KURS 190: FRETAGANDE OPERATIONS MANAGEMENT

Christian Hellstrm

2008-02-02

Sammanfattning KURS 190: FRETAGANDE OPERATIONS MANAGEMENT VT08Operations management p. 3-35What is operations management?

Operations management is the activity of managing resources which are devoted to the production and delivery of products and services.

3 core functions

Marketing function communicating the products to the market.

Product/service development function creating new products/services.

Operations function fulfilling customer requests.

Support functions Accounting/finance function help making economic decisions. HR function recruits/develops staff.All operations are input-transformation-output processes

Services customers form part of the input to, and the output from, the operation.

Transformed resources (resources that are treated, transformed or converted in a process)

Materials transform physical properties; change location; change possession; store. Information transform informational properties; change possession; store, change location. Customers change physical properties; store; transform location; transform physiological state; transform psychological state.Transforming resources (resources that act upon the transformed resource)

Facilities StaffOperations management is about managing processes

3 levels of operations analysis

The supply network flow between operations The operation flow between processes Processes flow between resourceOperation as a function the part of the organization which produces products for external users

Operation as an activity the management of the processes within any of the organizations functions.

Operations processes have different characteristics

Volume of output (McDonalds)

Variety of output (Taxi vs. bus)

Variation in the demand for their output (hotels)

Degree of visibility which customers have of the production of the product or service (shops vs. internet sales)

The activities of operations managementWhy it is important:

Reduce costs Increases revenue by increasing customer satisfaction Reduce investments Provide basis for future innovationProcess design p. 39-69

The design activity

Process design and product/service design should be considered together.

Process design should reflect process objectives (if an operation competes on its ability to respond to customer request quickly, its processes need to be designed to give fast throughput times).Measures of process flow performance

Throughput rate

Throughput time the time for a unit to move through a process

Work in process the number of units in the process

Utilization ratio of the actual output from a process or facility to its design capacity

Process types the volume-variety effect on process designLow volume operations processes high variety of products/services (vice versa)

Process types

Project processes well defined start/finish; long time between projects. E.g. shipbuilding, construction projects (low volume high variety).

Jobbing processes each product share operations resources with others. E.g. toolmaker, furniture restorers.

Batch processes like jobbing but part of operation has periods when it is repeating itself. E.g. machine tool manufacturing, gourmet frozen food.

Mass processes high volume narrow (in terms of fundamentals of the product design) variety. E.g. automobile plants.

Continuous processes often products are inseparable. E.g. electricity utilities, steel making.

Professional services high contact organizations with high levels of customization. E.g. management consultants. Service shops levels of customer contacts placed between professional and mass services. E.g. banks. Mass services many customer transactions, limited contact time and little customization. E.g. call centers.

Detailed process design Process mapping describes processes in terms of how the activities within the process relates to each other. Several different symbols are used.

Littles law

Throughput time = work in process * cycle time

Throughput time the time for a unit to move through a process.

Cycle time the average time between units of output emerging from a process.

Work in process the number of units within a process waiting to be processed further.

The effects of process variability

Variability may occur in processes because of late/early arrival of materials, breakdown of process technology etc.

Two fundamental types of variability

Variability in the demand for processing at an individual stage within the process.

Variation in the time taken to perform the activities at each stage.

The relationship between average waiting time and process utilization (diagram on p. 62).

To improve utilization and/or waiting time, a process designer has three options:

Long waiting time/high utilization

Low utilization/short waiting time

Reduce variability in arrival times and/or activity times and achieve high utilization and short waiting time.

Layout and flow p. 73-107

What is layout?

The layout of an operation or process means how its transforming resources are positioned relative to each other and how its various tasks are allocated to these transforming resources.

General objectives that make a good layout

Inherent safety dangerous processes should not be accessible by unauthorized. Length of flow minimizing the distance traveled by transformed resources. Clarity of flow e.g. colored lines painted on the floor in hospitals. Staff conditions provide a pleasant environment Management coordination supervision to be assisted by the location of staff. Accessibility machines should be accessible. Use of space e.g. the entrance lobby of a high-class hotel. Long-term flexibility layouts need to be changed periodically as the needs of the operation change.Layout is related to process type.

The basic layout types

Fixed position layout the material or people being transformed do not move but the transforming resources move around them. E.g. motorway construction. Functional layout all similar transforming resources are grouped together in the operation. E.g. tinned- and frozen goods as well as vegetables in a supermarket. Cell layout the resources needed for a particular class of product are grouped together in some way. E.g. a maternity unit at a hospital, who are unlikely to need the other facilities of the hospital. Product layout the transforming resources are located in sequence specifically for the convenience of products or product types. E.g. automobile assembly. Mixed layout a combination of elements of some or all of the basic layout types. The higher the volume, and the lower the variety are, the more the layout type moves from fixed position- to product layout (diagram on p. 85).

Detailed design of the layout

Fixed position layoutThe layout should allow all the transforming resources to maximize their contribution to the transformation process by allowing them to provide an effective service to the transformed resources. Resource location analysis is important when designing the layout.Functional layoutIt is about arranging working centers relative to each other, which lead to a very high number of combinations for relatively small number of working centers. The task is to minimize the distance traveled by the transformed resources through the operation.Cell layoutThe task is to group the products types such that convenient cells can be designed around their needs.

Product layoutIt includes a number of decisions: The cycle time to which the design must conform.

The number of stages in the operation.

The way tasks are allocated to the stages in the line.

The arrangement of the stages in the line.

The cycle time of each part of the design, together with the number of stages, is a function of where the design lies on the long thin to short fat spectrum (figure on p. 102)Introduction to Service Operations Management p. 111-144

What is service operations management?

Service operations management is the activities, decisions and responsibilities of operations managers in service organizations such as consultancy firms, hospitals, call centers etc.

Operations managers are responsible for:

The service operation.

Some or all of the organizations resources (inputs).

Some or all of the organizations customers.

Processing customers in the service operation.

The services and goods delivered to their customers.

Service product = service experience + service outcomeE.g. car insurance, a restaurant meal etc.

