Operations Management Slides

MBA 401 Operations Management Introduction to Operations Management
University of Gloucestershire Business School
Introduction to Module
Look at Operations Management from an international perspective Emphasis is on operations from a global logistics and supply chain management angle Underpinning knowledge of Operations theory and concepts is assumed Core text
MBA 401 10-11 HP Intro v0.2 ppt 2
What is Operations Management ?
Operations Management is about the way organisations produce goods and services
MBA 401 10-11 HP Intro v0.2 ppt
Source: Slack et al (2007)
Examples of Operations
Back office operation in a bank Kitchen unit manufacturing operation
They are all operations

Retail operation Take-out / restaurant operation
Source: Slack et al (2007) Pearson
Concept of Operations Management

The best way to start understanding the nature of operations is to look around you Everything you can see around you has been processed by an operation Every service you consumed today (radio station, bus service, lecture, etc.) has also been produced by an operation Operations Managers create everything you buy, sit on, wear, eat, and throw away
Operations Management at IKEA

Design a store layout which gives smooth and effective flow
Design elegant products which can be flat-packed efficiently
Ensure that the jobs of all staff encourage their contribution to business success
Site stores of an appropriate size in the most effective locations

Maintain cleanliness and safety of storage area
Continually examine and improve operations practice
Arrange for fast replenishment of products
Monitor and enhance quality of service to customers
The Activities of Operations Management

INPUT TRANSFORMED RESOURCES MATERIALS INFORMATION CUSTOMERS
INPUT
FACILITIES STAFF INPUT TRANSFORMING RESOURCES
Transformation
GOODS OUTPUT AND SERVICES
Source : Slack et al Operations Mgmt Pearson 2001
At Prt a Manger
Transformed resources Ingredients Packaging Customers Input resources Transforming resources Equipment Fittings Staff
Served and satisfied customers
Operations Managements Remit

Operations is not just concerned with what goes on at the point of production, but is also directly concerned with supplying the materials, the location and layout of facilities, the programming of operations and the motivation of employees.
CIPS Study Guide Pg 2
Some interfunctional relationships between the operations function and other core and support functions
Engineering/ technical function
Analysis of new technology options Provision of relevant Accounting data Understanding of the capabilities and constraints of the operations process
Product/service development function
Understanding of process technology New product and needs service ideas

Understanding of the capabilities and constraints of the operations process Market requirements
and finance function
Financial analysis for performance and decisions Understanding of human resource needs Recruitment development and training
Operations function
Marketing function
Understanding of infrastructural and system needs Provision of systems for design, planning and control, and improvement
Human Resources function

Information Technology (IT) function

10
Operations Management
Restricted sense
Planning organising and controlling production process and management of interface with support functions
Broader sense
Relevant to every sphere of organisational activity
Operations Management regarded as one of key functions of enterprise such as Finance, Marketing, HRM and sometimes Purchasing Management
11
The Five Competitive Objectives
Quality
Being RIGHT
Responsiveness / Speed
Being FAST
Dependability
Being ON TIME
Flexibility
Being ABLE TO CHANGE
Cost
Being PRODUCTIVE
Source : Slack et al 2001
12
What is Logistics?
Logistics involves getting
o o o o o o o o the right product in the right way in the right quantity and right quality to the right place at the right time for the right customer at the right cost
Its not just trucks and sheds

MBA 401 10-11 HP Intro v0.2 ppt 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/Mangan 13
Retail Logistics Typical Physical Infrastructure

Physical Flows e.g. Product, equipment, display material
Head Office
Home Delivery
Suppliers
Store
Customer
Store
Information Flows e.g. Orders, Forecasts, Sales

BM 203 09-10 S Chain v 0.1ppt 14
Meeting Essential Criteria

Effectively manage distribution function Select most suitable transport modes Plan routes and schedule deliveries
Examine, monitor and control distribution costs

Design efficient internal flows of goods within the warehouse Comply with complex legal transport requirements within and outside EU Waste disposal and recycling to meet environmental standards
Control inventory
Measure and control performance
Use of Information Technology

