Operation Management

1
 CHAPTER ONE

NATURE OF OPERATIONS

MANAGEMENT
2
• Introduction
– OM designs, operates, and improves productive systems

• systems for getting work done.

– OM design systems, ensure quality, produce products, and deliver
services.
– Operations are more than planning and controlling; it’s doing

• What is Operations Management?

– It deals with the production of goods and services that people

buy and use every day.

– It is a function that enables org. to achieve their goals through

3
 Cont.
……
• It refers to the interaction and control of the process that

transform input into finished goods and services

• is the activity of managing the resources, which produce

and deliver goods and services

• is the design, operation and improvements of the

production system that creates the firms primary products

or services

• Generally it is the management of system or processes that

4
Need/ operations
management?
• It provides users to be competitive in the environment through doing
activities efficiently and effectively.
• Operation lies at the heart of business activities.
• The concepts and tools of OM are widely used in managing other
functions of a business.

• Running a business requires three basic activities. These are:

– Finance– deals with getting capital & equipment to deal with the
business

– Operations– deals with the use of human & material resources to

create the products that either make an organization healthy5 &
 Cont.
……
– Marketing– deals with selling and distributing the
product.
– OM presents interesting career opportunities.
– Operation management helps to manage operating costs.
– OM provides a systematic way of looking at
organizational processes

• Historical Evolution of OM
– OM has existed as long as people produced goods and
services.
6
• Division/specialization of Labor –
– specialization of labor to a single task can result
in greater productivity and efficiency than the
assignment of many tasks to a single worker.
– specialization of labor increases output because of three
factors:

• Increased skills on the part of workers.

• Avoidance of lost time due to changing jobs,
and 7
• Standardization of parts
– parts are standardized so that they can be interchanged.
– Standardization was practiced in early Venice, where
rudders on warship were made to be interchangeable.
• Industrial revolution –
– it was in essence the substitution of machine power for
human power.
– revolution by Games Watt’s stem engine, which was a
major source of mobile machine power for agriculture
and factories.
– The development of the gasoline engine and electricity.
– mass production concepts were developed when heavy
demands for production were placed on American
industry. 8
• Scientific study of Work
– scientific approach to management could improve labor efficiency,
– proposed the following approaches:
• Develop standardized procedures for the workers.
• Scientifically select, train & develop workers instead of letting
them train themselves.
• Establish a spirit of cooperation between management &
workers so that high productivity at good pay is fostered.
• To divide the work between management and labor so that each
group does the work for which it is suited.
• Frank and Lillian Gilbreth (1911) when developed motion economy
studies. 9
• Human Relations
– highlighted the central importance of motivation & the human
element in work design.

– Elton Mayo and others developed this line of thought

– They believes that worker motivation – along with the physical &

technical work environment – is a crucial element in improving

productivity.

– This led to a modernization of the scientific management schools

which had emphasized the more technical aspects of work design.

– The human relations school of thinking has also led to job

10
enrichment recognized as the method with a great deal of potential
• Decision Models
– can be used to present a productive system in mathematical terms.
– is expressed in terms of performance measures, constraints, and
decision variables.
• Economic Order Quantity formula for inventory management.
• Statistical Quality control of work.
• Simplex method of Linear Programming, which made possible
the solution of a whole class of mathematical models.
• computer simulation contributed to the study and analysis of
operations.

11
• Computers –

– the use of computers has dramatically changed the field of

OM

– operations now employ computes for Inventory

management, Production scheduling, Quality control, and

computer Aided manufacturing and costing systems, in

office automation, and they are used virtually in all types of

service operations. 12
The Operations Function

13
• Activities in operations management (OM) include:
– organizing work, selecting processes, arranging layouts,
– locating facilities, designing jobs, measuring performance,
– controlling quality, scheduling work, managing inventory, and
planning production.
• Operations managers deal with people, technology, and deadlines.
• These managers need good technical, conceptual, and behavioral
skills.
• Their activities are closely intertwined with other functional areas of
a firm
• for most firms, operations is technical core or “hub” of the orgn.,
14
 Operation function & environment/
Operations System
• A typical business organization has four basic functions: operation,

finance, HR and marketing.

• These four functions, and other supporting functions (like

personnel, engineering, purchasing), perform different but related

activities necessary for the operation of the org.

• The functions must interact to achieve the goals and objectives of

the organization and each makes an important contribution.

• Often the success of an organization depends not only on how well

each are performs but also on how the areas interface with each
15
 Cont.
• An operation is often defined as a transformation process. ……
• inputs (such as material, machines, labor, management, and

capital) are transformed into outputs (goods and services).

• Requirements and feedback from customers are used to adjust

factors in the transformation process, which may in turn alter

inputs.

• In operations management, we try to ensure that the transformation

process is performed efficiently & that the output is of greater

value than the sum of the inputs.

• Thus, the role of operations is to create value. 16

• Operations –

– the operations function consists of all activities directly related to

producing goods or providing service.

– It is the core of most business organizations that exists not only in

manufacturing and assembly operations, which are goods-

oriented, but also in areas such as health care, transportation, food

handling, and retailing, which are primarily service-oriented.

– The operation function mainly involves the conversion of inputs

into outputs as it is indicated in the figure below: 17

18
 Cont.
……
• Inputs are used to obtain finished goods/services by using
transformation processes.
• To ensure that desired outputs are obtained, measurements are
taken at various points in the transformation process & then
compared with previously established standards to determine
whether corrective action is need (control).
• The essence of operations functions is to add value during the
transformation process.
• Value added is the term used to describe the difference
between the cost of input and value/price of output during
19
 Cont.
……
• The input–transformation–output process is characteristic of a wide
variety of operating systems.

• In an automobile factory, sheet steel is formed into different shapes,

painted and finished, and then assembled with thousands of

component parts to produce a working automobile.

• In an aluminum factory, various grades of bauxite are mixed,

heated, and cast into ingots of different sizes.

• In a hospital, patients are helped to become healthier individuals

through special care, meals, medication, lab work, and surgical

procedures. Obviously, “operations” can take many different forms.

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Manufacturing operation versus service operations
• Manufacturing implies production of a tangible output,
such as chair, table, whiteboard, pen or anything else
that we can see or touch.
• A service, on the other hand, generally implies an act
such as showing a theater.
• The majority of service jobs fall into these categories:
– government, wholesale/retail, financial service,
health care, personal services, business services,
21
telecommunication and education.
• Manufacturing and services are often similar in terms of
‘what is done’ but different in terms of ‘how it is done’.
• For example, both involve design and operating
decisions.
– Manufacturers must decide what size factory is
needed, and
• service organizations must decide what size building is
needed. Both must make location decisions, schedule
and control operations, and allocate scarce resources.
22
The difference involves the following:
• Customer contact:
– service involves a much higher degree of customer contact than
manufacturing
– performance of a service occurs at the point of consumption
– manufacturing often occurs in an isolated environment, away from
the customer.
– Customers are sometimes a part of the system such as in the case
of self service operations, so tight control is not possible.
– Service operations, because of their contact with customers, can be
much more limited in their range of options in these areas. 23
 Cont.
• Uniformity of input: ……

– service operations has more variability inputs than

manufacturing
– Consequently, job requirements for manufacturing are
generally more uniform than for services.
• Labor content of the jobs –
– because of the on site consumption of services and the high
degree of variation of inputs,
• services require a higher labor content,
• where as manufacturing can be more capital intensive
24
 Cont.
• Uniformity of output – ……
– manufacturing tends to be smooth and efficient

• because of high mechanization generates products with low variability,;

– service activities sometimes appear to be slow and awkward/ difficult, and

output is more variable.

• Measurement of productivity –

– it is more straight forward in manufacturing due to the high degree of

uniformity

– In service operations, variations in demand intensity and requirements

from job to job make productivity measurement considerably more

difficult.
25
 Cont.
……
• Quality assurance –

– is more challenging in service when production and

consumption occur at the same time.

– Quality at the point of creation is typically more important

for services than for manufacturing, where errors can be

corrected before the customer receives the output.