Service experience

The customers direct experience of the service process. It concerns the way the customer is dealt with by the service provider.

Service outcomeThe result for the customer of the service delivery. Involves tangible outcomes as well as intangible outcomes, such as value, emotions, judgments and intentions.

Many service operations, compared to manufacturing operations, process customers.Many challenges facing service operations managers

Managing multiple customers e.g. a nurserys customers include the child, parents, authorities, staff etc. A service operations manager must: 1. understand who the customers are; 2. understanding their needs and expectations; 3. developing relationships with them.

Understanding the service concept e.g. a nursery could be seen both as a babysitting service or a critical educational experience. A service operations manager must: 1. articulate and communicate the service concept; 2. ensure it can be delivered.Managing the outcome and the experience e.g. a customer in a restaurant is buying both the meal and the way it is served. A service operations manager must: 1. manage both outcome and experience simultaneously; 2. clarify the experience which the organization is selling; 3. develop performance measurements.Managing the customer e.g. a restaurant where the customer is a part of the operation. A service operations manager must: 1. develop a design that take account of how one customer affects another customers experience; 2. develop a design that has a positive impact on employees feelings; 3. create a good servicescape (atmosphere).Managing in real time e.g. children screaming for attention in a nursery. A service operations manager must: 1. in an appropriate way manage resources and staff; 2. create an appropriate culture.

Coordinating different parts of the organization A service operations manager must: 1. integrate marketing, resource- and people management etc; 2. understand the need of customers; 3. oversee logistics of supply chain; 4. ensure that the operation supports the strategic intent of the organization.Understanding the relationship between operations decisions and business/organizational success e.g. using a webcam in a nursery. A service operations manager must: 1. know how operations decisions affect business performance; 2. conclude which improvements are necessary.

Knowing, implementing and influencing strategy - A service operations manager must: 1. understand their role not only in implementing strategy but also in contributing to it; 2. provide a platform for competitive advantage.Continually improving the operation - A service operations manager must often improve both efficiency and quality.

Encouraging innovation e.g. the webcam at a nursery. A service operations manager must: 1. seek out new ideas; 2. have the will and support to assess new ideas carefully.Managing short-term and long-term issues simultaneously the immediacy leads to short-term focus. A service operations manager must pay attention to both strategy and the detail of process to create and sustain a successful organization.Different types of services

Business-to-business e.g. consultancy. Challenges: providing high quality services to business customers with high purchasing power.

Business-to-consumer e.g. banks. Challenges: providing consistent service to a wide variety of customers.

Internal services e.g. finance and IT. Challenges: demonstrating value for money against external alternatives.

Public services e.g. hospitals. Challenges: balancing political pressures and providing acceptable public services.

Not-for-profit services e.g. aid agencies. Challenges: dealing with differences between volunteers, donors and beneficiaries.Different types of service processes

Two key parameters (diagram on p. 131):

The volume of transactions

The variety of tasks

Capability low volume-high variety (low definition) e.g. five-star hotels.

Commodity high volume-low variety (high definition) e.g. budget hotels.

Simplicity low volume-low variety (high definition) e.g. microbreweries.Complexity high volume-high variety (low definition).

Judging the success of a service operation

Customer value customer may recognize value when they receive something they cannot do for themselves or do not have the time to do. An operations manager must understand that the customers idea of what represent value for money may vary from customer to customer.

Brand value brand promises must be kept at four levels: the rational-, emotional-, political- and spiritual level. An operations manager must consider how to build processes to deliver the brand values.

Financial contribution the process of service delivery should generate revenue for the organization. Revenues are linked to customer perceived value. An operations manager can increase the contribution by providing better customer perceived value and be cost-efficient.

Organizational contribution creating customer and brand value, financial contribution as well as enabling the organization to achieve it goals etc.

Economic contribution the contribution services make to a nations economy (at a macro level).The Service Concept p. 147-177

The service concept

As products and services become more similar, organizations compete through something that transcends their service offering the service concept. E.g. a hotel provides a bed, a bathroom etc. but looked at as a service concept it can provide anything from a low-cost nights sleep to an unforgettable experience.

The service concept defined

A service concept is a shared understanding of the nature of the service provided and received. It should encapsulate information about: The organizing idea the essence of the service bought/used by the customer.

The service experience the customers direct experience of the service process. The service outcome the result for the customer of the service.

The service operation the way in which the service will be delivered.

The value of the service the benefit that customers perceive to be inherent in the service weighed against the cost of that service.

The service concept should make it clear what the organization is selling and what the customer is buying.

It guides operations staff and managers to know what to deliver and how to deliver it. It links operations and marketing.

It needs to be well defined, so that operations and marketing can be aligned.

Service valueThe cost of a service to a customer is a combination of the financial price and the cost (inconvenience) of making the purchase. The service concept communicates the set of benefits

Outcome

Experience

Operation

Psychological benefits

- to a customer in order to demonstrate the potential value of the service. Value can be added, or even better, reinvented.

The service concept a shared view The organization business proposition (the way in which the organization would like to have its service perceived).

The customer perception of service.

The service concept should be a shared understanding of what the organization provides and what the customer receives.The DNA of the service concept

The service concept = the service product (all the different parts that form the service outcome, experience and the servicescape; 4-, 7- and 8-Ps). An organization should identify the parts, check them against customer needs, design and deliver them. The service concept is also the mental picture held by the customer.The service concept should be based upon the organizations:

Vision

Mission

Service ideas

Brand

Brand values

The service concept as strategic toolUsing the service concept to create organizational alignment

The service concept should be used as an alignment tool that links together different organizational functions with a common standard. It should create:

A common purpose

An interrelationship among the various functional groups

It should be written down and agreed upon, to create an explicit signal to customers.

Using the service concept to assess the implications of design changes

By defining the concept, service designers can compare it to alternatives. Changes to service concepts exposes weaknesses, its ability to co-ordinate various constituencies and its ability to communicate externally as well as internally.A capability mapping can enhance already existing concepts as well as creating new ones.