BM 203 09-10 S Chain v 0.1ppt
Source : CIPS Store & Distn Study Guide p 5
15
Managing the Supply Chain
Second-tier suppliers
First-tier suppliers
First-tier customers
Second-tier customers
The operation
Purchasing and Supply Management
Physical Distribution
Management
Materials Management Supply Chain Management Logistics

BM 203 09-10 S Chain v 0.1ppt 16
Source : Slack et al, 2001 Ops Mgmt Chap 13
Applications to Manufacturing and Services

Logistics and SCM can be used to generate both cost savings and service enhancements
e.g. after sales service and delivery add-ons
Robust logistics strategies enable the entire supply chain to compete

e.g. Dell
relatively cheap PCs, plus online sales and fast delivery
e.g. Triage
rapid assessment of patient needs, matching patients with the right care stream as early as possible
2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/Mangan
17
MBA 401 Operations Management Determining an Operations Strategy

What is Strategy?
Strategic decisions means those decisions which Are widespread in their effect on the organisation to which the strategy refers Define the position of the organisation relative to its environment Move the organisation closer to its long-term goals.
BMN 201 10-11 HP Wk 2 HP Strat v0.3
19
What is the role of the operations function?
Operations as an Implementer
Operations as Supporter Strategy
Operations as Driver Ops
Strategy
Ops Ops
Strategy Operations drives strategy
Operations implements strategy

Operations supports strategy
20
The Four Perspectives on Operations Strategy

Top-down perspective
What the business wants operations to do
Operations resources perspective

What operations resources can do
Operations strategy
Market requirement perspective

What the market position requires operations to do
What day-to-day experience suggests operations should do
Bottom-up perspective
21
How Operations Strategies are put Together
Identify what is wanted in the marketplace
Establish how well the operation performs vs. its competitors
Identify what the operation needs to do better
Identify how the operation could do these things better
Implement the strategy

BMN 201 10-11 HP Wk 2 HP Strat v0.3 22
The Benefits of Excelling
Minimum price, highest value Cost
Quick delivery
Speed Fast throughput
Minimum cost, maximum value Ability to change Reliable operation
Dependable delivery Dependability
Quality
Error-free processes
Ability to change
Flexibility Frequent new products, maximum choice

23
Error-free products and services
Relative Importance of Performance Objectives

The influence of the organisations customers The influence of the organisations competitors
The relative importance of each performance objective to the operation
The stage of the organisations products and services in its life cycle
24
Order Winning and Order Qualifying Criteria

Order Winners Offer features attractive to customers but not available from competition Secure orders in market place May become order qualifiers Order Qualifiers Feature necessary to enter a market Do not win orders May prevent loss of orders
25
Order Loser
Both Order Winners and Qualifiers can become Order Losers, if: Quality Delivery Speed Reliability Any other factors that made customers look to you,
suddenly become unacceptable

The four-stage model of Operations contribution
(Hayes and Wheelwright)
Redefining industry expectations Increasing strategic impact Clearly the best in the industry
STAGE 3 Link strategy with operations
STAGE 2 Adopt best practice STAGE 1
STAGE 4 Give an operations advantage
As good as the competitors

Holding the Correct worst organization back problems
Internally neutral
Externally neutral
Internally supportive
Externally supportive
Increasing operations capabilities
27
How can the contribution of the operations function be assessed?
Neutral
Supportive
Stage 1
Stage 3 Objective is for operations to provide credible support for the business strategy. Stage 4
Internally
Objective is to minimise the negative impact of operations. Stage 2
Externally
Objective is for operations Objective is for operations to help the business to provide a source of maintain parity with its competitive advantage. competitors.
28
Impact of Competitor Activity

