENT
relatives. Each seasonal relative is the
average for that season divided by the
average of all seasons.
Techniques for Cycles
- Cycles are up-and-down movements
similar to seasonal variations but of
longer duration.
- The most commonly used approach is
explanatory: Search for another
variable that relates to, and leads, the
variable of interest.
- It is important that a persistent
relationship exists between the two
variables.
- Moreover, the higher the correlation,
the better the chances that the forecast
will be on target.
3.10 Associative Forecasting Technique
Associative Forecast
- Associative techniques rely on
identification of related variables that
can be used to predict values of the
variable of interest. These techniques
develop equations to summarize the
effect of predictor variables. Predictors
Variables are used to predict values of
variable interest.
- The primary method of analysis is
known as regression, a technique for
fitting a line to a set of points.
CBM 0011-4
Simple Linear Regression
- The simplest and most widely used
form of regression involves a linear
relationship between two variables.
The object in linear regression is to
obtain an equation of a straight line
that minimizes the sum of square
vertical deviations of data points from
the line.
Least Squares Line
- Minimizes the sum of the squared
vertical deviations around the line.
Standard Error of Estimate
- A measure of the scatter of points
around a regression line.
- One indication of how accurate a
prediction might be for a linear
regression line.
- If the data points tend to be relatively
close to the line, predictions using the
linear equation will tend to be more
accurate than if the data points are
widely scattered
Correlation
- Measures the strength and direction of
relationship between two variables.
- Correlation can range from -1.00 to
+1.00.
- A correlation of -1.00 indicates that
changes in one variable are always
matched by changes in the other;
- A correlation of +1.00 indicates that
increases in one variable are matched
by decreases in the other; and linear
relationship between two variables.
25
 OPERATIONS MANAGEMENT
Formula for Correlation
Comments on the Use of Linear Regression
Analysis
1. Variations around the line are random. If
they are random, no patterns such as cycles or
trends should be apparent when the line and
data are plotted.
2. Deviations around the average value (i.e.,
the line) should be normally distributed. A
concentration of values close to the line with a
small proportion of larger deviations supports
the assumption of normality.
3. Predictions are being made only within the
range of observed values.
Weaknesses of Regression
● Simple linear regression applies only to
linear relationships with one independent
variable.
● One needs a considerable amount of data to
establish the relationship (20 or more
observations).
● All observations are weighted equally.
Nonlinear Regression Analysis
- Nonlinear regression analysis is used
when more than one predictor variable
is involved. When nonlinear
relationships are present, you should
employ curvilinear regression; models
that involve more than one predictor
require the use of multiple regression
analysis.
Multiple Regression Analysis
- Multiple regression forecasting
substantially increases data
requirements. In each case, it is
necessary to weigh the additional cost
and effort against potential
improvements in the accuracy of
predictions.
CBM 0011-4
3.11 Monitoring Forecast Errors
Forecast error
- The difference between the forecast
demand and the actual demand.
- Tracking the forecast errors can
provide useful insight on whether
forecasts are performing
satisfactorily.
Variety of possible sources of forecast
errors:
1. The model may be inadequate due to (a)
the omission of an important variable, (b) a
change or shift in the variable that the model
cannot deal with (e.g., sudden appearance of
a trend or cycle), or (c)the appearance of a
new variable (e.g.,new competitor).
2. Irregular variations may occur due to
severe weather or other natural phenomena,
temporary shortages or breakdowns,
catastrophes, or similar events.
3. Random variations. Randomness is the
inherent variation that remains in the data
after all causes of variation have been
accounted for. There are always random
variations.
Control Chart
- A visual tool for monitoring forecast errors.
Constructing a control chart:
26
 OPERATIONS MANAGEMENT CBM 0011-4

3.12 Choosing a Forecasting Technique

Many different kinds of forecasting

techniques are available, and non single
technique works best in every situation.

Important Factors in Choosing a

Forecasting Technique
1. Cost
- How much money is budgeted for
generating the forecast?
2. Accuracy
- What are the possible costs of errors,
and what are the benefits that might
accrue from an accurate forecast?
3. Availability of historical data
4. Availability of computer software; and
5. Time needed to gather and analyze data
and to prepare the forecast.
6. Forecast Horizon
- Some techniques are more suited to
long-range forecasts while others
work best for the short range

The higher the accuracy, the higher the cost,

so it is important to weigh cost–accuracy
trade-offs carefully. The best forecast is not
necessarily the most accurate or the least
costly; rather, it is some combination of
accuracy and cost deemed best by 3.13 Using Forecast Information
management.
Reactive Approach
Basic Forecasting Techniques (Qualitative - A reactive approach views forecasts
Methods) as probable future demand, and a
manager reacts to meet that demand.
Proactive Approach
- A proactive approach seeks to
actively influence demand.
- Requires either an explanatory model
or a subjective assessment of the
influence on demand.