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 Summary of the difference between manufacturing &
service operations
Manufacturing
Characteristic Service
Tangible
Out put Intangible
Low
Contact with customer High
High
Uniformity of input Low
Low
Labor content High
High
Uniformity of output Low
Easy
Measurement of Difficult
productivity
Output can be
Storage Not
inventoried
Long lead times
Delivery time Short lead time
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• In reality most firms are not selling purely services or goods rather
manufacturers provide many services as part of their product
• In essence goods are considered as vehicles for services.
• In services outputs cannot be inventoried while for goods products
can be invigorated
• There is extensive customer contact for service while for goods
production customer contact is little
• The lead-time is short for services (delivered immediately on spot
e.g. doctor) while for goods it is long.
• Service quality determined with difficulty
– customer service and customer satisfaction are difficult to
28
 Operations Decision making and operations
strategies
• Operations managers manage all the activities of the production
system,
• Operations managers’ manage by making decisions about all
activities of production systems.
• These decisions can be broadly categorized into three:
• Strategic decision –
– are decisions related to products, processes and facilities.
– concerned with long range plan for a company.
– Examples of strategic decisions include:
• Product and production process: whether to launch a new
product development project; and design for a
production process for a new product. 29
– Allocating resource to strategic alternatives:
• how to allocate scarce raw materials, utilities,
production capacity, and personnel among new and
existing business opportunities.
– Long range capacity planning and facility location:
• how much long range production capacity and
• what new factories are needed and where to locate
them.
• Facility layout:
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–
• Operating decisions:
– concerned with decisions about planning production to meet demand.

– These decisions are necessary if the ongoing production of goods and

services is to satisfy the demand of the market and provide profits for the
company.

– In carrying out this responsibility, numerous decisions are made such as:

• Production planning systems:

– companies aggregate production planning and master

production schedule
• Independent demand inventory system:

– how much finished goods inventory to carry for each

product 31
– Resource/materials requirement planning system:
• planning materials and capacity requirements
– Shop-floor planning and control:
• short range decisions about what to produce and
when to produce at each work center.
– Planning and scheduling service operations:
• decisions about planning and controlling production
of service
– Materials management and purchasing:
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• Control/ tactical Decisions –
– are concerned with decisions about planning &
controlling operations.
– Concerned with the day to day activities of workers,
quality of products and services, production and
overhead costs, and maintenance of machines.

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 Productivity measurements
• Productivity is a common measure of how well a country,
industry or business unit is using its resources (or factors
of production).
• In its broadest sense, productivity is defined as:
• Productivity = Output
Input

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• To increase productivity, we want to make this ratio of
output to inputs as large as practical.
• Productivity is what we call a relative measure.
• In other words, to be meaningful, it needs to be compared
with something else.
• Comparison can be made with similar operations within
its industry, or it can measure productivity over time
within the same operation.
• One of the primary responsibilities of an operations
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1. Productivity is an index that measures
– output (products and services) of an organization relative to the

– inputs (labor, materials, energy, and other resources) used to produce them.

Productivity = Total outputs of the firm

Total inputs used by the firm

• Here outputs represent desired results whereas inputs represent the resources
used to obtain those results.
• In all cases, outputs and inputs must be quantifiable measures to obtain
meaningful productivity ratio.
36
2. Productivity is a process whereby an organization
effectively and efficiently

– converts its resources into the products and services it

offers for sale.

• Effectiveness is obtaining desired results; it may reflect

output quantities, perceived quality, or both.

• Efficiency occurs when a certain output is obtained with a

minimum of input.

• In order to assure that productivity measures captures what

37
• Productivity = effectiveness or value to customer
Efficiency cost to produce

• Note – Effectiveness is doing the right things, and efficiency is doing

things right.

• In general productivity is a common measure of how well a country,

industry or business unit is using its resources (or factors of

production)

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 CHAPTER TWO

Operations Strategy

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 Operations Strategy & Competitiveness
• A Strategy is an integrated and coordinated set of
commitments and actions designed to gain a competitive
advantage.
• Operations strategy is concerned with both

– what the operation has to do in order to meet

current and future challenges and
– also is concerned with the long-term development of
its operations resources and processes so that they
can provide the basis for a sustainable advantage 40
LEVELS OF STRATEGY

Corporate level

Business level

Functional level

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42
1. Corporate level strategy

• Highest level of strategy.

• It sets the long-term direction and scope for the whole

organization.

• concerned with what those businesses should be, how

resources will be allocated between them, and how
relationships between the various business units and corporate
centre managed.

• Organizations often express their strategy in the form of a

corporate mission or vision statement. 43
2. Business level strategy

• How a particular business unit should compete within its

industry.

• Depending upon the organization’s corporate strategy a business

unit’s strategy may be constrained by a lack of resources or
strategic limitations placed upon it by the centre.

• In single business organizations, business level strategy is

synonymous with corporate level strategy.

44
3. Functional level strategy

• The bottom level of strategy is that of the individual function

(operations, marketing, finance, etc.)

• concerned with how each function contributes to the business

strategy, what their strategic objectives should be and how

they should manage their resources in pursuit of those

objectives.
45
Operations Strategy of Manufacturing/Services

• ‘Operations strategy concerns the pattern of

strategic decisions and actions which set the role,

objectives and activities of operations’.

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 Five operations strategy
• Cost: The ability to produce at low cost.

• Quality: The ability to produce in accordance with specification and without

error.
• Speed: The ability to do things quickly in response to customer demands.

• Dependability: The ability to deliver products and services in accordance

with promises made to customers.
• Flexibility: The ability to change operations. Four aspects:

– i. The ability to change the volume of production.

– ii. The ability to change the time taken to produce.
– iii. The ability to change the mix of products or services
– iv. The ability to innovate/introduce new products/ services. 47
 CORE COMPETENCE
• Core competency is what a firm does better than anyone else, its
distinctive competence.
• It can be exceptional service, higher quality, faster delivery, lower
cost etc.

• Based on experience, knowledge, and know-how, core competencies

represent sustainable competitive advantages (they are not static.

• They should be nurtured, enhanced, & developed over time.

• To avoid core competence problems, companies need to continually

evaluate the characteristics of their products or services that prompt

48
customer purchase; that is, the order qualifiers and order winners
 CORE COMPETENCE
• Order qualifiers are the characteristics of a product
or service that qualify it to be considered for
purchase by a customer

• An order winner is the characteristic of a product

or service that wins orders in the marketplace—the
final factor in the purchasing decision.

• Order winner is a criterion that differentiates the

49
 Competitiveness, Strategy, and Productivity
Competitiveness:
• How effectively an organization meets the wants and
needs of customers relative to others that offer similar
Businesses
goods orCompete
services Using Marketing
• Identifying consumer wants &
needs
• Pricing
• Advertising and promotion
Businesses Compete Using Operations
• Product and service design, Cost, Location, Quality,
Quick response
• Flexibility, Inventory management, Supply chain 50
 Strategy

• Strategies
– Plans for achieving organizational goals
• Mission
– The reason for existence for an organization
• Mission Statement
– Answers the question “What business are we in?”
• Goals
– Provide detail and scope of mission
• Tactics
– The methods and actions taken to accomplish strategies

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Planning and Decision Making

Mission

Goals

Organizational Strategies

Functional Goals

Finance Marketing Operations

Strategies Strategies Strategies

Tactics Tactics Tactics

Operating Operating Operating

procedures procedures procedures
52
Example 1 Strategy Example

Rita is a high school student. She would like to have a

career in business, have a good job, and earn enough
income to live comfortably

Mission: Live a good life

• Goal: Successful career, good income
• Strategy: Obtain a college education
• Tactics: Select a college and a major
• Operations: Register, buy books, take courses, 53
 Examples of
Strategies Strategy and Tactics
• Low cost • Distinctive Competencies
• Scale-based The special attributes or abilities
strategies that give an organization a
competitive edge.
• Specialization
• Flexible operations – Price
• High quality – Quality
• Service
– Time
– Flexibility
– Service
– Location 54
 Examples of Distinctive Competencies
Price Low Cost Wall Mart
Everyday low price

Quality High-performance design or Sony TV

high quality Consistent Lexus, Cadillac
quality Pepsi, Kodak, Motorola

Time Rapid delivery Express Mail, Fedex,

On-time delivery Five-minute photo, UPS

Flexibility Variety Burger King

Volume Supermarkets

Service Superior customer service Disneyland

Nordstroms

Location Convenience Banks, ATMs

 Operations Strategy
• Operations strategy – The approach, consistent with organization
strategy, that is used to guide the operations function.