Original Strategy Order winners Qualifiers Competitors Strategy Order winners Qualifiers Performance objectives Fast delivery Range Price Speed and Flexibility Performance objectives Fast delivery Range, Price Speed
Alternative Strategy 1 Order winners Qualifiers Performance objectives Fast delivery Range Price Speed and Flexibility
Alternative Strategy 2 Order winners Qualifiers Performance objectives Faster delivery Range, Price Speed
Alternative Strategy 3 Order winners Qualifiers Performance objectives Price Fast delivery Range Cost
The Hill Methodology of Strategy Formulation

Step 1 Corporate objectives Step 2 Marketing strategy Step 3 How do products or services win orders? Step 4 Step 5
Operations Strategy
Process choice
Infrastructure
Growth
Profit
ROI
Other financial measures

The Hill Methodology of Strategy Formulation

Step 1 Corporate objectives Step 2 Marketing strategy Step 3 How do products or services win orders?
Price Quality Delivery speed Delivery dependability Product /service range Product /service design Brand image Technical service
31
Step 4
Step 5
Operations Strategy
Process choice
Process technology Trade offs embodied in process Role of inventory Capacity, size, timing, location.
Infrastructure
Functional support Operations planning and control systems Work structuring Payment systems Organisational structure
Growth
Product/Service markets & segments Range Mix
Profit
ROI
Volumes Standardisation or customisation
Other financial measures
Innovation Leader or follower
Growth in international trade

Considerable growth in recent decades in world trade;
World exports grew from $62 billion in 1950 to $9,000 billion by 2004
Facilitated by reduction of trade barriers between countries and region Hence more freight is moving around world
Logistics systems are thus having to play an increasingly important role in the global economy
32
Total World Merchandise Exports 19502004 Figure 2.1
33
Globalisation
The path towards globalisation
Establish a presence in an overseas markets to become a multinational company
Trade across many borders, with operations in multiple countries to become a transnational corporation
34
Globalisation
Ethnocentricity: a company when doing business abroad thinks and acts as if they were still operating in their home country Polycentricity: a company adopts the host country perspective Geocentricity: a company acts completely independent of geography and adopts a global perspective, and will tailor to the local environment as appropriate (i.e. glocalisation)
Overseas Site Selection Factors

Table 2.4 Site Selection Factors
Labour costs
Employment regulations Available skills Land costs and availability of suitable sites
Political stability
Environmental regulations Taxation rates Government supports
Energy costs
Availability of suitable suppliers Transport and logistics costs Transport linkages Communications infrastructure and costs
Currency stability
Benefits of being part of a cluster of similar companies Preferred locations of competitors Access to markets Community issues and quality of life
36
Outsourcing
The transfer to a third party of the management and delivery of a process previously performed by the company itself
To reduce costs To increase flexibility To focus on core competences To gain access to the latest technologies
Offshoring
The transfer of specific processes to lower cost locations in other countries
Not the same as outsourcing
Outsourcing involves handing process ownership over to a third party In offshoring, the company may still own and control the process itself in the lower cost location
38
MBA 401 Operations Management

Purchasing & Supply
Where does the Business get its Competitive Advantage?
The technological specification of its product / service?
Product / Service Technology
The way it positions itself in its market?
Marketing
Operations
The way it produces its goods and services?
BMN 201 10-11 Wk 3 HP Design v0.2 ppt
Source : Slack et al Operations Mgmt Pearson 2001
40
The Purchasing Cycle
Vendor Rating / Performance Review
Identification of Need
Defining the Specification
Payment Contract Award Negotiating VFM
Defining Contractual Terms
Sourcing the Market Supplier Appraisal
Analysing Quotes / Tenders
Inviting Quotes / Tenders
CIPS 10-11 Lev 4 P&S Relns Wk 3 v 0.1.ppt
Source : CIPS Study Guide P 113
41
Reasons for Buying Abroad

Availability of products and raw materials
Features & technical specifications

Decline of manufacturing base High cost of Research & Development
Domestic capacity cant meet demand

Strategic reasons - secondary source Favourable prices due to:
Exchange rates, low wage costs, higher productivity