Using the service concept to drive strategic advantage

Thinking about the service concept help managers view their business in ways that can make it stand apart from other business. Managers may be able to create new concepts by thinking about the market, the different customer segments and the needs of the customers in those segments.

Focused and unfocused service operations

Focused service operations

Concentrating on providing a particular segment of customers with a narrow range of services. The service concept acts like a filter trying to ensure that the right customers will be drawn into the operation. Focus provides benefits to: The organization such as simplicity of operation.

The customers such as high value at low cost.

E.g. fixed menu restaurants; MasterCard and VISA credit cards narrow range of services for a broad market segment.

Unfocused service operations

Deliver a wide range of services to either a narrow market segment or a wide market. For a narrow market, the service concept has to act like a filter, e.g. a country club.Four service concepts and changing focus

Number of markets served range of services (figure on p. 168).

Cycle of proliferation and focus organizational growth first usually comes by increasing the range of services and then expanding the market. Focus is then achieved by separating out the organization into distinct operations or organizations focused on providing a particular service or on a particular market segment.Achieving the benefits of focus in unfocused service operations

Business focus split the market into segments with similar needs and expectations.

Operational focus split the operations into several parts so that each caters for a particular set of needs. E.g. an upper-class hotel with specific executive lounges for premium customers.Encounter focus use frontline staff to customize the initial experience to give the impression that the service is special for individuals. E.g. reception staff that treat a business executive differently from a family.Service processes p. 181-229

The whole interrelated chains of processes needs to be carefully designed, managed and controlled to deliver value to customers. Processes depend on:

Customization (management consulting; high variety low volume)

Consistency (call centers; low variety high volume)

Skill and knowledge of individual employees (medical doctors)

Technology

Service processes and their importance

Service processes process:

Customers

Materials

Information

Staff

The service process is only one part of the service operation, but it is the glue that holds it all together.

The service process: creating the service experience

The way the customer, materials and information are processed and how the link together creates the experience. Some tasks take place in the presence of the customer, the front office. Others take place in the back office remote from customers.Front office

Deal directly with customers

Customers interact with either service employees or technology

The customer plays an important role in service delivery and is an operational resource

E.g. management consultancy; call center agent answering customer queries etc.

Some processes have well-defined routines (call centers) whereas others depend on the service providers skills (management consultant)

One common problem: the unpredictability of the customer

Back office

Operates at a distance from customers The lack of customers presence make back office more efficient

E.g. preparation of food in a restaurant; cheque-clearing processes for a retail bank

Reasons for shifting activities from front- to back office

Cost and consistency benefits

Reduces the need for immediate response to customers requests

Business operate close to customers, but the work is carried out by technology at a remote, cheaper locationShifting activities from back- to front office

Customers require technical expertise

Cheap minilabs for film processing

The service experienceThe customers direct experience of the service process. Examples of interactions:

Face-to-face

Telephone cost effective but possibility of misunderstandings

E-service

Customers may perceive some degree of risk in the service process. These are:

Financial risk e.g. purchasing a pension plan for non-educated customers

Physical risk e.g. an adventure holiday

Psychological risk may come from customers lack of confidence or competence(Social interaction perceived risk figure on p. 189)

Customer variables that complicate the service experience: Customer mindset a customer complaint process will not have the customer in a helpful mindset

Customer mood people complaining might be expected to be angry

Personality clashes some people simply do not get on.

The need to manage the total chain of processesService operations managers need to be able to manage the total chain of processes, which link together the back- and front office and finally the end user. Failure to manage end-to-end (e2e) processes leads to: Lack of consistency

Poor reliability

Increased cost

A process manager must not only deal with the individual issues regarding front- and back offices, but also deal with integrating these two. He should design the process from the point of view of the thing being processed.

The process environment the servicescape

Servicescape the physical surroundings of the service operation. It includes both the physical and informational environment in which a service is both created and delivered.The servicescape can:

Affecting the customers experience

The choice and style of facilities should be in tune with the desired service experience (based on the service concept). E.g. the style of Caesars Palace; the memorabilia of Hard Rock cafs.Influencing customer behavior

Customers behavior, and experience, can be determined by the servicescape; its ambience, lightning or music. E.g. background music in a store can influence the pace of shopping.Influencing employees

The physical and informational aspects of a service environment influence employees in the same way as customers. An appropriate environment results in approach, and they become more committed to the organization.Understanding the nature of the service processProcesses need to be engineered and controlled. To do this, one need to understand the nature of service processes. They are described by three themes:

Service product varietyRunners

Standard activities and relatively predictable; easy to forecast demand.

Lend themselves to efficient operations.Repeaters

Standard activities but more complex and they occur less frequently.

Absorb more resources than runners because lower volume and hence, less automation.

Strangers

Non-standard activities and difficult to forecast demand.

They are least well defined in terms of resource requirements.

Types of process: volume and varietyCapability processes (high variety-low volume)

No service concept as high-volume services but more flexibility to change service outcome.

The capability resides with specific individuals, and may be lost when they leave the organization.

No consistency in processes.

Many professional services are in this category.

Strangers and runners dominate activities.

E.g. lawyers, accountants, management consultants.

Commodity processes (low variety-high volume) The service concept is well-defined, and translated into a series of tightly controlled processes little flexibility. Competing with price.

Consistency in processes, to ensure customer expectations is met. Customer-facing staff is likely to be relatively junior.

Usually mass services.

Activities are typified by runners.

E.g. restaurant chains, supermarkets, telephone banking.

Managers task is to create a planned environment where the various activities can be carried out as efficiently as possible.

Profiling processesWhen comparing companies on the capability-commodity spectrum, one must compare different process types within the same sector.Off-diagonal processes

The line of best fit between capability and commodity is in reality rather wider than just a thin line.

Operating in the complexity area (high volume-high variety)

Mass customization provide customers with whatever they want, however and wherever they want it, e.g. internet banking.

Operating in the simplicity area (low volume-low variety)

Usually inefficient operations because of the low volume. Might suit small niche companies such as microbreweries.

Adding value for the customer

Must recognize where value should be added. The categories of value:

Customer value what the customer recognizes and pays for.

Brand value aspects of the service that communicate the style that the organization would like to display.