Strategy Formulation

• Distinctive competencies
• Environmental scanning
• SWOT
• Order qualifiers Vs Order winners

56
 Factors Key Internal Factors

• Economic conditions • Human Resources

• Political conditions • Facilities and equipment

• Legal environment • Financial resources

• Technology • Customers

• Competition • Products and services

• Markets • Technology

• Suppliers
57
 Strategic perspective
 Organizational Strategy
 The general thrust of the process could be guided by
competition and market conditions in the industry
 Where is the industry now/What are the existing and potential
market/ what market gab exists/Where will it be in the future
 Situational analysis and market gab analysis
 After assessing, considering the following four priorities
organizational strategy must be developed
 Quality (product performance)
 Cost efficiency(low product cost)
 Dependency(Reliable, timely delivery)
 Flexibility( responsiveness in product and volume change)
58
 Operations Corporate strategy

Strategy Model
Business strategy

Operations Strategy
Internal
analysis Mission
Functional strategies in
Distinctive marketing, finance,
Competence engineering, human
resources, and
External Objectives information systems
analysis (cost, quality, flexibility, delivery)
Policies
(process, quality systems, capacity,
and inventory)

Consistent pattern of decisions

Results 59
• Distinctive Competence

• “Something an organization does better than any competing

organization that adds value for the customer.”

• Operations Competence

• To be sustainable, a distinctive competence must not only

be unique, it must be difficult to imitate or copy.

• Examples of Operations Distinctive Competence

• Skills of employees, Proprietary equipment or processes
• Rapid continuous improvement, Well developed partnerships
• Location, Organizational knowledge, Proprietary information60
 Operations Strategic Objectives
• The major strategic objectives are:
– Quality
– Flexibility—schedule or product change
– Delivery
• Time
• Reliability
– Cost efficiency
• How does a firm use them to gain a
competitive advantage, and how do they
trade-off? 61
 Linking Operations to Business Strategies
• Business strategy alternatives
– Product imitator (operational excellence) business strategy
• Typical of mature, price sensitive market with standardized
product (operations mission would emphasize cost as
dominant objective and operations should strive to reduce
costs)
• Operations must focus on keeping costs low.
• Order winner price for the customer; this implies the need
for low cost in operations, marketing and finance
– Product innovation (new-product introduction, product
leadership)
• Emerging & possibly growing market by bringing out
superior quality product. Price would not be the dominant
form of competition 62
 Chapter Three

Product and Service Design

63
 Product and service design
• The essence of an organization (a company) is the
goods and services it offers –
– Every aspect of the organization (company) is
structured around them.

• Product and service design – or redesign – should

be closely coupled to an organization’s strategy.
 What Does Product & Service Design Do?

1. Translates customer wants and needs into product and service

requirements

2. Filter existing products and services

3. Develops new products and services

4. Formulates quality goals

5. Formulates cost targets

6. Constructs and tests prototypes

7. Documents specifications

8. Translates product and service specifications into process specifications

(Involves Inter-functional Collaboration)

 Types of New-Product Approaches

1. Technology push
• Once the perceived value of tech. is great, technology push
usually result.
• When the new product is developed, marketing function
becomes important.
2. Market pull
• It is the result of market research and understanding the
needs of users and development a new product to satisfy
 Product Development and Strategy in Business Marketing

• Product development is engineering responsibility.

• Marketing and sales personnel are frequently called

on new product.
• It is the lifeblood of the industry; therefore, firms
should spent time and effort to developing new
product.
• However, it is a risky effort for every industrial
firm.
 Categories of New Products

• Incremental or unoriginal Products (Modification)

– Are hybrids or enhancements of existing products.
– Require minimal changes in design or process, allowing for
quick
development.
– Require fewer resources to develop new features or functions.
– Help ensure near-term cash flows by maintaining current market
share.
 Cont’d…

• Next Generation or Platform Products (Minor

Innovation)

– Represent new “system” solutions for customers.

– Require more resources to develop.

– Are key to continued product revenue growth.

• Advance or Radical Products (Major Innovations)

– Create new product categories as core businesses.

– Require substantial design and process change.

– Render existing products obsolete in long-term.

 The Product Life Cycle
• PLC is a concept that seeks to describe a product’s
sales, competitors, customers, and marketing emphasis
from its beginning until it is removed from the market.
• Companies often desire a balanced product collection.

• The life-cycle concept can be applied to a product class,

a product form, and a product brand (Trade Name).
Cont’d…
 Life Stage Strategies
1. Introduction
– Consider trade-offs between eliminating ‘bugs’ and
getting the
product or service to the market at an advantageous time
– Accurate demand forecasts are important to ensuring
adequate
capacity availability
2. Growth
– Demand forecasts are important to ensuring a continued
adequate
capacity availability
– Design improvements
 Cont’d…

3. Maturity
– Relatively few design changes
– Emphasis is on high productivity and low cost
4. Decline

– Continue or discontinue product or service

– Identify alternative uses for product or service
– Continued emphasis on high productivity and low
cost
73
 Why do (New) products fail?

• Competitors’ reaction • Too little marketing

• Poor positioning support

• Poor timing • Poor perceived

• Poor quality price/quality

• Failure of promised • Poor long-term planning

benefits • Lack of a differential

 Cont’d…

• Faulty estimate market potential and demand

• Faulty estimate of production and marketing cost

• Improper selection of distribution channels

• Unexpected change in the economy after introduction

• Lack of managerial synergy-marketing, engineering and

production

• Inattention to the environment of marketing and audit

sequences

• Marketing myopia (shortsightedness) 75

 Importance of Product Planning
• Increased Competition:
Increased global and domestic competition.

• Resulting Demand:
understanding consumer needs and wants.

• Increased buying Sophistication:

Seller analysis, value analysis and computer

simulations.

• Labor Saving Requirements:

 New Product Development Process

• New product- A product is anything that can be

offered to a market to satisfy needs and wants.

• A New product is any product which is perceived

by the customer as being new.

 Cont’d…

• New product Categories…….

– New to the world.

– New to the product lines.

– Additions to the existing product line.

– Improvements & revisions of existing products.

– Repositioning.

– Cost reductions. 78
 New Product development Process

• New Product Development is the development of original

products, product improvements, product modifications, and new
brands through the firm’s own R & D efforts.
• This process consist of following steps:
i. Idea Generation.
ii. Idea Screening.
iii. Concept Development & Testing.
iv. Marketing Strategy Development.
v. Business Analysis.
vi. Product Development.
vii. Market Testing.
viii.Commercialization.
 New Product development Process…

i. Idea Generation

• Idea generation is continuous, systematic search for new

product opportunities.

• Ideas form using creativity generating techniques and

generated through firm’s Internal Sources & external

Sources.
 Cont’d…

ii. Idea Screening.

• Filtering the ideas to pick out good ones & dropping the

poor ones.

• It involves a preliminary elimination process in which a

large number of product ideas are screened in terms of

the organization’s objectives, policies, technical

feasibility, and financial viability.

• Total ideas are categories into three group. 81

iii. Concept Development
& Testing
• Here, the Product Idea is converted into product concept.
• Product Ideas means possible product that company may
offer to the market.
• A product concept is a detailed version of the idea stated
in meaningful consumer terms;
When developing product concept following criteria
should be consider?
Who will use the product?
What primary benefit should this product provide?
When will this product be consumed?
• Concept Testing means presenting the product concept to
target consumers, physically or symbolically, and getting
their reactions.
iv. Marketing Strategy Development

• After concept testing, for concepts that qualify a

preliminary marketing strategy is created to introduce
new product into market.
V. Business Analysis.
• This stage will decide whether from financial as well as
marketing point of view, the project is beneficial or not.
In Business Analysis; Estimate likely selling price
based upon competition and customer feedback.
Estimate sales volume based upon size of market.
Estimate profitability and break-even point.
• If above are match with the company's objectives, then
the new product concept moves to product development
stage.
Vi. Product Development

• Up to now, the product has existed only as a word

description, a drawing.

• The company will now determine whether the

product idea can translate into a technically and
commercially feasible product.