Reciprocal deal with foreign firm or government
MBA 401 10-11 P&S v0.2 Source: CIPS T&O Guide 2003 p 160 42
Perceptions of Lead Time

Origin of Need Requisition Sellers lead time Makers lead time Order sent Order received Manufacture commenced Manufacture completed Despatch Receipt Available In users possession Use or consumption
MBA 401 10-11 P&S v0.2
True lead time
Users view of lead time
Purchasing lead time
Source Baily Farmer Jessop Jones 1998 CIPS P 43
43
General Problems of Overseas Sourcing

Longer and more variable lead times
Greater buffer stocks
Uncertainty reduced by improvements in

Containerisation Information and Communications Technology (ICT) Real cost of airfreight
Specifications
Differences in international standards Differences in nomenclature (Standards of measurement)
Outsourcing
A contractual relationship between an external vendor
and an enterprise in which the vendor assumes

responsibility for one or more business functions of the enterprise White & James 1993
Outsource non core activities
Focus on distinctive or core competences
MBA 401 10-11 P&S v0.2
Source: CIPS T&O Guide 2003 p 67
45
Make In House
Internal capacity:
Is spare capacity available ?
Cost:
Is it cheaper to make internally?
Quality:
Will internal manufacture allow closer quality control?
Timescale:
Is continuous supply available as required?
Confidentiality:
Is it necessary to keep data and info secret?
Trends in the Manufacturing Sector emerging from Globalisation

Global markets Global competition Competitors, partners and customers from around the world Global sourcing Global presence Global value chains resulting in increasing complexity and competition Global access to knowledge and new technologies High level of customer awareness and expectations Rapid pace of technological change Fast rate of product commoditisation SCM expertise and innovation are preconditions for business success
MBA 401 10-11 P&S v0.2
47
Relative Costs in a Do vs Buy Decision

In-source
opportunity
indirect
Out-source
supplier profit
allocated
direct
market price coordination risk coordination risk Buyer Costs
coordination risk
MBA 401 10-11 P&S v0.2
48
Process for Outsourcing

Strategic Analysis of current position Identify Core Business Identify Target areas for Outsourcing
Define clear & unambiguous Specifications
Selection of Supplier
Implementation & Review
Development of Relationship
MBA 401 10-11 P&S v0.2
Source: Based on CIPS Slide Set (2006)
49
Outsourcing Matrix
Low
Outsource / Buy in
Develop Contracting
Core
Collaboration
In-house
High High
Competence of Contractors
Low
MBA 401 10-11 P&S v0.2
50
Specification of Requirement
Be clear and unambiguous Include measurable performance criteria
Recognise & highlight remaining problems

Describe relationships sought Refer to confidentiality and security Identify licensing issues Consider terms and conditions of contract Include processes for change & development
MBA 401 10-11 P&S v0.2
Source: CIPS Study Guide (2006: 233)
51
The Service Cycle Continuous Improvement

Specification
Improvement
Selection
Appraisal
Performance
MBA 401 10-11 P&S v0.2
52
Figure 5.1 Most frequently reported Problems leading to failure in outsourcing (Pandit, 2005)
MBA 401 10-11 P&S v0.2
53
Regular Contact with Contractor to ensure...

Terms of contract met
Customer orders passed efficiently & correctly to contractor

Deliveries are made as scheduled (on time) Adequate reports of incidents, delays, shortfalls etc..
Costs and budgets regularly monitored

Relevant statistical information feedback
MBA 401 10-11 P&S v0.2
Source : CIPS Store & Distn Study Guide p 42
54
Risk Minimisation for Outsourcing

Retain some expertise in-house Partially outsource and measure results Measure effect on customer service & delivery quality Does 3rd party work for competitors and how prioritise work? Ensure Service Level Agreement covers range of needs Consider effect on total distribution costs Consider specialist company with sector expertise
MBA 401 10-11 P&S v0.2
Source CIPS Study Guide P 170
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Classifying Logistics Companies