A manager might make two forecasts:

- One to predict what will happen
under the status quo.
- One based on a “what if” approach, if

27
 OPERATIONS MANAGEMENT CBM 0011-4

the results of the status quo forecast
are unacceptable
3.14 Computer Software in Forecasting
Many software packages can be used for
forecasting, so it may be difficult to select
the right forecasting software.
Most forecasting software packages fall
into one of three categories:
1. Spreadsheets
- These packages provide basic
forecast capability, such as simple
exponential smoothing and
regression. Simple forecasting
programs can be written very quickly
for most spreadsheet programs.
Disadvantage
- They do not have the capability for
statistical analysis of forecast data
Examples: Microsoft Excel, Corel Quattro,
Lotus 123
packages designed primarily for
statistical analysis. Almost all these
packages also offer forecasting
capabilities, as well as extensive data
analysis capability.
- However, their many features can be
overwhelming for someone
interested only in forecasting.
Examples: SPSS, SAS, NCSS, Minitab
3. Specialty forecasting packages
- These packages often provide an
extensive range of forecasting
capability, though they may not offer
large statistical analysis capability.
These packages offer a wide range of
forecasting models, whereas others
specialize in a particular model
category.
Examples: Forecast Master, Forecast Pro,
SIBYL

2. Statistics packages
- Statistical software includes

CHAPTER 4
PRODUCT AND SERVICE DESIGN

service.
4.1 Product and Service Design
Key Questions
What Does Product and Service Design
Do? Buyer’s Organization’s
Product design Standpoint Standpoint
- is the combination of manufacturing
capabilities with product and business How much is the Is there a demand
knowledge to convert ideas into cost? for it?
physical and usable objects.
Service design Are the quality and Can we do it?
- is the coordination and combination performance are
of people, communication, and good?
material components to create quality

28
 OPERATIONS MANAGEMENT CBM 0011-4

What level of ethical considerations.

quality is - Most organizations are subject to
appropriate? numerous government agencies that
regulate them: Food and Drug
Does it make sense Administration (FDA), Occupational
from an economic Health and Safety Administration ,
standpoint? Environmental Protection Agency.

Reasons for Product and Service Design or
Redesign
• Economic
• Social and demographic
• Political, liability, or legal
• Competitive
• Cost or availability
• Technological
4.2 Idea Generation
Reverse engineering
- Dismantling and inspecting a
competitor’s product to discover
product improvements.
Research and development (R&D)
- Organized efforts to increase
scientific knowledge or product
innovation.
R&D efforts may involved in:
1. Basic research has the objective of
advancing the state of knowledge about
subject, without any near-term expectation of
commercial applications.
2. Applied research has the objective of
achieving commercial applications.
3. Development converts the results of
applied research into useful commercial
applications.
Product liability
- the responsibility of a manufacturer
for any injuries or damages caused by
a faulty product.
Republic Act No. 7394 The Consumer Act
of the Philippines
ARTICLE 11. Amendment and
Revocation of Declaration of the Injurious,
Unsafe or Dangerous Character of a
Consumer Product.
Any interested person may petition the
appropriate department to commence a
proceeding for the issuance of an amendment
or revocation of a consumer product safety
rule or an order declaring a consumer product
injurious dangerous and unsafe. The
department shall also direct the manufacturer,
distributor or seller of such product to extend
any or all of the following remedies to the
injured person:
- d) to pay the consumer reasonable
damages as may be determined by the
department.
Example: Mitsubishi Montero Sport crash
incidents in 2015
Uniform Commercial Code
- a product must be suitable for its
intended purpose.

4.3 Legal and Ethical Considerations Organizations generally want designers to

adhere to guidelines such as the following:
- Designers must be careful to take into - Produce designs that are consistent
account a wide array of legal and with the goals of the organization.

