Chapter 8:

Operations Control
 Operating Costs
Type of Cost Components
Direct labor Wages and salaries of employees engaged in the
– variable direct generation of goods and services. This
typically does not include wages and salaries of
support personnel.
Materials Cost of materials that become a tangible part of
– variable finished goods and services.

Production Training new employees, safety training,

overhead – variable supervision and clerical, overtime premium, shift
premium, payroll taxes, vacation and holiday,
retirement funds, group insurance, supplies, travel,
repairs and maintenance.
Production Travel, research and development, fuel, electricity,
overhead – fixed water, repairs and maintenance, rent, depreciation,
real estate taxes, insurance. 2
 Overhead
• Variable overhead expenses
– Expenses that change in proportion to the
level of production or service.
• Fixed overhead
– Expenses that do not change appreciably with
fluctuations in the level of production or
service.

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 Dimensions of Design Quality
Dimension Meaning
Performance Primary product or service characteristics
Features Added touches; bells and whistles; secondary
characteristics
Reliability Consistency of performance over time; probability of
failing
Durability Useful life
Serviceability Ease of repair
Response Characteristics of human-to-human interface (speed,
courtesy, competence)
Aesthetics Sensory characteristics (sound, feel, look, etc.)

Reputation Past performance and other intangibles (perceived

quality) 4
 Customer Response Programs
• Implementation keys:
– Develop a new attitude toward customers.
– Reduce management layers so that managers are
in contact with customers.
– Link quality and information systems to customer
needs and problems.
– Train employees in customer responsiveness.
– Integrate customer responsiveness throughout the
entire distribution channel.
– Use customer responsiveness as a marketing tool.
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 Deming’s 14 Quality Elements

1. Create and publish to all employees a statement of the aims

and purposes of the company or other organization. The
management must demonstrate constantly their
commitment to this statement.
2. Learn the new philosophy, top management and everybody.
3. Understand the purpose of inspection, for improvement of
processes and reduction of cost.
4. End the practice of awarding business on the basis of price
tag alone.
5. Improve constantly and forever the system of production
and service.
6. Institute training.
7. Teach and institute leadership.
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 Deming’s 14 Quality Elements

1. Drive out fear. Create trust. Create a climate for

innovation.
2. Optimize toward the aims and purposes of the company the
efforts of teams, groups, and staff.
3. Eliminate exhortations for the workforce.
4. Eliminate numerical quotas for production; eliminate
management by objective.
5. Remove barriers that rob people of pride and workmanship.
6. Encourage education and self-improvement for everyone.
7. Take action to accomplish the transformation.

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 Total Quality Management
• Essential steps:
– Find out what customers want.
– Design a product or service that will meet (or
exceed) what customers want.
– Design a production process that facilitates
doing the job right the first time.
– Keep track of results, and use those results to
guide improvement in the system.
– Extend these concepts to suppliers and to
distribution. 8
 TQM vs. Traditional Approaches
Aspect Traditional TQM
Overall mission Maximize return on Meet of exceed customer
investment satisfaction
Objectives Emphasis on short-term Balance of long- and
short-term
Management Not always open; Open; encourages
sometimes inconsistent employee input;
objectives consistent objectives
Role of manager Issue and enforce orders Coach, remove barriers,
build trust
Customer Not highest priority; may Highest priority; important
requirements be unclear to identify and understand
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 TQM vs. Traditional Approaches

Aspect Traditional TQM

Problems Assign blame; punish Identify and resolve

Problem solving Not systematic; by Systematic; by teams

individuals
Improvement Erratic Continual

Suppliers Adversarial Partners

Jobs Narrow, specialized; Broad, more general;

much individual effort much team effort
Focus Product oriented Process oriented

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 Quality Improvement Approaches

• Continuous improvement
– Ongoing effort throughout the entire
organization.
• Kaizen
– “Good change”; continuous improvement;
views employees as most valuable asset.
• Quality at the source
– Philosophy of making each employee
responsible for the quality of his or her own
work. 11
 Quality Improvement Approaches

• Six sigma
– Statistical and customer-driven; “what does
the customer want in the way of quality?”
• Lean manufacturing
– Focuses on identifying and eliminating waste
and non-value-added activities.

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 Zero Defects
• Zero defects program
• Increasing quality by increasing everyone’s impact
on quality.
• Characteristics of successful zero-defects
programs:
• Extensive communication regarding the importance
of quality.
• Organization-wide recognition for high-quality work.
• Quality problem identification by employees.
• Employee participation in goal setting.
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 Types of Quality Control
• Product quality control
• Relates to inputs or outputs of the system.
• Used to evaluate quality of a batch of existing
products or services.
• Process control
• Relates to equipment and processes used during
the production process.
• Acceptance sampling
• Statistical method of predicting quality through
inspection of a batch or large group of products.
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 Inventory Control
Inventories add flexibility and allow the
organization to:
1. Purchase, produce, and ship in economic lot
sizes rather than in small jobs.
2. Produce on a smooth, continuous basis even
if the demand for the finished product or raw
material fluctuates.
3. Prevent major problems when forecasts of
demand are in error or when unforeseen
slowdowns or stoppages in supply or
production occur. 15
 Just-in-Time Inventory Control
Benefits:
2. Inventory levels are drastically lowered.
3. The time it takes products to go through the production
facility is greatly reduced. This enables the organization to
be more flexible and more responsive to changing customer
demands.
4. Product/service quality is improved and the cost of scrap is
reduced because defective parts and services are
discovered earlier.
5. With smaller product batches, less space is occupied by
inventory and materials-handling equipment. This also
allows employees to work closer together, which improves
communication and teamwork.

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 ABC Inventory Classification
100
Percent of total inventory value

80

60

40

20 A items

0 B items
C items
0 20 40 60 80 100

Percent of total list of different stock items

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 Material Requirements
Planning (MRP)
1. Reduces the average amount of inventory for
dependent demand items (raw material, parts,
and work-in-progress inventory).
2. Improves work flow; reduces elapsed time
between the start and finish of jobs.
3. Enables delivery promises to be more reliable.
4. Minimizes parts shortages.
5. Keeps work item priorities up to date; shop work
is more effective and appropriate.

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 Material Requirements
Planning (MRP)
1. Helps plan the timing of design changes and aids
in their implementation.
2. Can simulate and evaluate changes in the master
schedule.
3. Tells management ahead of time if desired
delivery dates appear achievable.
4. Changes (expedites or de-expedites) due dates
for orders.
5. Facilitates capacity requirements planning.

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