Financial contribution earning revenue for the organization.

Organizational contribution aspects that do not fall into the previous categories, but still are essential for the organization.

An operation manager must view the service operations in their entirety, both back- and front office to recognize where the bulk of the value-adding activity lies.The Key Decision Area Matrix helps us understand where the prime value is added (figure on p. 204) and it can give an insight into the impact of changes in service concept.The four areas (e.g. all four types of KDA: s may be represented in the operations of a bank):

The service factory High volume-low variety with runners/repeaters and low customer involvement. Back office KDA and the prime task is efficient and consistent, high volume operations. Adds value.

Front office make service factory look friendly.

E.g. restaurant chains.

Do-it-yourself service High volume-low variety with runners/repeaters and high customer involvement.

KDA customer, back- and front office which add value. Balance decisions. E.g. fitness clubs.

Service projects

Repeaters/strangers and low customer involvement.

KDA back- and front office which both add value.

E.g. market research companies.

Service partnership

High variety with strangers/repeaters and high customer involvement. KDA customer and front office.

Efficiency depends on personal chemistry.

E.g. management consulting firms.

Task allocation

Operations managers must make decisions about which tasks are carried out in the back- and front office or by the customer.Engineering service processes

Operation managers and staff look at the service processes from an internal perspective instead of a customer perspective, and therefore missing problems and errors.

Tools to design service processes:

Process mapping

Charting of a service process in order to assist in the evaluation, design and development of processes.

Capture all activities and relationships on paper, which is time consuming. Either micro- or macro level, created with different symbols.

Walk through audits

Staff, managers and other acting as surrogate customers and evaluate the service.

The audit should be based on a checklist of questions.

Identifies critical elements of the customer experience from first contact to the exit.Service transaction analysis

Identifies the reason for the outcome of each transaction so that improvements can be made.

Five key stages:

The service concept needs to be agreed and specified.

Mystery shoppers walk through the actual process to assess how customers assess the transactions.

Interpretation as to why the customer arrives at this evaluation.

The assessments are joined to give a visible profile.

Service designers and managers then working from the sheet to find improvements that can be made.

Controlling service processes

An operations manager must try to achieve consistency of outcome for customers. The most important factor when influencing customer satisfaction is reliability.

Capable processes

Uses statistical process control (SPC) to asses if the process is capable, and creates a normal distribution to se if the process lies within the promised limit (figure on p. 214). To deliver an item on time, is a capable process.

If not delivered on time, the process is out of control.If the process is out of control, there are two strategies management must consider:

To invest in the process, so the customer is ensured the item is delivered on time.

To relax the process specification (not make any promises).

The SPC is applicable to factory-like processes.

Quality systems

Quality assurance activity is usually focusing on preventing poor quality, but not encouraging good quality. High volume commodity-type of services is best suited for quality system approaches. They can be:

Mapped

Consistent standards can be established and monitored.

Standard operating procedures (SOPs) are used to make sure quality specifications are met.

Repositioning service processes

Commodity processes may want to be more flexible and customized, whereas capability processes may want to increase volume and reduce cost.From capability to commodity

An innovative organization has a requirement for growth, and as it grows, an innovative solution can be packaged and sold to a wider range of customers.

The most significant aspect of the transition is the impact on the individuals. They may have joined because of the professional autonomy they offer. When the organization grows, they become less motivated.

Implications of growth:

Customers may require consistency across different locations.

More effort must be put on sales and marketing activities, and this may take the organization into cost competition.

From commodity to capability

Organizations wishing not only to compete with prices may provide a degree of customization for individual customers.Mass customization incorporates the following principles:

Develop standard modules.

Postpone customization until the latest possible stage the delivery process is standardized for all stages until the last.

Significant changes in the operations task frequently include the following:

Shifting from back office consistency to front office flexibility. Customer-facing staff must give individual advices to customers.

Uppskilling customer-facing staff by training and provisions.

Making processes more flexible.

Strategies for change

For service operations lying in between capability and commodity there are four different ways to deal with transitions:1. Building capability through systems and training Invest in information systems and expanding the role of the front office.

Benefit: the organization is well placed to deal with new challenges.

2. Building capability through incremental development The organization takes on activities that are outside its normal sphere of action.

Disadvantages: learning by doing may damage customer relationships.

3. Moving to commodity by constraining flexible resources Moving a gourmet chef to a fast-food chain.

Disadvantages: keeping staff motivated and the organization may become uncompetitive.

4. Moving to commodity through investment in process capability The market needs a high-volume version of existing services. Disadvantage: require investments and is therefore risky.

Managing the gap between market position and operations

In selling the benefits of a particular service it is common to find that companies emphasize customer flexibility while continuing to operate on a mass-production basis. It is effective, but customer satisfaction may fall into the gap between market flexibility and operation efficiency. To manage the gap, companies may adopt different strategies:

Customer service departments provides human interface.

Named personal contact provides some personalized attention.

Account or client managers B2B services may use accounts to provide a closer customer contact.

Change the nature of the service the process is repositioned from service partnership to do-it-yourself service.

Change customer expectations if high volume-low flexibility companies need to educate customers not to expect personalized service.Lean operations and JIT p. 233-264

Toyota case-studyToyota production system

Just-in-time coordinated movement of parts throughout the production system and supply network to meet customer demand.

Jidoka humanizing the interface between operator and machine.

These two helps eliminating waste. Seven types of waste (activity which does not add value):

Overproduction Waiting time Transportation waste Inventory waste Processing waste Waste of motion Waste from product defectsThe overall philosophy: that activities, connections, and production flows in a Toyota factory are rigidly scripted, yet at the same time Toyotas operations are enormously flexible and adaptable.

What is lean and just-in-time (JIT)?Lean (philosophy) = JIT (technique) - producing goods and services exactly when they are needed, with perfect quality and no waste.

Traditional approach Each stage will build up an inventory to prevent stages downstream to stop.

The larger the inventory is, the greater is the degree of isolation between stages.

Problems will not be apparent until the inventory in between stages is eliminated.

Focus on high capacity utilization.