• Produce a physical prototype Test the product

Conduct focus group customer Make adjustment.
Vii. Market Testing

• Now the product is ready to be branded with a name, logo,

and packaging and go into a preliminary market testing.
• involves placing a product for sale in one or more selected
areas and observing its actual performance under the
proposed marketing plan.
• Methods for market testing:
– Sales wave research.
– Simulated test marketing.
– Controlled testing marketing.
Viii. Commercialization

• After successful market testing, new product comes to

commercialization

• During this stage, production of new product on a

commercial basis is rapidly built up and implementing a
total marketing plan.

• For formally launching a New Product, the following

decisions to be taken:

– When to launch (Timing)

–
 Service Design

• It is an emerging discipline and an existing body of

knowledge, which can dramatically improve the
productivity and quality of services.
• It provides a systematic and creative approach to:
Meeting service organizations' need to be competitive
Meeting customers’ rising expectations of choice and
quality
Making use of the technologies’ revolution, that
 Cont’d…

Answering the pressing environmental, social and

economic challenges to sustainability
Fostering innovative social models and behaviors
Sharing knowledge & learning

• They also provided the format for a service designer’s

responsibilities:
• “The Service Designer can:
visualize, express and choreograph what other people
can’t see, envisage solutions that do not yet exist
 Cont’d…

observe and interpret needs and behaviors and

transform them into possible service futures
express and evaluate, in the language of experiences,
the quality of design”
• As well as setting out expectations for the way service
design would perform:
– Service Design aims to create services that are
Useful, Useable, Desirable, Efficient & Effective

89
 Cont’d…

– Service Design is a human-centred approach that

focuses on customer experience and the quality of service
encounter as the key value for success.
– Service Design is a holistic approach, which considers
in an integrated way strategic, system, process and touch
point design decisions
– Service Design is a systematic and iterative process
that integrates user-oriented, team-based,
interdisciplinary approaches and methods, in ever-
learning cycles."
 The Well-Designed Service System

• Having value that is obvious to the customer

Characteristics:
• Having effective linkages between back-
– Being consistent with and front-of-the house

• operations – Having a single, unifying

the organization mission
theme
– Being user-friendly • Having design features and checks that will

ensure service that is

– Being easy to sustain
• reliable and of high quality
– Being cost-effective
 Process Selection
• It plays an important part in over all design

of production & operations management systems.

• It

allows an organization to offer a safe and reliable product

& service through pragmatic design &

effective capacity planning.

• With the help of process selection we can understand

the different types

 Cont’d…
• It allows an operations manager to better understand

the need for management of technology.

• Together with capacity planning it helps an organization to develop

different approaches to meet the irregular demand pattern of the customers.

• Process Selection refers to the way an organization chooses to produce its

good/service

• It takes into account selection

of technology, capacity planning, layout of facilities, and design

of work systems

• It is a natural extension after selection of new products and services.

93
 Cont’d…
• An organizations process strategy would include

1. Make or Buy Decisions:

• The extent to which an organization will produce goods or provide in

house as opposed to relying on an outside organization to produce

or provide them.

2. Capital Intensity:

• The mix of equipment and labor will be used by the government.

3. Process Flexibility:

• The degree to which the system can be adjusted

to changes in processing requirements due to such factors

 Operations Strategy with respect to process selection

• OS has the quality of being fine tuned whenever we discuss a new idea,

process selection is no different, and we can formulate a process selection

based operations strategy as follows;

1. Hire and Promote Managers -Managers

who have both Technical and Managerial Skills.

As engineers fail in managerial decisions and managers end up relying on

engineers.

2. Flexibility as a competitive strategy to be incorporated at all levels.

3. Judicious use of Automation as unnecessary Automation causes increase

in cost and a subsequent increase in product and inventory.

 Strategic Capacity Planning

• The overall objective: to reach an optimal level

where production capabilities meet demand.
• Capacity needs include equipment, space, and
employee skills.
• If production capabilities are not meeting
demand, it will result in higher costs, strains on
resources, and possible customer loss.
 Cont’d…

• It is important to note that capacity planning has many

long-term concerns given the long-term commitment of
resources.
• Managers should recognize the broader effects capacity
decisions have on the entire organization.
• Common strategies include leading capacity, where
capacity is increased to meet expected demand,
and following capacity, where companies wait for
demand increases before expanding capabilities.
97
 Cont’d…

• A third approach is tracking capacity, which adds

incremental capacity over time to meet demand.

• Finally, the two most useful functions of capacity

planning are design capacity and effective capacity.

a. Design capacity refers to the maximum designed

capacity or output rate and

b. Effective capacity is the design capacity minus

personal and other allowances.

 Cont’d…

• These two functions of capacity can be used to

find the efficiency and utilization.
• These are calculated by the formulas below:
– Efficiency = (Actual Output / Effective Capacity) x
100%
– Utilization = (Actual Output / Design Capacity) x
100%
– Effective Capacity = Design Capacity –
allowances
 Capacity Planning for Products and Services
• Capacity refers to a system’s potential for producing

goods or delivering services over a specified time

interval.

• Capacity planning involves long-term and short- term

considerations.

• Long-term considerations relate to the overall level of

capacity; short-term considerations relate to variations in

capacity requirements due to seasonal, random, and

 Cont’d…

• This often means that the demand in the market for the

product is below what the firm could potentially supply to

the market.

• Excess capacity is inefficient & will cause manufacturers

incur extra costs.

• Capacity can be broken down in two categories: Design

Capacity and Effective Capacity.

• Three key inputs to capacity planning are:

 Determinants of Effective Capacity

1. Facilities: The size and provision for expansion are key in the design
of facilities.

• Other facility factors include locational factors, such as transportation

costs, distance to market, labor supply, and energy sources.

• The layout of the work area can determine how smoothly work can be
performed.

2. Product and Service Factors: The more uniform the output, the more
opportunities there are for standardization of methods and materials .

• This leads to greater capacity.

 Cont’d…

3. Process Factors: Quantity capability is an

important determinant of capacity, but so is output
quality.
• If the quality does not meet standards, then output
rate decreases because of need of inspection and
rework activities.
• Process improvements that increase quality and
productivity can result in increased capacity.
• Another process factor to consider is the time it
takes to change over equipment settings for
different products or services.
 Cont’d…

4. Human Factors: the tasks that are needed in certain jobs,

the array of activities involved, and the training, skill, and
experience required to perform a job all affect the
potential and actual output.

• Employee motivation, absenteeism, and labor turnover all

affect the output rate as well.

5. Policy Factors: Management policy can affect capacity

by allowing or disallowing capacity options such as
overtime or second or third shifts.
 Cont’d…

6. Operational Factors: Scheduling problems may

occur when an organization has differences in
equipment capabilities among different pieces of
equipment or differences in job requirements.
• Other areas of impact on effective capacity
include inventory stocking decisions, late
deliveries, purchasing requirements, acceptability
of purchased materials and parts, and quality 105
 Cont’d…
8. Supply Chain Factors: 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?

• If capacity is to be decreased, what impact will the loss of

business have on these elements of the supply chain?

9. External Factors: Minimum quality and performance standards

can restrict management’s options for increasing and using capacity.
 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
Facility Location and Layout

108
• Concept of Facility Location:-

– Facility location may be defined as a place where the

facility will be set up for producing goods or services.

– The need for location selection may arise under any of

the following conditions:

a. When a business is newly started.

b. When the existing business unit has outgrown its

original facilities and expansion is not possible;

 Cont’d…

a. When the volume of business or the extent of market

necessitates the establishment of branches.

b. When the lease expires and the landlord does not

renew the lease.

c. Other social or economic reasons.

110
 Need for Facility Location Planning
• It is also required for providing a cost benefit to the

organization.

• The location planning should help in reducing the

transportation cost for the organization. This ultimately

helps in decreasing the cost of production and generating

cost advantage for the organization.

• It is also needed to identify proximity to the sources of raw

materials and transportation facilities.

Factors Affecting Facility Location Decisions
• While selecting a facility location, an organization should

consider various factors that may have significant impact

on its performance.

• These factors are explained below:

➢ Availability of power ➢ Transportation

➢ Suitability of climate ➢ Government

policy

➢ Competition between states ➢ Availability of

 Procedures & Techniques for Selecting Facility
Location

• An organization follows certain steps to make a correct

location choice.