29
 OPERATIONS MANAGEMENT
- Give customers the value they expect.
- Make health and safety a primary
concern
4.4 Human Factors
1. Safety and liability are two critical issues
in many instances, and they must be carefully
considered.
2. Adding new features to their products or
services; “creeping featurism”
4.4 Cultural Factors
- Product designers in companies that
operate globally also must take into
account any cultural differences of
different countries or regions related
to the product.
Example: McDo across the world
4.6 Global Product and Service Design
Traditionally, product design has been
conducted by members of the design team
who are located in one facility or a few
nearby facilities. However, organizations that
operate globally are discovering advantages
in global product design, which uses the
combined efforts of a team of designers who
work in different countries and even on
different continents
Example: Apple, Amazon
4.6 Environmental Factors: Sustainability
Cradle-to-Grave Assessment
- Also known as life cycle analysis, is
the assessment of the environmental
impact of a product or service
throughout its useful life.
Goal: To choose products and services that
have the least environmental impact while
still taking into account economic
considerations.
CBM 0011-4
End-of-Life Programs
- Deal with products that have reached
the end of their useful lives.
Goal: To reduce the dumping of products,
particularly electronic equipment, in landfills
or third-world countries, as has been the
common practice, or incinera tion, which
converts materials into hazardous air and
water emissions and generates toxic ash.
The Three Rs: Reduce, Reuse, and Recycle
Reduce: Value Analysis
- Value analysis refers to an
examination of the function of parts
and materials in an effort to reduce
the cost and/or improve the
performance of a product.
Reuse: Remanufacturing
- Remanufacturing refers to
refurbishing used products by
replacing worn-out or defective
components, and reselling the
products.
- Design for disassembly (DFD)
Design so that used products can be
easily taken apart.
Recycle
- Recycling means recover ing
materials for future use.
Companies recycle for a variety of
reasons, including:
1. Cost savings.
2. Environment concerns.
3. Environmental regulations.
The pressure to recycle has given rise to the
term design for recycling (DFR) , referring to
product design that takes into account the
ability to disassemble a used product to
recover the recyclable parts.
30
 OPERATIONS MANAGEMENT
4.8 Other Design Considerations
Strategies for Product or Service Life
Stages
Introduction Phase
- Treated as a curiosity item.
- Many potential buyers may suspect
that all the bugs haven’t been worked
out and that the price may drop after
the introductory period.
- Strategically, companies must
carefully weigh the trade-offs in
getting all the bugs out versus getting
a leap on the competition, as well as
getting to the market at an
advantageous time.
Growth Phase
- It is important to obtain accurate
projections of the demand growth rate
and how long that will persist, and
then to ensure that capacity increases
coincide with increasing demand.
Maturity Phase
- Demand levels off.
- Few, if any, design changes are
needed.
- Generally, costs are low and
productivity is high. New uses for
products or services can extend their
life and increase the market size.
Declining Phase
- Decisions must be made on whether
to discontinue a product or service
CBM 0011-4
and replace it with new ones or
abandon the market, or to attempt to
find new uses or new users for the
existing product or service.
Degree of Standardization
- Standardization refers to the extent to
which there is absence of variety in a
product, service, or process.
- Standardized products are made in
large quantities of identical items.
- Standardized service implies that
every customer or item processed
receives essentially the same service.
Benefits of Standardization
1. Immediately available to customers.
2. Standardized products mean
interchangeable parts, which greatly lower
the cost of production while increasing
productivity
3. Design costs are generally lower.
4. Reduced time and cost to train employees
and reduced time to design jobs.
Advantages of Standardization
1. Fewer parts to deal with in inventory and
in manufacturing.
2. Reduced training costs and time.
3. More routine purchasing, handling, and
inspection procedures.
4. Orders fillable from inventory.
5. Opportunities for long production runs and
automation.
6. Need for fewer parts justifies increased
expenditures on perfecting designs and
improving quality control procedures.
Disadvantages of Standardization
1. Designs may be frozen with too many
imperfections remaining.
2. High cost of design changes increases
resistance to improvements.
3. Decreased variety results in less consumer
appeal.
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 OPERATIONS MANAGEMENT
Designing for Mass Customization
Mass customization
- A strategy of producing basically
standardized goods, but incorporating
some degree of customization.
Several tactics make this possible:
Delayed differentiation - is a postponement
tactic: the process of producing, but not quite
completing, a product or service, postponing
completion until customer preferences or
specifications are known.
Modular design - a form of standardization
in which component parts are grouped into
modules that are easily replaced or
interchanged.
Reliability
- Reliability is a measure of the ability
of a product, a part, a service, or an
entire system to perform its intended
function under a prescribed set of
conditions.
- The higher the reliability of a product,
the fewer the resources that will be
needed to maintain it
Failure
- Situation in which a product, part, or
system does not perform as intended.
Normal operating conditions
- The set of conditions under which an
item’s reliability is specified.
Improving Reliability
1. Improve component design.
2. Improve production and/or assembly
techniques.
3. Improve testing.
4. Use backups.
5. Improve preventive maintenance
procedures.
6. Improve user education.
CBM 0011-4
7. Improve system design.
Robust Design
- Design that results in products or
services that can function over a
broad range of conditions.
- The more robust a product or service,
the less likely it will fail due to a
change in the environment in which it
is used or in which it is performed.
Taguchi’s Approach
Japanese engineer Genichi Taguchi’s
approach is based on the concept of robust
design.
- His premise is that it is often easier to
design a product that is insensitive to
environmental factors, either in
manufacturing or in use, than to
control the environmental factors.
- The central feature of Taguchi’s
approach is parameter design. This
involves determining the specification
settings for both the product and the
process that will result in robust
design in terms of manufacturing
variations, product deterioration, and
conditions during use
Degree of Newness
- Product or service design change can
range from the modification of an
existing product or service to an
entirely new product or service:
1. Modification of an existing product or
service.
2. Expansion of an existing product line or
service offering.
3. Clone of a competitor’s product or service.
4. New product or service.
Quality Function Deployment (QFD)
- A structured approach for integrating
the “voice of the customer” into both
the product and service development
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 OPERATIONS MANAGEMENT CBM 0011-4

process.
- The purpose is to ensure that
customer requirements are factored
into every aspect of the process.

The Kano model

- A theory of product and service
design developed by Dr. Noriaki
Kano, a Japanese professor, who
offered a perspective on customer
perceptions of quality different from
the traditional view that “more is
better.”
- His model provides insights into the As time passes, excitement factors become
attributes that are perceived to be performance factors, and performance
important to customers. factors become basic factors

The model employs three definitions of 4.9 Phases in Product Design and
quality: basic, performance, and excitement. Development
1. Basic quality refers to customer
Feasibility analysis.
requirements that have only a limited
- Feasibility analysis entails market
effect on customer satisfaction if
analysis (demand), economic analysis
present, but lead to dissatisfaction if
(development cost and production
not present.
cost, profit potential), and technical
2. Performance quality refers to
analysis (capacity requirements and
customer requirements that generate
availability, and the skills needed).
satisfaction or dissatisfaction in
- Also, it is necessary to answer the
proportion to their level of
question, Does it fit with the mission?
functionality and appeal.
It requires collaboration among
3. Excitement quality refers to a
marketing, finance, accounting,
feature or attribute that was
engineering, and operations.
unexpected by the customer and
Product specifications.
causes excitement (the “wow” factor).
- This involves detailed descriptions of
what is needed to meet (or exceed)
customer wants, and requires
collaboration between legal,
marketing, and operations.
Process specifications.
- Once product specifications have
been set, attention turns to
specifications for the process that will
be needed to produce the product.
- Alternatives must be weighed in
terms of cost, availability of
resources, profit potential, and