JIT approach

Items are passed directly to the next stage.

Low inventory to problems are exposed and solved Inventory is a blanket of obscurity rocks in the river.

Producing only when needed.

Lower capacity utilization.

The lean philosophy

Three key issues: Eliminate waste

Involve everyone

Continues improvementEliminate waste (activity which does not add value)

Seven forms of waste (identifying waste)

Over-production

Waiting time

Transport

Process

Inventory

Motion

Defectives

The 5 Ss (principles for reducing waste) Sort eliminate what is not needed.

Straighten position things in such a way that they can be easily reached.

Shine keep things clean.

Standardize maintain cleanliness.

Sustain develop pride in keeping to standards.

Minimize throughput time

Value stream mapping

Visually maps a product form start to finish. Distinguishes between value-adding and non-value-adding activities.

Involve everyone

Teamwork Job enrichment

Multi-skilling

High degree of personal responsibility

Continuous improvement

Possible to get closer to the ideal over time

JIT techniques (means for cutting out the waste)Adopt basic working practices

Discipline work standards which are critical for the safety etc.

Flexibility expand responsibilities to the extent of peoples capacity.

Equality implement the egalitarian message.

Autonomy delegate responsibilities to people.

Development of personnel.

Quality of working e.g. working area facilities.

Creativity

Total people involvement

Design for ease of processing

Design improvements can dramatically reduce product cost.

Emphasize operations focus

Simplicity, repetition and experience breed competence.

Use small simple machines

Many, small machines are more flexible in production and a breakdown is not as harmful.

Layout for smooth flow

Placing workstations close together (no inventory buildup).

U-shaped lines so that staff can move between workstations.Adopt total productivity maintenance

Eliminate the variability in operations processes caused by breakdowns.

Reduce setup times

Reduce the time taken to change over the process from one activity to the next.

Ensure visibility

Performance measures or use of visual signals to indicate when a problem occurs.JIT planning and control

Based on the principle of a pull system.Kanban control (a method of operationalizing a pull-based planning and control system)

E.g. a card used by a customer stage to instruct its supplier stage to send more material.

Three different types:

The move kanban signal to a previous stage that material can be withdrawn from inventory and transferred to a specific destination.

The product kanban signal to a production process that it can start producing a part.

The vendor kanban signal to a supplier to send material to a stage.The principle is that the receipt of a kanban triggers the movement of a unit.

The single card system (uses move kanbans)

(Figure on p. 251)

Leveled scheduling

Producing a small amount of output, instead of a large batch. Inventory decreases.

The same routine everyday scheduling.

Can be applied to transportation processes.

Synchronization

The pacing of output should be the same at each stage to provide a steady flow.

Parts need to be classified according to the frequency with which they are demanded.

Classifications: runners, repeaters and strangers.Mixed modeling

Processes can be made so flexible that they achieve the JIT ideal of a batch size of one.

JIT in service operations

In the service sector JIT can be applied as well. Instead of eliminating inventory, as in production, one needs to eliminate the queues of material, information and customers.

For example:

An empty shelf in a supermarket sends a signal to store the shelf pull control. Restaurants cook food when ordered pull control reduces throughput time. Billing customers later than necessary fast throughput time improves cash flow.JIT and MRP

Key characteristics of MRP

Push system inventory is driven through each process.

Uses complex computer-based organization.

Dependent of accuracy of data.

Assume fixed lead times.

Excellent at planning, weak at control.

Necessary for strangers.

Key characteristics of JIT

Pull system flow between stages is pulled by demand from the previous stage.

The control of the pull between stages is accomplished by using cards.

Decentralized organization.

Rate-based rather than volume-based.

Assumes resource flexibility.

Works well for runners and repeaters.

When to use JIT, MRP and combined systems(Figure p. 258) Depends on the complexity of product structures and the complexity of the flow-path routings through which they must pass.

JIT- simple structures-simple routings.

MRP complex structures-complex routings.

The design of products and services p. 267-296

Why is good design so important?

Design objectives:

Meet customers expectations Reliable products

Manufacturing should be quick and easy

What is designed in a product or service?The concept

The understanding of the nature, use and value of the service or product.

E.g. patients are not concerned about the ingredients of a drug, but how they will use it and the benefits it will provide.

The package of products and services

Should provide those benefits defined in the concept. Both products and services are usually part of the package. E.g. a car with warranty.

The process

The way in which products will be created and delivered to the customers.

E.g. a car manufacturer designing a new assembly line.

The stages of design

Concept generation

Concept screening

Preliminary design

Evaluation and improvement

Prototyping and final design

Concept generation

Ideas from customers

Listening to customers

Ideas from competitor activity

Ideas from staff

Ideas from research and development

Concept screening

Evaluation of concept by asking three questions: Can we do it?

Do we want to do it?

Do we want to take the risk?

The design funnelReduces the number of possibilities until the final design is reached.

Balancing evaluation with creativity

The process of evaluation is important but it must be balanced by the need for design creativity.

Preliminary design

First attempt at both specifying the component products and services in the package and defining the processes to create the package.1. Specifying the components of the package2. Reducing design complexity Standardization minimize variety among products.

Commonality the range of which products incorporates the same components.

Modularization designing standardized sub-components of a product or service which can be put together in different ways.

3. Defining the process to create the package the process should be examined before the product is finalized.

Evaluation and improvement

The purpose is to take the preliminary design and see whether it can be improved before the product is tested in the market. Three methods:

1. Quality function deployment A technique used to ensure that the eventual design of a product meets the needs of its customers.

Captures what the customer needs and how it might be achieved.

2. Value engineering Tries to eliminate any costs that do not contribute to the value of the product.

It examines the purpose of the product, its basic function and its secondary functions.

3. Taguchi methods

A technique that uses design combinations to test the robustness of design.Prototyping and final design

Turn the improved design into a prototype so that it can be tested. Prototypes include everything from clay models to computer simulation (CAD)

The benefits of interactive design Design of products and services on one hand, and design of the processes that create them on the other, should be integrated.

Benefits: reduces the time for the whole design activity, from concept through market introduction, which in turn reduces costs and become a competitive advantage.