• These steps are:

1. Decide on the criteria for evaluating location

alternatives

2. Identify important factors

3. Develop location alternatives

4. Evaluate the alternatives

Following are some main techniques used in making location decisions:

➢ Location rating factor technique:

• In the location factor rating system, factors that are

important in the location decision are identified and

selected based on the weightage of factors and the score

obtained by each location.

• In this technique, first of all an organization needs to

identify the factors that influence its location decision.

 Cont’d…

• Next, each factor is provided a weight between ‘0’ to

‘1’ according to the level of importance, where ‘0’
denotes least important and ‘1’ denotes most
important.
• The advantage of this technique is that the decision of
location is taken by accommodating all possible
factors of location.

115
• Example of Location factor rating:

– The Dynaco Manufacturing Company is going to build a

new plant to manufacture ring bearings (used in

automobiles and trucks).

– The location selection team is evaluating three sites, and

they have scored the important factors for each as follows.

– They want to use these ratings to compare the locations.

 Scores (0 to 100)
Location Factor LOC
Weight LOC 1 LOC 2 3

Labor cost & availability 0.30 45 58 72

Proximity to suppliers 0.20 88 56 20

Labor skills 0.15 52 70 50

Infrastructural facilities 0.15 67 35 45

Government support 0.10 62 46 55

Solution:
Step 1: Calculate the weighted scores of each location (Factor
weightage x location score)
Weighted Scores
Location Factor LOC
Weight LOC 1 LOC 2 3
Labour cost and availability 0.30 13.50 17.40 21.60
Proximity to suppliers 0.20 17.60 11.20 4.00
Labour skills 0.15 7.80 10.50 7.50
Infrastructural facilities 0.15 10.05 5.25 6.75
Government support 0.10 6.20 4.60 5.50
Market novice 0.10 5.00 5.50 5.20
TOTAL SCORE 60.15 54.45 50.55
•As Location 1 has the maximum total score, that location should be
chosen for the plant.
• Factor rating method
• Factor ratings are frequently used to evaluate
location alternatives because
– their simplicity facilitates communication about why
one site is better than another
– they enable mangers to bring diverse location
consideration into the evaluation process
– Then faster consistency and judgment about location
alternatives.
• Procedures:

• List the most relevant factors in the location

decision

• Assign a weigh to each factor that indicates its

relative importance compared with all other

factors.
• Decide on a common scale for all factors. Each

factors should be rated, say form 1 (very low ) to

5 (very high) , according to its relative

importance

• Score rate each location alternative (1-100)or (1-

• Multiply factor weight or rate by the score

(location rate for each factor , and sum the results

for each location alternatives

• Choose the location that has the highest

composite score.
Centre-of-gravity technique:

➢ This technique emphasizes on transportation cost in the

determination of facility location.

• Transportation cost mainly depends on distance, weight

of merchandise and the time required for transportation.

• Centre-of-gravity maps various supplier locations on a

Cartesian plane and suggests a central facility location

with respect to the locations of suppliers.

123
 Center-of-gravity technique

• Center-of-gravity technique assumes that transportation cost

is the major factor determining location, and transportation
cost is the function of distance, weight, and time.

• This method identifies a set of coordinates designating a

central location on a map relative to all other locations.

• The starting point for this method is a grid map set up on a

Cartesian plane, as shown in Figure below.
Cont.……

125
 Example: Center-of-gravity technique
• Abebe Bakery purchases ingredients from four different material

suppliers. The company wants to construct a new baking unit to

process and package the confectioneries before transporting them

to their various retail shops.

• The suppliers transport ingredient items in 40-foot truck trailers,

each with a capacity of 38,000 kgs.

• The locations of the four suppliers, A, B, C, and D, and the annual

number of trailer loads that will be transported to the distribution

center are shown in the following figure:

 Cont.……

• If the Bakery is focusing on minimizing transportation

cost of materials by locating the baking unit centrally,
identify the possible location for the baking unit.

127
How to calculate the coordinates of desired
location?

•
 Solution: Center-of-gravity technique

Parameters A B C D SUM
Xi 200 100 250 500
Yi 200 500 600 300
wi 75 105 135 60 375
x i wi 15000 10500 40500 30000 96000
y i wi 15000 52500 81000 18000 166500

•
Solution (Continues…): Center-of-gravity technique
700

600 600

500 500

444
400

300 300

200 Series1; 200

100

0
50 100 150 200 250 300 350 400 450 500 550
PROCESS SELECTION
DECISION
 Types of Operation
• The degree of standardization and the volume of

output of a product or service influence the way

production are organized.

• Output can range from high volume, highly

standardized, to low volume, highly customized.

• There are three types of product flows:

• In manufacturing, product flow is the same as material

flow, since materials are being converted into a product.

• In pure service industries, there is no physical product

flow, but there is, nevertheless, a sequence of operations

performed in delivering the service.

• This sequence of service operations is considered as the

“product flow” for service industries.

Continuous Production Process/Line flow

• it is a system that produces highly uniform

products or continuous services,

• often performed by machines.

• Example: refineries, paper plants, chemical
plants, automobile industries, flour milling,
electric utility, etc.
• It is characterized by:

– A linear sequence of operations used to make

the product or service.

– The product is well standardized and must flow

from

one operation or workstation to the next in a

– There may be side flow which impinges on this line,

but they are integrated to achieve a smooth flow

– It usually yields a lower unit cost for the product or

service being produced due to economies of scale

– Storage costs per unit are usually lower, as the

raw materials are stored only briefly and work

in progress inventories move through the plant

very rapidly.

– The time required for production is very shorter

– Fixed path materials handling equipment like

– It requires large investment because it uses special

purpose machines, etc.

– The marketing effort focuses on developing

distribution channels for the large volume of output

and persuading customers to accept standardized

products.
 Mass Production
• Manufacture of discrete parts or assemblies using

a continuous process are called Mass Production.

• This production system is justified by very large

volume of production.

• The machines are arranged in a line or product

• Product and process standardization exists and all

outputs follow the same path.

• Mass Production is characterized by

– Standardization of product and process sequence.

– Dedicated special purpose machines having

higher production capacities and output rates.

– Large volume of products.

– Shorter cycle time of production.

– Lower in process inventory.

– Perfectly balanced production lines.

– Flow of materials, components and parts is

continuous and without any back tracking.

– Production planning and control is easy.

– Material handling can be completely automatic.

 Intermittent processing
• it is a system that produces lower volumes of

items or services with a grater variety of

processing requirements.

• Volume is much lower than in continuous

system.
Similar
equipment
& skills are
organized
• are characterized by general purpose equipment
that can satisfy:
– variety of processing requirement,

– semiskilled or skilled workers who operate the

equipment, and
– narrow span of supervision than for most
continuous system.
• Thus investment requirement is low.

• Equipment and labor are organized into work

centers by similar types of skills and/or knowledge

or equipment.

• A product or job will then flow only to those work

centers that are required and will skip the rest.

 There are two major types of intermittent processing:

• Batch processing –

– is an intermittent processing system used to

produce moderate volumes of similar products.

• Food processors (example, bakeries, and

canneries) typically produce in batches.

• The processing requirement and equipment are the

same, but some of the ingredients vary from one

batch to the next.

• Batch output can be:

– standardized (example: paint, ice cream, canned

vegetables) or
• Job shop –

– it is an intermittent processing system designed

to handle a greater variety of job requirements

than batch processing.

– It is a system that renders unit or small lot

production or service with varying

– It maintains the ability to perform certain types of

operations but generally nor responsible for

specific products.

– Instead, it performs to customer specification;

jobs tend to vary according to the needs of

customers.
• Lot sizes vary from large to small, even a single unit.

• What distinguishes the job shop operation from

batch processing is that the job requirements often

vary considerably from job to job.

• This means that the sequence of processing steps and

the job content of the steps also vary considerably.

• Difference in job processing requirements add

routing and scheduling complexities, as well as a

frequent need to adjust equipment settings or

make other alterations for successive jobs.

• Processing cost per unit is generally higher than it

is under continuous processing.

 Project production process

• it is a system where by non repetitive set of

activities directed toward a unique goal with a

limited time frame. It is

– Used to produce a unique product such as a

work of art, a concert, a building or a motion

– no product flow for a project; but, there is still

a sequence of product operations.

– all individual operations or tasks should be

sequenced to contribute to the final project

objective
– A significant problems is the planning,

sequencing and controlling of the individual

tasks leading to completion of the entire project.