33
 OPERATIONS MANAGEMENT
quality. This involves collaboration
between accounting and operations.
Prototype development.
- With product and process
specifications complete, one (or a
few) units are made to see if there are
any problems with the product or
process specifications.
Design review.
- At this stage, any necessary changes
are made or the project is aban doned.
Marketing, finance, engineering,
design, and operations collaborate to
determine whether to proceed or
abandon.
Market test.
- A market test is used to determine the
extent of consumer acceptance. If
unsuccessful, the product returns to
the design review phase. This phase is
handled by marketing.
Product introduction.
- The new product is promoted. This
phase is handled by marketing.
Follow-up evaluation.
- Based on user feedback, changes may
be made or forecasts refined. This
phase is handled by marketing.
4.10 Designing For Production
Concurrent Engineering
- Bringing engineering design and
manufacturing personnel together
early in the design phase.
Advantages:
1. Manufacturing personnel are able
to identify production capabilities
and capacities.
Very often, they have some latitude in design
in terms of selecting suitable materials and
processes. Knowledge of production
capabilities can help in the selection process.
In addition, cost and quality considerations
CBM 0011-4
can be greatly influenced by design, and
conflicts during production can be greatly
reduced.
2. Design or procurement of critical
tooling, some of which might have
long lead times, can occur early in the
process.
This can result in a major shortening of the
product development process, which could be
a key competitive advantage.
3. The technical feasibility of a
particular design or a portion of a
design can be assessed early on.
Again, this can avoid serious problems during
production.
4. The emphasis can be on problem
resolution instead of conflict
resolution.
Disadvantages
1. Long-standing boundaries between design
and manufacturing can be difficult to
overcome. Simply bringing a group of people
together and thinking that they will be able to
work together effectively is probably naive.
2. There must be extra communication and
flexibility if the process is to work, and these
can be difficult to achieve.
Computer-Aided Design (CAD)
- Product design using computer
graphics.
Benefits of CAD
- Increased productivity of designers.
No longer is it necessary to
laboriously prepare mechanical
drawing of products or parts and
revise them repeatedly to correct
errors or incorporate revision.
- Creation of a database for
manufacturing that can supply needed
information on product geometry and
dimensions, tolerance, material
specifications, and so on. It should be
noted, however, that CAD needs this
34
 OPERATIONS MANAGEMENT
database to function and that this
entails a considerable amount of effort
Production Requirements
- Designers must take into account
production capabilities.
- Design needs to clearly understand the
capabilities of production
Manufacturability
- A key concern for manufactured
goods: Ease of fabrication and/or
assembly is important for cost,
productivity, and quality. With
services, ease of providing the service,
cost, productivity, and quality are of
great concern.
- The ease of fabrication and/or
assembly.
Design for Manufacturing (DFM)
- is used to indicate the designing of
products that are compatible with an
organization’s capabilities.
Design for Assembly (DFA)
- Design that focuses on reducing the
number of parts in a product and on
assembly methods and sequence.
Component Commonality
- The use of the same version of a
component across multiple products,
is increasingly considered as a
promising way to offer high external
variety while retaining low internal
variety in operations
4.11 Service Design
Service
- Refers to an act, something that is
done to or for a customer (client,
patient, etc.).
Service delivery system
CBM 0011-4
- The facilities, processes, and skills
needed to provide a service.
Product bundle
- The combination of goods and
services provided to a customer.
Service package
- The physical resources needed to
perform the service, the accompany
ing goods, and the explicit and
implicit services included.
System design involves development or
refinement of the overall service package :
1. The physical resources needed.
2. The accompanying goods that are
purchased or consumed by the customer, or
provided with the service.
3. Explicit services (the essential/core features
of a service, such as tax preparation).
4. Implicit services (ancillary/extra features,
such as friendliness, courtesy).
Overview of Service Design
- The selection of a service strategy
establishes the target market, the
nature, and the focus of the service.
Top management must evaluate the
potential market, profitability (or need,
in the case of a nonprofit
organization), and suitability of the
organization to deliver the service,
among other factors.
Differences between Service Design and
Product Design
1. Products are generally tangible;
services are generally intangible.
2. In many instances services are created
and delivered at the same time
3. Services cannot be inventoried.
4. Services are highly visible to
consumers and must be designed with
that in mind
5. Some services have low barriers to
entry and exit.
6. Location is often important to service
35
 OPERATIONS MANAGEMENT
design, with convenience as a major
factor.
7. Service systems range from those with
little or no customer contact to those
that have a very high degree of
customer contact.
8. Demand variability alternately creates
waiting lines or idle service resources.
Phases in the Service Design Process:
1. Conceptualize.
- Idea generation
- Assessment of customer wants/needs
(marketing)
- Assessment of demand potential (marketing)
2. Identify service package components
needed (operations and marketing).
3. Determine performance specifications
(operations and marketing).
4. Translate performance specifications
into design specifications.
5. Translate design specifications into
delivery specifications.
Service Blueprint
- A method used in service design to
describe and analyze a proposed
service.
Major Steps in Service Blueprinting
1. Establish boundaries for the service
and decide on the level of detail
needed.
2. Identify and determine the sequence of
customer and service actions and
interactions. A flowchart can be a
useful tool for this.
3. Develop time estimates for each phase
of the process, as well as time
variability.
4. Identify potential failure points and
develop a plan to prevent or minimize
them, as well as a plan to respond to
service errors.
CBM 0011-4
Characteristics of Well-Designed Service
Systems
1. Being consistent with the
organization’s mission.
2. Being user-friendly.