Own account transportation: when a company provides its own transport services Logistics service providers:
Freight carriers: e.g. hauliers, trucking companies, train companies, airlines, shipping companies Freight forwarders: make transportation arrangements Couriers: immediate delivery of products Integrators: offer a seamless (i.e. integrated) end-to-end service from consignor to consignee Agencies: companies combine buying power to gain reduced freight transport rates
MBA 401 10-11 P&S v0.2
56
MBA 401 Operations Management Capacity and Demand Management
Capacity Planning and Control
Capacity planning and control
Operations strategy
The market requires the availability of products and services

Design The operation supplies ... the capacity to deliver products and services
Operations management Improvement
Planning and control
BMN 201 10-11 wk 4 HP Dem Cap v0.2.ppt
58
Objective
To provide an appropriate amount of capacity at any point in time
The appropriateness of capacity planning in any part of the operation can be judged by its effect on
Costs Revenue Working capital Service level
Source: British A
Source: Slack et al (2007) Pearson 59
How is Capacity Defined ?

Capacity is the ability to hold, receive, store or accommodate a certain volume (Van Looy , 1998 p 282) People
Man Hours per shift
Equipment
Litres delivered per day
Facilities
Seats available per day
60
How Capacity and Demand are Measured
Efficiency =
Planned loss of 59 hours
Actual output Effective capacity
Design capacity
168 hours per week Effective capacity 109 hours per week
Avoidable loss - 58 hours per week Actual output 51 hours per week
Utilisation =
Actual output Design capacity
61
The Nature of Aggregate Capacity
Aggregate capacity of a hotel:

rooms per night ignores the numbers of guests in each room
Aggregate capacity of an aluminium producer: tonnes per month ignores types of alloy, gauge and batch variations
62
Finite Loading
Loading Basis Hours, weight or throughput
Capacity
200 180 160 140 120 100 80 60 40 20 0 1
Work Centre
64
Infinite Loading
Loading Basis Hours, weight or throughput
Capacity
250 200 150 100 50 0 1
Work Centre
65
Causes of Seasonality
Climatic
Festive
Behaviour al
Politica l
Financi al
Soci al
Source: Alamy/Medical-on-li
Construction Beverages (beer, materials Foods cola) (ice-cream, Christmas Clothing (swimwear, shoes) cake) Gardening items (seeds, Fireworks fertilizer)
Travel services Holidays Tax processing Doctors (influenza epidemic) Sports services Education services
66
Demand Fluctuations in Four Operations
67
Adjust output to match demand
Hire Temporary labour Overtime Subcontract
Fire
Source: Corbis/Photocuisine
Lay-off
Short time Third-party work
68
Moving a peak in demand can make capacity planning easier
69
Coping Strategies
Absorb demand
Have excess capacity

Make to stock
Part finished, Finished Goods, or Customer Inventory
Keep output level Make customer wait

Queues Backlogs
70
Capacity Decision Factors

Do we need to do it ourselves?
Size/scale of operations unit(s)

Increment of capacity additions
Cycle time of operation

Location of capacity
Flexibility/cost balance
Skill and labour requirements
BMN 201 10-11 wk 4 HP Dem Cap v0.2.ppt 71
Flexing Demand
Pricing by Time
Pricing by Segment
Advertising / Promotions Co-promotions with other products to shift demand Introduce reservation systems New location delivery points Sales Force incentives
BMN 201 10-11 wk 4 HP Dem Cap v0.2.ppt 72
Ways of Reconciling Capacity and Demand
Demand Capacity
Demand Capacity
Demand Capacity
Level capacity
Chase demand
Demand management
73
MBA 401 Operations Management
Materials Management
Inventory is created to compensate for differences in timing between supply and demand
Rate of supply from input process
Source: Alamy/Van Hilversum
Inventory
Rate of demand from output process
Input process Inventory