– Used when there is a greater need for creativity

and uniqueness
– Automation is difficult in the case of projects as
they are done only once.

– Projects involve high cost and difficulty in

managerial planning and control as it is hard to

define initially with a great probability of

changes in the meantime.

– Examples; include construction buildings,
 CAPACITY PLANNING

• Capacity is the upper limit or ceiling on the load

– (demand for a product or service) that an

operating unit can handle.

• Capacity is the rate of o/t that can be achieved

from process.
• Design capacity is the rate at which a firm would

like to produce under normal circumstances and

for which the system was designed.

• Maximum capacity is used to describe the

maximum output rate that could be achieved when

productive resources are used to their maximum.

• However, at this maximum level, utilization of

resources may be inefficient

– (for example, increasing energy costs, the need

for overtime, higher maintenance costs, etc.).

• An Operations Manager is supposed to identify tactics and

formulate a strategy in order to answer the basic questions

with respect to capacity handling. These questions are:

– What kind of capacity is needed?

– How much is needed?

– When is it needed?
• Importance of Capacity Decisions

– Capacity decisions impacts ability to meet

future demands & affects operating costs.

– These decisions often act as a major

determinant of initial costs, as they involve

long-term commitment.

– These decisions affect competitiveness and

 – Capacity Decisions focus on globalization as it

is more complex and impacts long range

planning.

• Impacts ability to meet future demands –

– Capacity essentially limits the rate of possible

output.
• An international automobile manufacturer of good

repute increased its production by working on its

capacity decision after its quality product received a

lot more demand than it was originally anticipated.

• Affects operating costs –

– We already know that estimated or forecasted

demand differs from actual demand, so the ideal

concept of capacity matching demand is untrue.

– Organizations should be willing to take a critical

decision to balance the cost of over and under

capacity.
 – Overcapacity reflects overkill of resources and

under capacity shows a weak management

philosophy to make best use of an available

market.
• Acts as a major determinant of initial cost

– It is typical to see that the greater the capacity

– This does not mean it is advocating a one to one

relationship for higher capacity for production to costs; in

fact larger units tend to cost proportionately less than

smaller units.

– E.g. Kallitie Steel Mill at Addis Ababa is one good

example, where higher costs are misunderstood as the mills

capacity is not being fully utilized

• Involves long-term commitment

– Once long term commitments of resources have been

taken, the difficulty of reversing would cost more.

– Indicating a capacity increase or decrease for an

organization set up would mean additional costs.

• Affects competitiveness

– This is very critical, if a firm has an

excessive capacity or can quickly add

capacity, which fact may serve as a barrier

against entry by other firms.

• Affects ease of management

– Capacity increase or decrease decisions

involves management to answer the question of

operating the organization as well as an

increase or decrease in the plant capacity.

• Globalization adds complexity

• Capacity decision often involves making

a decision in a foreign country which

requires the management to know about

the political, economic and cultural

issues.
• Impacts long range planning

– Capacity decisions extend beyond 18

months and thus get classified as long

term in nature.
• Organizations often end up making use of

monetary amount in order to show their capacity

ceiling.

• This unfortunately needs a constant updating due

to changes in price of raw materials as well as

• A simple way out is to reflect the load or

capacity in terms of unit produced but this

has the limitation that its only good for a

single unit and fails in case of multiple

types , designs of units being produced.

• A preferred type of capacity measurement is to identify

capacity in terms of availability of input units. Example:

like hospitals are identified to have a capacity of 200

beds, a workshop by its man-hours and so on and so forth.

 Factors affecting Capacity
• Operations Manager often focus on determinants

of effective capacity by taking into account both

macro and micro levels.

• At the macro levels the managers look for Supply

chain and External factors, while at the micro level

they look for operational factors including

There are 7 determinants of effective capacity namely:-

• Facilities
– The design of facilities includes the size as well
as the provision of expansion.
– transportation costs, distance to market, labor
supply, energy supply sources and the ease and
smoothness with which work can be performed.
• Product and service factors

– can have a tremendous influence on capacity.

– E.g. when items are similar, the ability of the
system to produce those items is generally
much greater than when successive items are
different and unique.

– The idea is more uniformity in the final

• Process factors
– refer to the quantity and quality requirements
of a process.
– Quantity always refers to capacity.
– Another added feature is quality of output.
– If quality of output does not match the
standard requirements it would generate
inspection and possible reworks.
• Human factors

– include skill, craftsmanship, training and qualification to

handle any job it also includes the motivational factors.

• Supply chain factors

– relate to any short coming to suppliers, warehouse

processing, operational hick up or distribution issues.

• Operational factors

– with respect to effective capacity always refer

to scheduling, late deliveries, acceptability of

purchased materials, parts, quality inspection,

control procedures and inventory problems.

– Scheduling issues arise when an organization

has a difference in equipment capabilities for

development of alternative capacities.

– Inventory problems have a negative impact on

capacity
• External factors

– include product standards, safety regulations,

unions and pollution control standards.

– At times organizations have experienced shutting

down of their facility if they could not provide

support to government regulations of pollution

control.
 Measures of capacity
• The capacity of a process is its maximum output.

• However, most operations do not work at their full

capacity, as this tends to strain the resources and

put stress on the people.

• Instead they work at a lower level so that they can

• We can arrow for these effects by defining
several types of capacity as follows:

• Design (theoretical/ideal) capacity

– is the maximum rate of O/P achieved under

ideal condition.

– it is planned (engineered) rate of output of

goods or services under normal or full scale

• Effective capacity

– is the maximum possible given a product mix,

problems in scheduling and balancing

operations, machine maintenance, quality factor,

and so on (considers some planned problems).

– It also includes lunch breaks and coffee breaks.

• Actual capacity

– the actual output of a system at a given

point in time.

– It is even less than effective capacity, for

it is affected by short-range factors

•Factors such as

• actual demand, equipment breakdowns, absenteeism,

• shortage of raw materials, productivity, and

– other factors that are outside the control of the

operations manager (tries to consider unplanned

problems).
• Note- Actual output ≤ effective capacity ≤ Design

capacity

• Capital intensive processes depend on physical

facilities, plant and equipment.

• Short-term capacity can be modified by operating

• In labor intensive processes short-term capacity can be changed

by laying off or hiring people or by giving overtime to workers.

• The strategies for changing capacity also depend upon how long

the product can be stored as inventory.

• Major short-term capacity strategies are based on inventories,

employment (hiring and firing), subcontracting, process design,

etc.
Efficiency & Utilization
• Economies of scale

• Economies of scale

– If the output rate is less than the optimal level, increasing

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

CHAPTER
4

OPERATIONS PLANNING AND

CONTROL

4.1. Aggregate Production Planning

 Aggregate Production Planning
Aggregate planning
 Determine the quantity and timing of production
for the immediate future (usually 3 to 18 months) by
adjusting the production rate, employment, inventory,
and other controllable variables.

 Aggregate planning links long-range and short-range

planning activities.

Aggregate Planning Strategies

 Several different strategies have been employed to
assist in aggregate planning. Three ―pure strategies
are recognized.
1. Vary production to match demand by changes in
employment (Chase demand strategy): This strategy
permits hiring and layoff of workers, use of overtime, and
subcontracting as required in each period. However,
inventory build-up is not used.

2. Produce at a constant rate and use inventories. (Level

production strategy): This strategy retains a stable work
force producing at a constant output rate. Inventory can be
accumulated to satisfy peak demands.

3. Produce with stable workforce but vary the utilization

rate (Stable work-force strategy): This strategy retains a
stable work force but permits overtime, part-time, and idle
time.
 These controllable variables constitute pure strategies by which
fluctuations in demand and uncertainties in production activities can
be accommodated by using the following steps:
1. Vary the size or the workforce: Output is controlled by hiring or
laying off workers in proportion to changes in demand.

2. Vary the hours worked: Maintain the stable workforce, but permit
idle time when there is a slack and permit overtime (OT) when
demand is peak.