3. Being robust if variability is a factor.
4. Being easy to sustain.
5. Being cost-effective.
6. Having value that is obvious to
customers.
7. Having effective linkages between
back-of-the-house operationsand
front-of-the-house operations.
8. Having a single, unifying theme, such
as convenience or speed.
9. Having design features and checks
that will ensure service that is reliable
and of high quality.
Challenges of Service Design
In the majority of corporate activities,
variability is a big problem, and this is
especially true when designing service
systems. The nature of requirements is
frequently unpredictable, both in terms of the
variations in what consumers want or need
and in the timeliness of their requests.
Guidelines for Successful Service Design
1. Define the service package in detail. A
service blueprint may be helpful for
this.
2. Focus on the operation from the
customer’s perspective. Consider how
customer expectations and perceptions
are managed during and after the
service.
3. Consider the image that the service
package will present both to customers
and to prospective customers.
4. Recognize that designers’ familiarity
with the system may give them a quite
different perspective than that of the
36
 OPERATIONS MANAGEMENT
customer, and take steps to overcome
this.
5. Make sure that managers are involved
and will support the design once it is
implemented.
6. Define quality for both tangibles and
intangibles. Intangible standards are
more difficult to define, but they must
be addressed.
7. Make sure that recruitment, training,
and reward policies are consistent with
service expectations.
8. Establish procedures to handle both
predictable and unpredictable events.
9. Establish systems to monitor,
maintain, and improve service.
4S.1 Reliability
Reliability is a measure of the ability of a
product, service, part, or system to perform its
intended function under a prescribed set of
conditions. In effect, reliability is a
probability.
4S.2 Quantifying Reliability
Probability is used in two ways.
1. The probability that the product or
system will function when activated.
2. The probability that the product or
system will function for a given length
of time.
Focuses on:
1. One point in time and is often used
when a system must operate for one
time or a relatively few number of
times.
2. On the length of service. The
distinction will become more apparent
as each of these approaches is
described in more detail.
Finding the Probability of Functioning
When Activated
CBM 0011-4
Determining that probability when the
product or system consists of a number of
independent components requires the use of
the rules of probability for independent
events.
Independent Events
- Events whose occurrence or
nonoccurrence does not influence each
other.
Rules
Rule 1.
If two or more events are independent and
success is defined as the probability that all
of the events occur, then the probability of
success is equal to the product of the
probabilities of the events.
Redundancy
- The use of backup components to
increase reliability.
Rule 2.
If two events are independent and success is
defined as the probability that at least one of
the events will occur, the probability of
success is equal to the probability of either
one plus 1.00 minus that probability
multiplied by the other probability.
Rule 3.
If two or more events are involved and
success is defined as the probability that at
least one of them occurs, the probability of
success is 1 – P (all fail).
4S.3 Availability
Availability
- The fraction of time a piece of
equipment is expected to be available
for operation.
- Availability can range from zero
37
 OPERATIONS MANAGEMENT
(never available) to 1.00 (always
available).
- Availability is a function of both the
mean time between failures and the
mean time to repair.
Formula for Availability
CHAPTER 5
STRATEGIC CAPACITY PLANNING FOR PRODUCTS AND SERVICES
5.1 Capacity
Capacity
- The upper limit or ceiling on the load
that an operating unit can handle.
The goal of strategic capacity planning is to
achieve a match between the long-term supply
capabilities of an organization and the
predicted level of long-term demand.
Reasons why organizations are involved in
capacity planning:
Changes in demand
Changes in technology
Changes in the environment, and perceived
threats or opportunities.
Out of Balance - when there’s a gap between
current and desired capacity
Overcapacity - causes operating costs that are
too high
CBM 0011-4
Undercapacity - causes strained resources
and possible loss of customers.
The key questions in capacity planning are
the following:
1. What kind of capacity is needed?
- The question of what kind of capacity
is needed depends on the products and
services that management intends to
produce or provide.
2. How much is needed to match
demand?
3. When is it needed?
- Forecasts are key inputs used
to answer the questions of how
much capacity is needed and
when is it needed.
5.2 Capacity Decisions are Strategic
Capacity decisions are among the most
fundamental of all the design decisions that
managers must make. In fact, capacity
38
 OPERATIONS MANAGEMENT
decisions can be critical for an organization.
1. Capacity decisions have a real
impact on the ability of the
organization to meet future
demands for products and services;
capacity essentially limits the rate of
output possible. Having capacity to
satisfy demand can often allow a
company to take advantage of
tremendous benefits.
2. Capacity decisions affect operating
costs. Ideally, capacity and demand
requirements will be matched, which
will tend to minimize operating costs.
In practice, this is not always achieved
because actual demand either differs
from expected demand or tends to
vary.. In such cases, a decision might
be made to attempt to balance the
costs of over- and undercapacity.
3. Capacity is usually a major
determinant of initial cost. Typically,
the greater the capacity of a productive
unit, the greater its cost. This does not
necessarily imply a one-for-one
relationship; larger units tend to cost
proportionately less than smaller units.
4. Capacity decisions often involve
long-term commitment of resources
and the fact that, once they are
implemented, those decisions may be
difficult or impossible to modify
without incurring major costs.
5. Capacity decisions can affect
competitiveness. If a firm has excess
capacity, or can quickly add capacity,
that fact may serve as a barrier to entry
by other firms. Then too, capacity can
affect delivery speed, which can be a
competitive advantage.
6. Capacity affects the ease of
management; having appropriate
capacity makes manage�ment easier
than when capacity is mismatched.
CBM 0011-4
7. Globalization has increased the
importance and the complexity of
capacity decisions. Far-flung supply