Three factors which can reduce time to market:1. Simultaneous development Simultaneous development of the various stages in the overall process.

Move away from the traditional sequential approach.

2. Early conflict resolution Look at design activity as a series of decisions. Decisions may be altered during time, depending on the current state.

By resolving conflicts early, uncertainty is reduced.

3. Project-based organization structures Two options: a project group with personnel from the different disciplines and a project manager, or personnel from different discipline working on the project but having their own functional manager.

More effective with a project group on larger projects.

Supply network design p. 299-336

The supply network perspective

Setting an operation in the context of all the other operations with which it interacts, both suppliers and customers. The total supply network is made up by:

First- and second-tier suppliers and customers.

The supply and demand side.

Why consider the whole supply network?

It helps an understanding of competitiveness

To understand the customers needs the company can rely on the intermediate customers, or they can look beyond them

It helps identify significant links in the network

A company must identify the parts of the network which contribute to those performance objectives valued by end customers. The analysis must start by understanding the downstream end of the network.

It helps focus on long-term issues A long-term supply network view would be to weigh the relative advantages to be gained from assisting or replacing the weak link.

Design decisions in supply networks

How should the network be configured? Where should each part of the network owned by the company be located? What physical capacity should each part of the network have at any point in time?Configuring the supply network

Changing the shape of the supply network

Manage network behavior by reconfiguring the network.

Operations may be merged the way responsibilities are allocated.

E.g. reducing the number of direct suppliers.

Disintermediation

Cut out the middlemen.

E.g. airplane tickets can be bought directly from the airline instead of from a travel-agency.

Co-opetition

Any business is surrounded by four types of players: suppliers, customers, competitors and complementors. All the players can be both friends and enemies at different times.

E.g. an area with many restaurants helps attracting customers to all the restaurants.

In-source or out-source? The vertical integration (VI) decisionVI can be defined in terms of three factors: The direction of VI should an operation buy a supplier or a customer?

The extent of VI how far should an operation take the extent of its VI?

The balance among stages not about the ownership of the network but rather the exclusivity of the relationship between operations.

Making the outsourcing/VI decision

One question: does in-house or outsourced supply in an operation make it more competitive?Deciding whether to outsource

If an activity has long-term strategic importance to a company, it is unlikely to outsource it.

The location of capacity

Reasons for location decisions

Some operations are where they are because of historical reasons. The cost involved in changing location often outweighs the benefits of a new location. Two stimuli to change location: Changes in demand if customers move, suppliers may move with them. Changes in supply if the cost or availability of intermediate products changes, it may stimulate relocation.

The objectives of the location decision

The aim of the location decision is to achieve an appropriate balance between three related objectives:

The geographically variable cost of the operation.

The service the operation is able to provide to its customers.

The revenue potential of the operation.

Supply-side influences Labor costs hourly cost or unit cost (includes effects of productivity and exchange rates). Land costs Energy costs Transportation costs includes the cost of transporting inputs from their source to the site of the operation and the cost of transporting good from the site to customers.Community factors

E.g. local tax rates, political stability etc.

Demand-side influences

Labor skills e.g. a science park close to a university. The suitability of the site itself e.g. a hotel located next to a beach. Image of the location e.g. fashion in Milan.

Convenience for customers e.g. location of a hospital.

Location techniques

Weighted-score method compares the attractiveness of locations that allocates a score to the factors that are significant in the decision and weights each score by the significance of the factor.

Center-of-gravity method uses the physical analogy of balance to determine the geographical location that balances the weighted importance of the other operations with which the one being located has a direct relationship.

Long-term capacity management

The optimum capacity level

Decisions on the size of the facility need to be made.

A larger facility may reduce the average cost, due to economies of scale. If the facility too large, the average cost may raise due to diseconomies of scale (transportation costs due to remote location and complexity costs due to increase in size).

Scale of capacity and the demand-capacity balance

If the facility is too large, there will be costly overcapacity, if demand is not constant.Balancing capacity

For the network to operate efficiently, all its stages must have the same capacity. If not, the capacity of the network as a whole will be limited to the capacity of its slowest link.

The timing of capacity change

Two ways of handling an increase in capacity: Capacity leads demand timing the introduction of capacity in such a way that there is always sufficient capacity to meet demand.

Capacity lags demand timing the introduction of capacity so that demand is always equal to or greater than capacity.

Smoothing with inventory

Using inventory to locate the operation in between leads and lags demand. Capacity is always fully utilized, but inventory costs.

Break-even analysis of capacity expansion

Capacity is added in increments, making the first period in each new increment unprofitable because of increasing fixed costs.Forecasting knowing the optionsAs a manager, the first question to ask is to know how far you need to look, and this depends on options and decision availability. Three different terms of capacity:

Short-term capacity management (hiring short-term teachers).

Medium-term capacity management (hiring new teachers).

Long-term capacity management (build a new school).

In essence forecasting is simple

To forecast how many children that may turn up in school in a few years, one need to look at birth figures, death rates and immigration.

Approaches to forecasting

Two different methods: Qualitative methods

Quantitative methods

Qualitative methods

Collecting and appraising judgments, options, best guesses and past performance from experts to make predictions.

Panel approach

Acts like a focus group allowing everyone to talk freely.

Difficult to reach consensus and the loudest participants opinion may emerge.

Delphi method

Questionnaires are posted to experts.

The questionnaires are analyzed and then returned to the experts.

The experts are asked to reconsider their original opinion.

This is repeated several times to conclude either a consensus or a narrower range of decisions.

Scenario planning

Applied to long-range forecasting, using a panel. Panel members are asked to devise a range of future scenarios.

Quantitative methods

Two different methods: Time series analysis

Casual models

Time series analysis

Plots a variable over and removes underlying variations, such as seasonal variation, to predict future behavior.

Casual models

Employ complex techniques to understand the strength of relationships between the network of variables and the impact they have on each other.