3. Vary inventory levels: Demand fluctuations can be met by large

amount of inventory.
4. Subcontract: Constant production rates can be met by using
subcontractors to provide extra capacity.
 Aggregate Planning Strategies
• Proactive
–Alter demand to match capacity
• Reactive
–Alter capacity to match demand
• Mixed
–Some of each
 APS: Demand Options
 Demand management is proactive strategy.
1. Influencing demand
 Using advertising or promotion to increase
demand in low periods
 Using pricing differentials to shift demand
from peak periods to off-peak periods
 Attempt to shift demand to slow periods
 May not be sufficient to balance demand and
capacity
 APS: Demand Options
2. Back ordering during high- demand periods
 Requires customers to wait for an order without
loss of goodwill or the order
 Orders are taken in one period and deliveries
promised for a later period
 The success of this approach depends on how
willing customers are to wait for delivery
 Most effective when there are few if any
substitutes for the product or service
 Often results in lost sales, disappointed
customers, and perhaps additional paperwork.
 APS: Demand Options
3. Counter seasonal product and service
mixing/New demand
 Develop a product mix of counter
seasonal items
 May lead to products or services
outside the company’s areas of
expertise
 Capacity/Supply Options
1. Changing inventory levels
Increase inventory in low demand
periods to meet high demand in the
future
Increases costs associated with storage,
insurance, handling, obsolescence, and
capital investment 15% to 40%
Shortages can mean lost sales due to
long lead times and poor customer
service
 Capacity/Supply Options
2. Varying workforce size by hiring or layoffs
Match production rate to demand
Training and separation costs for hiring
and laying off workers
New workers may have lower
productivity
Laying off workers may lower morale and
productivity
 Capacity/Supply Options
3. Varying production rate through
overtime or idle time
Allows constant workforce
May be difficult to meet large
increases in demand
Overtime can be costly and may drive
down productivity
Absorbing idle time may be difficult
 Capacity/Supply Options
4. Subcontracting
 Temporary measure during periods of peak
demand
 May be costly
 Assuring quality and timely delivery may be
difficult
 Exposes your customers to a possible
competitor
5. Using part-time workers
 Useful for filling unskilled or low skilled positions,
especially in services
CHAPTER
4

OPERATIONS PLANNING AND

CONTROL

4.2. Operations Scheduling

 Operations Scheduling

• Scheduling: Establishing the timing

of the use of equipment, facilities
and human activities in an
organization.
• Effective scheduling can yield
–Cost savings
–Increases in productivity
 Strategic Importance of Scheduling
 Effective and efficient scheduling can be
a competitive advantage
 Faster movement of goods through a
facility means better use of assets and
lower costs
 Additional capacity resulting from faster
throughput improves customer service
through faster delivery
 Good schedules result in more
dependable deliveries
Forward and Backward Scheduling

 Forward scheduling፡ Schedule that determines

the earliest possible completion date for a job.

 With forward scheduling, processing starts

immediately when a job is received, regardless of
its due date.

 Each job activity is scheduled for completion as

soon as possible, which allows you to determine the
job‘s earliest possible completion date.
Backward scheduling፡
 It is a scheduling method that determines when the job
must be started to be done on the due date.

 With backward scheduling, you begin scheduling the

job‘s last activity so that the job is finished right on the
due date.

 To do this, you start with the due date and work

backward, calculating when to start the last activity,
when to start the next-to-last activity, and so forth.

 Backward scheduling shows you how late the job can

be started and still be finished on time.
 Forward and Backward Scheduling
 Backward scheduling begins with the due
date and schedules the final operation first
 Schedule is produced by working backwards
though the processes
 Often these approaches are combined to
develop a trade-off between a feasible
schedule and customer due dates

Now Due Date

 Scheduling Criteria
1. Minimize completion time
2. Maximize utilization of facilities
3. Minimize work-in-process (WIP)
inventory
4. Minimize customer waiting time
Optimize the use of resources so that
production objectives are met
 Loading
· Loading - assignment of jobs to process
centers
· Infinite
loading: Refers to jobs are assigned
to work centers with out regard to the capacity
of the work centers.
· Finiteloading: Refers to jobs are assigned to
work centers taking into account the work
center capacity and job processing times.
 Assignment Method/model
 A special class of linear
programming models that assign
tasks or jobs to resources
 Finds optimal assignment of tasks
and resources
 Objective is to minimize cost or time
 Only one job (or worker) is assigned
to one machine (or project)
 Assignment Model: Hungarian Method
1. Row reduction: subtract the smallest number in each row
from every number in the row
a. Enter the result in a new table

2. Column reduction: subtract the smallest number in each

column from every number in the column
a. Enter the result in a new table

3. Test whether an optimum assignment can be made

a. Determine the minimum number of lines needed to
cross out all zeros
b. If the number of lines equals the number of rows, an
optimum assignment is possible. Go to step 6
c. Else, go to step 4
4.
Hungarian Method (Cont’d)
If the number of lines is less than the number of rows, modify the
table:
a. Subtract the smallest number from every uncovered number in
the table
b. Add the smallest uncovered number to the numbers at
intersections of cross-out lines
c. Numbers crossed out but not at intersections of cross-out lines
carry over unchanged to the next table
5. Repeat steps 3 and 4 until an optimal table is obtained
6. Make the assignments
a. Begin with rows or columns with only one zero
b. Match items that have zeros, using only one match for each row
and each column
c. Eliminate both the row and the column after the match
 Example: Hungarian Method
· Determine the optimum assignment of jobs to
workers for the following data:

Worker

A B C D

1 8 6 2 4

2 6 7 11 10
Job
3 3 5 7 6

4 5 10 12 9
Example: Hungarian Method (contd.)
Worker
Row
A B C D minimum

1 8 6 2 4 2 Subtract the smallest

number in each row from
2 6 7 11 10 6 every number in the row
Job
3 3 5 7 6 3
4 5 10 12 9 5

Worker
A B C D
1 6 4 0 2
2 0 1 5 4
Job
3 0 2 4 3
4 0 5 7 4
Example: Hungarian Method (contd.)
Worker
A B C D
1 6 4 0 2 Subtract the smallest
2 0 1 5 4 number in each column
Job from every number in the
3 0 2 4 3 column
4 0 5 7 4
Column min. 0 1 0 2

Worker
A B C D
1 6 3 0 0
2 0 0 5 2
Job
3 0 1 4 1
4 0 4 7 2
Example: Hungarian Method (cont’d)
Worker
A B C D
Determine the minimum
1 6 3 0 0
number of lines needed to
2 0 0 5 2 cross out all zeros. (Try to
Job
3 0 1 4 1 cross out as many zeros as
possible when drawing lines
4 0 4 7 2

Since only three lines are needed to cross out all

zeros and the table has four rows, this is not the
optimum. Note: the smallest uncovered value is 1
Example: Hungarian Method (cont’d)
Worker
A B C D
Subtract the smallest
1 6 3 0 0
uncovered value from every
2 0 0 5 2 uncovered number, and add
Job
3 0 1 4 1 it to the values at the
intersection of covering
4 0 4 7 2 lines.

Worker
A B C D
1 7 3 0 0
2 1 0 5 2
Job
3 0 0 3 0
4 0 3 6 1
Example: Hungarian Method (cont’d)
Worker
A B C D
1 7 3 0 0 Determine the minimum
number of lines needed to
2 1 0 5 2 cross out all zeros. (Try to
Job
3 0 0 3 0 cross out as many zeros as
possible when drawing lines
4 0 3 6 1

Since four lines are needed to cross out all zeros and
the table has four rows, this an optimal assignment
can be made
Example: Hungarian Method (cont’d)
Worker
A B C D
1 7 3 0 0 Make assignments: Start
with rows and columns with
2 1 0 5 2 only one zero. Match jobs
Job
3 0 0 3 0 with machines that have a
zero cost
4 0 3 6 1

Assignment Cost
2-B $7
4-A $5
1-C $3
3-D $6
Total $20
 Sequencing
• Sequencing: Determine the order in which
jobs at a work center will be processed.
• Workstation: An area where one person
works, usually with special equipment, on a
specialized job.
· Priority rules: Simple heuristics used to select
the order in which jobs will be processed.
· Job time: Time needed for setup and
processing of a job.
 Priority Rules

• FCFS - first come, first served

• SPT - shortest processing time
• EDD - earliest due date
• Rush – emergency
• LPT- Longest Processing Time
• Job flow time: this is the length of time a job is at a
particular work station or work center.

• The average flow time for a group of jobs is equal

to the total flow time for the jobs divided by the
number of jobs.