chains and distant markets add to the
uncertainty about capacity needs.
8. Because capacity decisions often
involve substantial financial and other
resources, it is necessary to plan for
them far in advance. However, this
increases the risk that the designated
amount of capacity will not match
actual demand when the capacity
becomes available.
5.3 Defining and Measuring Capacity
Capacity often refers to an upper limit on the
rate of output. However, here are subtle
difficulties in actually measuring capacity in
certain cases. These difficulties arise because
of different interpretations of the term
capacity and problems with identifying
suitable measures for a specific situation.
1. In selecting a measure of capacity, it
is important to choose one that does
not require updating.
2. Where only one product or service is
involved, the capacity of the
productive unit may be expressed in
terms of that item. However, when
multiple products or services are
involved, as is often the case, using a
simple measure of capacity based on
units of output can be misleading.
Design capacity
- The maximum output rate or service
capacity an operation, process, or
facility is designed for and is achieved
under ideal conditions.
Effective capacity
- Design capacity minus allowances
such as personal time, equipment
maintenance, delays due to scheduling
problems, and changing the mix of
39
 OPERATIONS MANAGEMENT
products.
- It is always less than design capacity
owing to realities of changing product
mix, the need for periodic maintenance
of equipment, lunch breaks, coffee
breaks, problems in schedul�ing and
balancing operations, and similar
circumstances.
Actual output cannot exceed effective
capacity and is often less because of machine
breakdowns, absenteeism, shortages of
materials, and quality problems, as well as
factors that are outside the control of the
operations managers.
These different measures of capacity are
useful in defining two measures of system
effectiveness: efficiency and utilization.
Efficiency - is the ratio of actual output to
effective capacity.
Capacity utilization - is the ratio of actual
output to design capacity.
5.4 Determinants of Effective Capacity
Factors that Determine Effective Capacity
Facilities
- Design
- Location
- Layout
- Environment
Product and Service Factors
- Design
- Product or service mix
Process Factors
- Quantity capabilities
- Quality capabilities
Human Factors
- Job content
CBM 0011-4
- Job design
- Training adn experience
- Motivation
- Compensation
- Learning rates
- Absenteeism and labor turnover
Policy
- by allowing or not allowing capacity
options such as overtime or second or
third shifts
Operational
- Scheduling
- Materials management
- Quality assurance
- Maintenance policies
- Equipment breakdowns
Supply chain
- Key questions include: What impact
will the changes have on suppliers,
warehousing, transportation, and
distributors? If capacity will be
increased, will these elements of the
supply chain be able to handle the
increase? Conversely, if capacity is to
be decreased, what impact will the loss
of business have on these elements of
the supply chain
External factors
- Product standards
- Safety regulations
- Unions
- Pollution control standards
5.5 Strategy Formulation
Three Primary Strategies
Leading - A leading capacity builds capacity
in anticipation of future demand increases. If
capacity increases involve a long lead time,
this strategy may be the best option.
Following - A following strategy builds
capacity when demand exceeds current
capacity.
Tracking - A tracking strategy is similar to a
following strategy, but it adds capacity in
40
 OPERATIONS MANAGEMENT
relatively small increments to keep pace with
increasing demand.
An organization typically bases its capacity
strategy on assumptions and predictions
about long-term demand patterns,
technological changes, and the behavior of
its competitors. It involves:
1. The growth rate and variability of
demand
2. The costs of building and operating
facilities of various sizes
3. The rate and direction of technological
innovation
4. The likely behavior of competitors,
and (5) availability of capital and other
inputs.
Capacity cushion
- Extra capacity used to offset demand
uncertainty. Typically, the greater the
degree of demand uncertainty, the
greater the amount of cushion used.
Organizations that have standard
products or services generally have
smaller capacity cushions.
Steps in the Capacity Planning Process
1. Estimate future capacity requirements.
2. Evaluate existing capacity and
facilities and identify gaps.
3. Identify alternatives for meeting
requirements.
4. Conduct financial analyses of each
alternative.
5. Assess key qualitative issues for each
alternative.
6. Select the alternative to pursue that
will be best in the long term.
7. Implement the selected alternative.
8. Monitor results.
Capacity planning can be difficult at times
due to the complex influence of market forces
and technology.
CBM 0011-4
5.6 Forecasting Capacity Requirements
Long-term capacity - needs require
forecasting demand over a time horizon and
then con�verting those forecasts into capacity
requirements.
Basic demand patterns that might be
identified by a forecast
In addition to basic patterns there are more
complex patterns, such as a combination of
cycles and trends.
When trends are identified, the fundamental
issues are:
1. How long the trend might per�sist,
because few things last forever
2. The slope of the trend. If cycles are
identified, interest focuses on
a. The approximate length of the
cycles
b. The amplitude of the cycles
Short-term capacity - needs are less
concerned with cycles or trends than with
seasonal vari�ations and other variations
from average. These deviations are
particularly important because they can place
a severe strain on a system’s ability to satisfy
demand at some times and yet result in idle
capacity at other times.
Seasonal - An organization can identify
seasonal patterns using standard forecasting
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techniques. Although commonly thought of as
annual fluctuations, seasonal variations are
also reflected in monthly, weekly, and even
daily capacity requirements. When time
intervals are too short to have seasonal
variations in demand, the analysis can often
describe the variations by probability
distributions
Irregular variations - are perhaps the most
troublesome: They are difficult or impossible
to predict. They are created by such diverse
forces as major equipment breakdowns, freak
storms that disrupt normal routines, foreign
political turmoil that causes oil shortages,
discovery of health hazards.
5.7 Additional Challenges of Planning
Service Capacity
Three very important factors in planning
service capacity are