What is Operations Strategy p. 339-372

What is operations and why is it so important?Operations is the activity of managing the resources and processes that produce and deliver goods and services. Operations transform resource inputs into outputs of products and services (input-transformation-output model). Inputs are either material, information or people. Other resource inputs do the transforming e.g. facilities, machines, human capital etc. An operation may produce both products and services.Three levels of input-transformation-output

Supply network a supply network is an arrangement of operations.

Operation an operation is an arrangement of processes.

Process a process is an arrangement of resources.Operations management can contribute to the success of any organization by doing the following:

Reduce costs by being efficient in the way it transforms inputs into outputs.

Increase revenue by promoting outstanding customer satisfaction.

Reduce the amount of investment necessary to produce the products.

Provide the basis for future innovation by building a solid base of operations-based capabilities.

What is strategy?

For example: Setting broad objectives that direct a firm towards its overall goal.

Planning the path that will achieve these goals.

Stressing long-term objectives.

Dealing with the total picture.

Operations strategy operations is not always operational

Operational means detailed, short-term, day-to-day etc. Operations strategy is concerned with the total transformation process (the business).

It is concerned with how the competitive environment is changing.

It is concerned with the long-term development of its operations resources.

E.g. IKEA has a clear operations strategy.

Four perspectives on operations strategy

The top-down perspective The bottom-up perspective

The market requirements perspective

The operations resources perspective

The top-down per. operations strategy should interpret higher-level strategy Three levels of strategies corporate, business and functional, which form a hierarchy.

The corporate strategy forming the business strategy etc.

The corporate strategy may consist of what type of business the group wants to be in, in what parts of the world it wants to operate etc.

The bottom-up per. operations strategy should learn from day-to-day experience

When reviewing the strategy, a business usually consult individual functions. By doing this, it can base its strategy on day-to-day experiences, which may incorporate customers needs in a better way.

The market requirements per. operations strategy should satisfy the organizations markets

Operations strategy must reflect the organizations market position. Must develop an understanding of what is required in order to support that position.

The needs that define the market will shape the organizations attempt to satisfy those needs.

How the organization chooses to position itself will depend on how it feels it can achieve an advantage over its competitors.

The last stage in forming the strategy is to define performance objectives the aspects of operations performance that satisfy market requirements and therefore that the operation is expected to pursue.Performance objectives (required performance) Quality

Speed

Dependability

Flexibility

Cost

The operations resource per. operations strategy should build on operations capabilities

An organization needs to know what it has (resources) and then decide what actions to take.

To understand an operation, one need to examine the interaction between resources, intangible resources included.

Informal information flows make up the efficiency of an operation, and is a valuable resource.

The concept of routines (formal and informal processes) and intangible assets is the resource-based view, and together they form the organizations competitive advantage.

E.g. Intel may posses a capability-based performance advantage over its competitors, but it may be competed away quickly.

However, the resource-based advantage is still valuable.

So what is operations strategy?

Operations strategy is the attempt to reconcile all four perspectives. The tension between the market requirements (MRP) and the operations resource perspective (ORP) is central to operations strategy.

An organization cannot simply follow the market, but it must also develop long-term capabilities which are inherent in the resources.

It is a complex interaction which depends on the difficulty in clarifying the nature of market requirements together with the difficulty in knowing the value, abilities etc. of their own resources.

The content and process of operations strategy

Content is concerned with the strategic decisions which shape and develop the long-term direction of the operation and form the building blocks of an operation. Process is the procedures which are used to formulate operations strategy.

The process determines how an operation pursues the reconciliation between MRP and ORP.

The content of operations strategy an overview

Operations strategy attempts to influence the way it satisfies market requirements by setting performance objectives and it attempts to influence the capabilities of its operations resources through the decisions it takes in how those resources are deployed.

Understanding the relative importance of the operations performance objectives and the influence on them of the decision areas that determine resource deployment.

Performance objectives

The purpose of performance objectives is to articulate market requirements. Ways for a company to articulate its position in the market: compare it to competitors; associate itself with the needs of a particular group of customers. In this way, market position is defined by the dimensions price, quality, service etc. (competitive factors).

They describe the things that a customer can see or experience. Each company need to know what list of performance objectives that is appropriate to their business, what competitive factors each represents and how each competitive factor is to be defined.

Decision areasThe set of decisions needed to manage the resources of the operation. Capacity

Supply networks

Process technology

Development and organizationCapacity strategy

How capacity and facilities in general should be configured.

Supply network strategy, including purchasing and logistics

How operation relate to its interconnected network of operations.

Process technology strategy

The choice and development of the systems, machines etc. which act directly/indirectly on transformed resources to convert them into finished products.

Development and organization Broad and long-term decisions governing how the operation is run on a continuing basis.

Why these decision areas?

ROA can be broken down into several ratio-measurements, to reflect the different decision areas.Structural and infrastructural decisions

A distinction is drawn between strategic decisions that determine an operations structure, and those that determine its infrastructure. Structural issues influence the physical arrangement of the operations resources.

Infrastructural strategy areas influence the activities that take place within the operations structure (compare hardware to software in a computer system).

The operations strategy matrix

Describes operations strategy as the intersection of a companys performance objectives with its decision areas. E.g. it should explain how flexibility is influenced by capacity, supply network, process technology and development and organization decisions etc.

Appendix: the resource-based view of the firm Two schools: environmental and resource based and why some firms outperform others.Environmental

A firms performance is related to industrial structure of its markets.

Key strategic tasks centered on competitive positioning within industrial sectors. The firm is an allocator of resources between different market opportunities.

Firm should analyze the forces present within the environment in order to assess the profit potential of the industry, and then design a strategy that aligns the firm to the environment.Resource based

Good performance is more likely to be the result of the core capabilities inherent in a firms resources than its competitive advantage in its industry.

Operations performance s. 375-408

Operations performance objectives Perceived performance is a function of who you are and your objectives etc.

For operations strategy to be effective, performance must be measured.

Each group of stakeholders has different performance objectives.

The five generic performance objectives

Relates to an operations basic task in a better way than stakeholder objectives.

Quality

Two concepts product specification and operations conformance to the particular specification. Product specification hard and soft aspects of specification quality, e.g. features and helpfulness respectively.