MBA 401 Wk5 Mats Mgmt v 0.2.ppt
Output process
75
Single-stage and two-stage inventory systems
Single-stage inventory system
Two-stage inventory system
Stock
Sales operation
Central depot
Distribution
Sales Local distribution operation point
Suppliers
Suppliers
e.g. Local retail store

e.g. Automotive parts distributor

Inventory Management
How much to order :
Balance cost of holding stock and cost of purchasing items
When to order :
Balance early delivery / cost of stock holding and late delivery / cost of stock-out
77
A multi-echelon Inventory System
Garment manufacturers
Cloth manufacturers Yarn producers
Regional warehouses
Retail stores
The Forrester or Bullwhip Effect
Source : CIPS Study Guide P 49
79
Generic warehouse functions
Figure 7.3
80
The Throughflow Warehouse
81
The Crossflow Warehouse Flow
82
Inverted T Warehouse Flow
83
Storage Equipment
84
Using warehouses to add value

(after Jessop & Morrison, 1994) Figure 7.2
85
The Decoupling Point

Martin Christopher
Lean
Agile
Forecast at generic level Economic Batch Quantities Maximise Efficiencies
Demand Driven Localised Configuration Maximise Effectiveness
Strategic Inventory
BMN 201 10-11 HP Invent v 0.2.ppt 86 Source: Christopher, M. Logistics & SCM (2005:121)
Process Types in Manufacturing
High
Project Jobbing
Variety
Batch
Mass
Continuous
Low Low Volume High
87
The Four Dimensions of Operations

Process Focus
Low
Repetitive Focus
Volume
Product Focus
High
Variety
High Low
Variation (in Demand)

High
Low
Visibility
High Low
88

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MBA 401 Operations Management Introduction to Operations Management

University of Gloucestershire Business School

What is Operations Management ?

MBA 401 10-11 HP Intro v0.2 ppt

Source: Slack et al (2007)

They are all operations

MBA 401 10-11 HP Intro v0.2 ppt

Source: Slack et al (2007) Pearson

Concept of Operations Management

Source: Slack et al (2007) Pearson

Operations Management at IKEA

Design elegant products which can be flat-packed efficiently

Site stores of an appropriate size in the most effective locations

Continually examine and improve operations practice

Arrange for fast replenishment of products

Monitor and enhance quality of service to customers

MBA 401 10-11 HP Intro v0.2 ppt

Source: Slack et al (2007) Pearson

The Activities of Operations Management

GOODS OUTPUT AND SERVICES

MBA 401 10-11 HP Intro v0.2 ppt

Source : Slack et al Operations Mgmt Pearson 2001

Served and satisfied customers

Source: Slack et al (2007) Pearson

Operations Managements Remit

MBA 401 10-11 HP Intro v0.2 ppt

CIPS Study Guide Pg 2

Product/service development function

Understanding of process technology New product and needs service ideas

and finance function

Human Resources function

Information Technology (IT) function

MBA 401 10-11 HP Intro v0.2 ppt

The Five Competitive Objectives

Being ABLE TO CHANGE

MBA 401 10-11 HP Intro v0.2 ppt

Source : Slack et al 2001

Its not just trucks and sheds

Retail Logistics Typical Physical Infrastructure

Information Flows e.g. Orders, Forecasts, Sales

Meeting Essential Criteria

Examine, monitor and control distribution costs

Use of Information Technology

Source : CIPS Store & Distn Study Guide p 5

Managing the Supply Chain

Purchasing and Supply Management

Materials Management Supply Chain Management Logistics

Source : Slack et al, 2001 Ops Mgmt Chap 13

Applications to Manufacturing and Services

Robust logistics strategies enable the entire supply chain to compete

MBA 401 10-11 HP Intro v0.2 ppt

2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/Mangan

MBA 401 Operations Management Determining an Operations Strategy

BMN 201 10-11 HP Wk 2 HP Strat v0.3

Source: Slack et al (2007) Pearson

What is the role of the operations function?

Operations as Supporter Strategy

Operations as Driver Ops

Strategy Operations drives strategy

Operations implements strategy

Operations supports strategy

The Four Perspectives on Operations Strategy

Operations resources perspective

Market requirement perspective