1. There may be a need to be near
customers
2. The inability to store service
3. The degree of volatility of demand.
Capacity planning for services can present
special challenges due to the nature of
services.
1. Convenience for customers is often an
important aspect of service. Generally,
a service must be located near
customers.
2. Capacity also must be matched with
the timing of demand. Unlike goods,
services can�not be produced in one
period and stored for use in a later
period.
3. Demand volatility presents problems
for capacity planners. Demand
volatility tends to be higher for
services than for goods, not only in
timing of demand, but also in the
CBM 0011-4
amount of time required to service
individual customers. The fact that
services can’t be stored means service
systems cannot turn to inventory to
smooth demand require�ments on the
system the way goods-producing
systems are able to. Instead, service
planners have to devise other methods
of coping with demand volatility and
cyclical demand.
4. In some instances, demand
management strategies can be used to
offset capacity limita�tions. Pricing,
promotions, discounts, and similar
tactics can help to shift some demand
away from peak periods and into slow
periods, allowing organizations to
achieve a closer match in supply and
demand.
5.8 Do it In-House or Outsource it?
Many organizations buy parts or contract out
services, for a variety of reasons. Among
those factors are:
1. Available capacity.
If an organization has available the
equipment, necessary skills, and
time, it often makes sense to produce an item
or perform a service in-house. The
addi�tional costs would be relatively small
compared with those required to buy items or
sub�contract services. On the other hand,
outsourcing can increase capacity and
flexibility.
2. Expertise.
If a firm lacks the expertise to do a job
satisfactorily, buying might be a rea�sonable
alternative.
3. Quality considerations.
Firms that specialize can usually offer higher
quality than an organization can attain itself.
Conversely, unique quality requirements or
the desire to closely monitor quality may
cause an organization to perform a job itself.
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4. The nature of demand.
When demand for an item is high and steady,
the organization is often better off doing the
work itself. However, wide fluctuations in
demand or small orders are usually better
handled by specialists who are able to
combine orders from multiple sources, which
results in higher volume and tends to offset
individual buyer fluctuations.
5. Cost.
Any cost savings achieved from buying or
making must be weighed against the
preceding factors. Cost savings might come
from the item itself or from transportation
cost savings. If there are fixed costs associated
with making an item that cannot be
real�located if the service or product is
outsourced, that has to be recognized in the
analysis. Conversely, outsourcing may help a
firm avoid incurring fixed costs.
6. Risks.
Buying goods or services may entail
considerable risks. Loss of direct control
over operations, knowledge sharing, and the
possible need to disclose proprietary
infor�mation are three risks. And liability can
be a tremendous risk if the products or
services of other companies cause harm to
customers or the environment, as well as
damage to an organization’s reputation.
Reputation can also be damaged if the public
discovers that a supplier operates with
substandard working conditions.
5.9 Developing Capacity Strategies
1. Design flexibility into systems.
The long-term nature of many capacity
decisions and the risks inherent in long-term
forecasts suggest potential benefits from
designing flexible systems. Other
considerations in flexible design involve
layout of equipment, location, equipment
selection, production planning, scheduling,
and inventory policies, which will be
discussed in later chapters.
CBM 0011-4
2. Take stage of life cycle into account.
Capacity requirements are often closely linked
to the stage of the life cycle that a product or
service is in.
At the introduction phase, it can be difficult
to determine both the size of the market and
the organization’s eventual share of that
market.
In the growth phase, the overall market may
experience rapid growth. However, the real
issue is the rate at which the organization’s
market share grows, which may be more or
less than the market rate, depending on the
success of the organization’s strategies.
Organizations generally regard growth as a
good thing. However, there can also be a
downside to this because increasing output
levels will require increasing capacity, and
that means increasing investment and
increasing complexity.
In the maturity phase, the size of the market
levels off, and organizations tend to have
stable market shares. Organizations may still
be able to increase profitability by reducing
costs and making full use of capacity.
However, some organizations may still try to
increase profitability by increasing capacity if
they believe this stage will be fairly long, or
the cost to increase capacity is relatively
small.
In the decline phase, an organization is faced
with underutilization of capacity due to
declining demand. Organizations may
eliminate the excess capacity by selling it, or
by intro�ducing new products or services. An
option that is sometimes used in
manufacturing is to transfer capacity to a
location that has lower labor costs, which
allows the organization to continue to make a
profit on the product for a while longer
3. Take a “big-picture” (i.e., systems)
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 OPERATIONS MANAGEMENT
approach to capacity changes.
When developing capacity alternatives, it is
important to consider how parts of the system
interrelate. Capacity changes inevitably affect
an organization’s supply chain. Suppliers may
need time to adjust to their capacity, so
collaborating with supply chain partners on
plans for capacity increases is essential. That
includes not only suppliers, but also
distributors and transporters. The risk in not
taking a big-picture approach is that the
system will be unbalanced. Evidence of an
unbalanced system is the existence of a
bottleneck operation. A bottleneck operation
is an operation in a sequence of operations
whose capacity is lower than the capacities of
other operations in the sequence. As a
consequence, the capacity of the bottleneck
operation limits the system capacity; the
capacity of the system is reduced to the
capacity of the bottleneck operation.
4. Prepare to deal with capacity
“chunks.”
Capacity increases are often acquired in
fairly large chunks rather than smooth
increments, making it difficult to achieve a
match between desired capacity and feasible
capacity.