Conformance quality operations ability to produce goods to their defined specification.

Speed

Time between the beginning of an operations process and its end. E.g. time between when materials enter an operation and when it leaves fully processed.

Dependability

Keeping delivery promises; honoring the delivery time given to a customer.

Dependability = due delivery time actual delivery time

Flexibility First distinction to make is between range flexibility how much the operation can be changed; and response flexibility how fast the operation can be changed.

Next distinction is between the way we describe the flexibility of a whole operation and the flexibility of the individual resources which, together, make up the system.

Cost

The most important objective a financial input to the operation that enables it to produce its products. Three categories of financial inputs: operating expenditure, capital expenditure and working capital.The internal and external effects of the performance objectives

Must examine how each of the performance objectives affects market position outside the operation and operations resources inside the operation. E.g. if the operation is focused on speed, the customers (market position) will get the products quickly and throughput time as well as inventory will decrease (operations resources).

Different businesses should apply different priorities to its performance objectives depending on their message to customers.

Order-winning, delights and qualifying competitive factors A way of determining the relative importance of competitive factors.

Order-winning factors

Regarded by customers as key reasons for purchasing the product.

Can achieve negative or positive competitive benefit, depending on achieved performance.

Delights

Aspects of performance that customers have not yet been made aware of. The absence of delights will not upset customers, because they are not aware of them. However, when the operations starts performing successfully in terms of delights, the potential competitive benefit could be significant.Qualifying

Those aspects of competitiveness where the operations performance has to be above a particular level just to be considered by customers.

No matter how well an organization performs at its qualifiers, it is not going to achieve high levels of competitive benefits. Customers expect these things.As delights loose their novelty, they become order-winners, and order-winners may become qualifying factors as time goes.

The relative importance of performance objectives change over time

Changes in the firms markets the product/service life cycle influence on performance

One way of generalizing the market requirements that operations need to fulfill is to link it to the life cycle of the products.

The life cycle as a function of sales volume

Introduction stage

Few competitors; dominant operations performance objectives (DOPO): flexibility, quality.

Growth stage

Increasing number or competitors; DOPO: speed, dependability, quality.

Maturity stage Stable number of competitors; DOPO: cost, dependability.

Decline stage Declining number of competitors; DOPO: cost.

Changes in the firms resource base

New technologies may require a fundamental rethink of how operations resources can be used to provide competitive advantage. Other operations-based changes may be necessary to maintain a market position.

Mapping operations strategies

To understand how an organizations operations strategy changes over time, one needs to understand how it views its markets, its operations resources and how it attempts to reconcile these two.Trade-offs

In order to excel in some particular aspects of performance, one must to some extent sacrifice performance in others.

Why are trade-offs important

Two important characteristics of operations performance: All measures of performance will not have equal importance for an individual operation.

Performances will trade off against each other.

E.g. we will not be impressed by a call center that answer our calls quickly at all times if it charges us high fees.

Are trade-offs real or imagined?

Two schools:First school

Excellence in one objective usually means poor performance in some other.

The key issue of operations strategy is to position the competitive objectives of the operation to reflect the companys overall competitive strategy.

Second school

Trade-offs are not real, since companies (e.g. Toyota) have achieved improvements in several aspects of performance simultaneously.

Trade-offs and the efficient frontier The further out an operation lies in a variety-cost efficiency diagram (p. 398), the better. If two operations lie on the efficient frontier, they are both efficient but they can choose a different mix depending on their market strategies.

Improving operations effectiveness by using trade-offs If an operation is good at variety but not at cost efficiency, to move to a higher efficient frontier will usually require it to become even better at variety, but worse at cost efficiency.Targeting and operations focus

The concept of focus

Skinner: first a business must establish a consistent set of policies. Second, because of trade-offs, one operation cannot provide peak performance in all performance objectives at the same time.

By focusing on a narrow set of objectives, an operation can outperform its competitors.

Focus as operations segmentation

Separate clusters of resources should serve individual market segments. The problem is that the basis for segmenting markets does not always map onto the basis for segmenting operations resources.

The operation-within-an-operation concept

Allows an operation to accrue benefits of focus without the considerable expanse of setting up independent operations. A portion of the operation is partitioned off and dedicated to the manufacture of a particular product.

Types of focus

Performance objective focus

Products have similar characteristics in terms of performance objectives.Product/service specification focus

Each range of products is targeted at a clearly defined market segment.Geographic focus

Market segments are defined by their geographic location.Variety focus

Segment operations in terms of the number of different activities it is engaged in.

Volume focus

Separate operations for different volume requirements.

Process requirement focus

A particular technology is the point of focus for the operation.Benefits and risks in focus

Benefits:

Clarity of performance objectives

Makes task prioritizing easier for those few performance objectives which are important for the particular market.

Developing appropriate resources

A narrow set of resources allows those resources to be developed specifically to meet the relatively narrow set of performance objectives required by the market.

Enhanced learning and improvement A combination of clear objectives, together with resources organized to meet those objectives, can enhance an operations ability to manage its learning and improvement of its processes.

Risks:

Significant shifts in the marketplace

A shift in the competitive market environment can undermine the effectiveness of a focus strategy.

Few economies of scale

By separating resources which once were bundled, will allow those resources to be developed appropriately for the market they serve, but they will not achieve the same economies of scale.

Structural vulnerability

A shift in the market together with few economies of scale will ruin the focus.

Drifting out of focus

Unfocused operations are often a result of a gradual drift away form a clear strategy. Reasons:

New products and services

After developing a new product, companies usually turn to their existing operations to produce them. The most successful operations are usually perceived as being the best to cope with the new product, although the operations success may be built upon focus.Strategy drift

In absence of a clear competitive direction, managers often attempt to perform equally good (bad) against all of the performance objectives.Control by specialist

In absence of an operations strategy, specialists will tend to develop their own systems at the expense of greater strategic objectives.Company-wide solutions

A belief that one solution can cure all the problems, without sufficient regard for the need to tailor solutions to suit particular circumstances.Business growth

When, for example, an operation has to deal with larger volumes, it may loose focus.

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