• Job lateness: is the length of time the job

completion date is expected to exceed the date the
job was due or promised to a customer.
• It is the difference between the actual completion
time and the due date.
• If we only record differences for jobs with the
completion times that exceed due dates and assign
zeros to jobs that are early, the term we use refer to
that is job tardiness.
• Make span: is the total time needed to complete a
group of jobs from the beginning of the first job to
the completion of the last job.
• Example: processing time (including set up times)
and due dates for six jobs waiting to be processed
at work center are given in the following table.

• Determine the sequence of jobs, average flow

time, average tardiness and average number of
jobs at the work center for each of these rules.

A. FCFS B. SPT C. EDD

.
 Scheduling Service Operations
• Appointment systems
– Controls customer arrivals for service
• Reservation systems
– Estimates demand for service
• Scheduling the workforce
– Manages capacity for service
• Scheduling multiple resources
– Coordinates use of more than one
resource
CHAPTER
5

Quality Management and Control

 5.1. Quality Management

• What does the term quality mean?

• Quality is the ability of a product or service
to consistently meet or exceed customer
expectations.
• The totality of features and characteristics of
a product or service that bears on its ability
to satisfy stated or implied needs (American
Society for Quality)
 Different Views of Quality
 User-based – better performance,
more features
 Manufacturing-based –
conformance to standards, making it
right the first time
 Product-based – specific and
measurable attributes of the product
 Implications of Quality
1. Company reputation
 Perception of new products
 Employment practices
 Supplier relations
2. Product liability
 Reduce risk
3. Global implications
 Improved ability to compete
 Quality Assurance vs. Strategic Approach

• Quality Assurance
–Emphasis on finding and correcting
defects before reaching market
• Strategic Approach
–Proactive, focusing on preventing
mistakes from occurring
–Greater emphasis on customer
satisfaction
 Dimensions of Quality

• Performance - main characteristics of

the product/service
• Aesthetics - appearance, feel, smell,
taste
• Special Features - extra characteristics
• Conformance - how well product/service
conforms to customer’s expectations
• Reliability - consistency of performance
 Dimensions of Quality (Cont’d)

• Durability - useful life of the

product/service
• Perceived Quality - indirect evaluation of
quality (e.g. reputation)
• Serviceability - service after sale
 Service Quality
• Tangibles
• Convenience
• Reliability
• Responsiveness
• Time
• Assurance
• Courtesy
 Determinants of Quality (cont’d)
• Quality of design
–Intension of designers to include or
exclude features in a product or
service
• Quality of conformance
–The degree to which goods or services
conform to the intent of the designers
 Costs of Quality

Total Total Cost

Cost
External Failure

Internal Failure

Prevention

Appraisal
Quality Improvement
 Costs of Quality
• Failure Costs - costs incurred by defective
parts/products or faulty services.
• Internal Failure Costs
– Costs incurred to fix problems that are detected
before the product/service is delivered to the
customer.
• External Failure Costs
– All costs incurred to fix problems that are
detected after the product/service is delivered
to the customer.
 Costs of Quality (continued)
• Appraisal Costs
– Costs of activities designed to ensure
quality or uncover defects
• Prevention Costs
– All TQ training, TQ planning, customer
assessment, process control, and
quality improvement costs to prevent
defects from occurring
 Quality Certification
• ISO 9000
– Set of international standards on quality
management and quality assurance, critical to
international business
• ISO 14000
– A set of international standards for assessing a
company’s environmental performance
– ISO 24700
– A set of international standards that pertains to
the quality and performance of office
equipment that contains reused components
 Total Quality Management
T Q M

 A philosophy that involves everyone in an

organization in a continual effort to improve
quality and achieve customer satisfaction.
 Encompasses entire organization, from supplier to
customer
 Stresses a commitment by management to have a
continuing, companywide drive toward excellence
in all aspects of products and services that are
important to the customer
 The TQM Approach

1.Find out what the customer wants

2.Design a product or service that meets
or exceeds customer wants
3.Design processes that facilitates doing
the job right the first time
4.Keep track of results
5.Extend these concepts to suppliers
 Elements of TQM
• Team approach
 Continuous
improvement
• Decisions based on
 Six Sigma facts
 Employee • Supplier quality
empowerment
• Champion
 Benchmarking
 Just-in-time (JIT) • Quality at the
 Taguchi concepts source
 Knowledge of TQM • Suppliers
tools
 Continuous Improvement
• Philosophy that seeks to make never-ending
improvements to the process of converting inputs
into outputs.
• Represents continual improvement of all
processes
• Involves all operations and work centers including
suppliers and customers
 People, Equipment, Materials, Procedures
• Kaizen: Japanese word for continuous
improvement.
 Quality at the Source

The philosophy of making each

worker responsible for the
quality of his or her work.
 Six Sigma
• Six Sigma
– A business process for improving quality, reducing
costs, and increasing customer satisfaction
• Statistically
– Having no more than 3.4 defects per million
– Statistical definition of a process that is 99.9997%
capable, 3.4 defects per million opportunities (DPMO)
• Conceptually
– Program designed to reduce defects, lower costs, and
improve customer satisfaction
– Requires the use of certain tools and techniques
 Six Sigma Process: DMAIC
1. Define critical outputs
and identify gaps for
improvement DMAIC Approach
2. Measure the work and
collect process data
3. Analyze the data
4. Improve the process
5. Control the new process to
make sure new
performance is maintained
 Six Sigma Programs
• Six Sigma programs:
– Improve quality
– Save time,
– Cut costs
• Employed in
– Design
– Production
– Service
– Inventory management
– Delivery
 Six Sigma Management
• Providing strong leadership
• Defining performance metrics
• Selecting projects likely to succeed
• Selecting and training appropriate
people
 Six Sigma Technical
• Improving process performance
• Reducing variation
• Utilizing statistical models
• Designing a structured improvement
strategy
 Six Sigma Team
• Top management
• Program champions
• Master “black belts”
• “Black belts”
• “Green belts”
 Employee Empowerment
 Getting employees involved in product and process
improvements
 85% of quality problems are due to process and
material
Quality Circles: Group of employees who meet
regularly to solve problems
 Trained in planning, problem solving, and statistical
methods
 Often led by a facilitator
 Very effective when done properly
 Team approach: List reduction, Balance sheet,
Paired comparisons
 Benchmarking
Selecting best practices to use as a standard
for performance
 Determine what to benchmark
 Form a benchmark team
 Identify benchmarking partners
 Collect and analyze benchmarking
information
 Take action to match or exceed the
benchmark
 Just-in-Time (JIT)
Relationship to quality:

 JIT cuts the cost of quality

 JIT improves quality
 Better quality means less inventory
and better, easier-to-employ JIT
system
 Obstacles to Implementing TQM
• Lack of:
– Company-wide definition of quality
– Strategic plan for change
– Customer focus
– Real employee empowerment
– Strong motivation
– Time to devote to quality initiatives
– Leadership
 Obstacles to Implementing TQM

• Poor inter-organizational
communication
• View of quality as a “quick fix”
• Emphasis on short-term financial
results
• Internal political and “turf” wars
 Criticisms of TQM
• Blind pursuit of TQM programs
• Programs may not be linked to
strategies
• Quality-related decisions may not
be tied to market performance
• Failure to carefully plan a program
 Basic Steps in Problem Solving

1.Define the problem and establish an

improvement goal
2.Collect data
3.Analyze the problem
4.Generate potential solutions
5.Choose a solution
6.Implement the solution
7.Monitor the solution to see if it
accomplishes the goal
 The PDSA Cycle

Plan

Act

Do

Study
 Process Improvement

• Process Improvement:
• A systematic approach to improving
a process
• Process mapping
• Analyze the process
• Redesign the process
The Process Improvement Cycle
Select a
process

Document

Study/document

Evaluate

Seek ways to
Implement the
Improve it
Improved process

Design an
Improved process
 Tools of TQM/Basic Quality Tools
• Quality Tools
– There are a number of tools that can be used for problem solving
and process improvement
– Tools aid in data collection and interpretation, and provide the basis
for decision making
 Tools for Generating Ideas: Check sheets, Scatter diagrams, Cause-and-
effect diagrams
 Tools to Organize the Data: Pareto charts, Flowcharts
 Tools for Identifying Problems, Histogram, Statistical process control chart