5. Attempt to smooth out capacity
requirements.
Unevenness in capacity requirements also can
create certain problems. . Still another source
of varying demand is seasonality. Seasonal
variations are generally easier to cope with
than random variations because they are
predictable. Consequently, management can
make allowances in planning and scheduling
activities and inventories. However, seasonal
variations can still pose problems because of
their uneven demands on the system. One
possible approach to this problem is to
identify products or services that have
complementary demand patterns, that is,
patterns that tend to offset each other.
6. Identify the optimal operating level.
CBM 0011-4
Production units typically have an ideal or
optimal level of operation in terms of unit cost
of output. At the ideal level, cost per unit is
the lowest for that production unit. If the
output rate is less than the optimal level,
increasing the output rate will result in
decreasing average unit costs. This is known
as economies of scale. However, if output is
increased beyond the optimal level, average
unit costs will become increasingly larger.
This is known as diseconomies of scale.
Economies of scale
- If the output rate is less than the
optimal level, increasing the output
rate results in decreasing average unit
costs.
Diseconomies of scale
- If the output rate is more than the
optimal level, increasing the output
rate results in increasing average unit
costs.
7. Choose a strategy if expansion is
involved.
Consider whether incremental expansion or
single step is more appropriate. Factors
include competitive pressures, market
opportuni�ties, costs and availability of
funds, disruption of operations, and training
requirements. Also, decide whether to lead or
follow competitors. Leading is more risky, but
it may have greater potential for rewards
5.10 Constraint Management
A constraint is something that limits the
performance of a process or system in
achieving its goals.
There are seven categories of constraints:
1. Market: Insufficient demand.
2. Resource: Too little of one or more
resources.
3. Material: Too little of one or more
materials.
4. Financial: Insufficient funds.
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 OPERATIONS MANAGEMENT
5. Supplier: Unreliable, long lead time,
substandard quality.
6. Knowledge or competency: Needed
knowledge or skills missing or
incomplete.
7. Policy: Laws or regulations interfere.
Constraint issues can be resolved by using
the following five steps
1. Identify the most pressing constraint.
If it can easily be overcome.
2. Change the operation to achieve the
maximum benefit, given the
constraint. This may be a short-term
solution.
3. Make sure other portions of the
process are supportive of the
constraint (e.g., bottleneck operation).
4. Explore and evaluate ways to
overcome the constraint.
5. Repeat the process until the level of
constraints is acceptable.
5.11 Evaluating Alternatives
An organization needs to examine
alternatives for future capacity from a
number of different perspectives.
Cost–Volume Analysis
- Cost–volume analysis focuses on
relationships between cost,
revenue, and volume of output.
- The purpose of cost–volume
analysis is to estimate the income
of an organization under different
operating conditions. It is
particularly useful as a tool for
comparing capacity alternatives.
- Use of the technique requires
identification of all costs related to
the production of a given product.
These costs are then designated as
CBM 0011-4
fixed costs or variable costs.
Fixed costs tend to remain constant
regardless of volume of output.
Variable costs vary directly with volume
of output. The major components of
variable costs are generally materials and
labor costs.
Cost–volume analysis can be a valuable
tool for comparing capacity alternatives
if certain assumptions are satisfied:
1. One product is involved.
2. Everything produced can be sold.
3. The variable cost per unit is the same
regardless of the volume.
4. Fixed costs do not change with volume
changes, or they are step changes.
5. The revenue per unit is the same
regardless of volume.
6. Revenue per unit exceeds variable cost
per unit.
Financial Analysis
Operations personnel need to have the
ability to do financial analysis. A problem
that is universally encountered by
managers is how to allocate scarce funds.
A common approach is to use financial
analysis to rank investment proposals,
taking into account the time value of
money.
Two important terms in financial
analysis:
Cash flow refers to the difference between
the cash received from sales (of goods or
services) and other sources (e.g., sale of
old equipment) and the cash outflow for
labor, materials, overhead, and taxes.
Present value expresses in current value
the sum of all future cash flows of an
investment proposal.
Three most commonly used methods of
financial analysis
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 OPERATIONS MANAGEMENT
1. Payback is a crude but widely
used method that focuses on the
length of time it will take for an
investment to return its original
cost. It ignores the time value of
money. Its use is easier to
rationalize for short-term than for
long�term projects.
2. Present value summarizes the
initial cost of an investment, its
estimated annual cash flows, and
any expected salvage value in a
single value called the equivalent
current value, taking into account
the time value of money
3. Internal Rate of Return (IRR)
summarizes the initial cost,
expected annual cash flows, and
estimated future salvage value of
an investment proposal in an
equivalent interest rate. In other
words, this method identifies the
rate of return that equates the
estimated future returns and the
initial cost.
Decision Theory
Decision theory is a helpful tool for
financial comparison of alternatives under
conditions of risk or uncertainty. It is
CBM 0011-4
suited to capacity decisions and to a wide
range of other decisions managers must
make. It involves identifying a set of
possible future conditions that could
influence results, listing alternative courses
of action, and developing a financial
outcome for each alternative–future
condition combination.
Waiting-Line Analysis
Analysis of lines is often useful for
designing or modifying service systems.
Waiting lines have a tendency to form in a
wide variety of service systems. The lines
are symp�toms of bottleneck operations.
Analysis is useful in helping managers
choose a capacity level
that will be cost-effective through
balancing the cost of having customers
wait with the cost of providing additional
capacity. It can aid in the determination of
expected costs for various levels of service
capacity.
Simulation
Simulation can be a useful tool in
evaluating what-if scenarios.
46