OPERATIONS MANAGEMENT

Operation Essence of Operations Function: 3. Supporting Process

- responsible for producing - add value during the process - support the core process
goods/services
Value-Added – difference between *All business processes are composed
- core of what an organization does cost of input and price of output of a series of supplier-customer-
relationship.
Operations Management *Non-Profit - value to society; the
greater value, the greater
- management of systems or processes effectiveness of operations
that creates goods/services Organization,
*For-Profit – prices customers willing Supplier Department, Customer
*Goods – physical items (raw to pay; branding; the greater value, Business ProcessIndividual Management (BPM)
materials, parts, subassemblies) the greater amount of funds - process design, execution, and
*Services – activities (time, location, monitoring
form, psychological value)
MANUFACTURING VS SERVICES - managing process to meet demands
and deal with process variability
Goods Services
THREE BASIC FUNCTIONAL AREAS 1. Output Lead time – realistic estimate of how
Tangible Intangible long it will take to fill their orders
1. Finance – secure financial resources
and allocating resources 2. Degree of Customer Contact
Low High
2. Marketing – assess wants and 3. Labor Content PROCESS VARIATION
needs, and selling and promotion Low High 1. Variety of Goods and Services Being
3. Operation – producing and 4. Uniformity of Inputs Offered
providing goods and services High Low
5. Measurement of Productivity 2. Structural Variation in Demand
Easy Hard - trends and seasonal variation
Supply chain 6. Opportunity to Correct
High Low 3. Random Variation
- sequence of activities involved in 7. Inventory
- natural variability
producing and delivering goods or Much Little
services 8. Wages 4. Assignable Variation
- value increases as it moves through Narrow Range Wide Range
- caused by defectives
the chain 9. Ability to Patent
Usually Not Usually
*External: provide inputs
Process Management SCOPE OF OPERATIONS
*Internal: supply operations with MANAGEMENT
materials and labor - management of the process in
transformation of products  Forecasting
Transformation Process – the storing,  Capacity Planning
transporting, and repairing of product - central role of all management  Facilities and Layout
*Feedback – measurement taken to *Process – action/s that transform  Scheduling
ensure desired outputs are obtained inputs into outputs  Managing Inventories
 Assuring Quality
*Control – comparison of feedback to 1. Upper-Management Process  Motivating and Training
know if correction is needed - govern the entire operation  Locating Facilities
Product Packages – combination of 2. Operational Process
goods and services
- core process
Goods-Oriented
- manufacturing and assembly 9. Management Information Systems Models
operations (MIS) – provides information needed
to manage effectively - abstraction of reality, a simplified
Service-Oriented representation
WHY LEARN OPERATIONS
- healthcare, transportation, food MANAGEMENT? - decision making aids
handling, and retailing
- every aspect of business is affected 1. Physical – look like real-life
by operations counterpart
Operations Manager 2. Schematic – more abstract; less
- to have a better understanding on
resemblance to the physical reality
- guide the system by decision-making the world we live in, global
dependencies of companies, success 3. Mathematical – most abstract; do
- ultimate responsible to creation of and failure of businesses, and not look like real-life counterpart;
goods or provision of service importance of working with others easiest to manipulate
1. System Design
- system capacity, geographic Operations Field Skill Set: Quantitative Approaches
location, physical structures, product
and service planning, equipment 1. People Skills: political awareness, - attempt to obtain mathematically
acquisition mentoring ability, and collaboration, optimal solutions
negotiation, and communication skills
- require long-term commitments 1. Linear Programming
2. Knowledge Skills: credibility and
- “strategic decisions” good decision making, product/service - optimum allocation of scarce
and process knowledge, industry and resources
2. System Operation
global knowledge, and financial and 2. Queuing Techniques
- management of personnel, accounting skills
inventory, scheduling, project - analyzing situation in which waiting
management, quality assurance line forms
- “tactical and operational decisions” DECISION MAKING 3. Inventory Models
What: What resources are needed? - control inventories
OTHER FUNCTIONAL AREAS When: When will each resource be 4. Project Models
needed? When should the work be
1. Accounting – prepared financial scheduled? When should materials - for planning, coordinating, and
statements and other supplies be ordered? controlling large-scale projects
2. Purchasing – procurement of Where: Where will the work be done? 5. Forecasting Techniques
materials, supplies, and equipment
Who: Who will do the work? - for planning and scheduling
3. Personnel – recruitment and
6. Statistical Models
training of employees, labor relations, Why: Why we need to produce or
etc. provide that service
- for decision making
4. Public Relations – building and How: How will the product or service
maintaining positive image be designed? How will the work be
done? How will resources be Analysis of Trade-Offs
5. Industrial Engineering – scheduling, allocated?
performance standards, etc. - considering consequences in making
How Much: How much money we decisions
6. Distribution – shipping of goods need or effort/manpower?
- looking for the pros and cons
7. Maintenance – general upkeep and
repair
8. Legal – consulted in contracts
Degree of Customization - production changed when machine *Interchangeable Parts – standardized
power substituted human power parts so it did not have to be custom
- highly customized products/services fitted (Eli Whitney, late 1700s)
tends to be more labor intensive Craft Production
*Division of Labor – production
- more time consuming, requires highly - highly skilled workers using simple, process is divided into small tasks, and
skilled people, involves more flexible flexible tools to produce small individual workers (Adam Smith,
equipment quantities of customized goods Wealth of Nations, 1776)

Systems Approach Scientific Management Human Relations Movement

- considering the capability of other - brought widespread changes to the - emphasized the importance of
departments in making decisions management of factories human elements in job design
- the whole is greater than the sum of Frederick Winslow Lilian Gilbreth
its individual parts
- “Father of Scientific Management” - wife of Frank Gilbreth
- concentrate on efficiency within
subsystems and thereby achieve - based on observation, measurement, - focused on the human factor in work
overall efficiency analysis, and improvement of work
methods, and economic incentives Elton Mayo (1930)
*System – set of interrelated parts
that must work together - introduced moving assembly line - worker motivation is critical in
improving productivity
- emphasized maximizing outputs
Abraham Maslow (1940)
Establishing Priorities - Principles of Scientific Management,
1911 - developed a motivational theory:
- certain issues are more important Hierarchy of Needs
than others Frank Gilbreth
Frederick Hertzberg (1950s)
- “Father of Motion Study” (Therbligs)
Pareto Phenomenon
- refined Maslow’s Theory: Satisfiers
- a few factors account for a high - developed principles of motion and Dissatisfiers (Motivation and
percentage of the occurrence of economy to small portion of tasks Hygiene)
events Henry Gantt Douglas McGregor (1960s)
- few issues are more important that it - the value of nonmonetary rewards to
gives disproportionately large impact motivate workers - Theory X: workers do not like to work
and to be controlled to do good work
- you do not solve for big problems, - Gantt Chart: system for scheduling
look for the root which causes the - Theory Y: workers enjoy physical and
Harrington Emerson mental aspects of works and become
bigger problem
committed to work
- use of experts to improve
organizational efficiency William Ouchi (1970)
HISTORICAL EVOLUTION
Henry Ford - Theory Z: Japanese approach of
Industrial Revolution lifetime employment
- an industrialist
- began in 1770’s in England, and
spread to Europe and US in 19th - known for his assembly lines
Decision Models and Management
Century - employed scientific management Science
- goods were produced in small shops techniques
- the factory movement was
by craftsmen *Mass Production – large volumes of accompanied by the development of
- only simple tools were available standardized goods are produced by several quantitative techniques
low-skilled/semi-skilled workers using
specialized machineries
F.W. Harris (1915) Technology Key Issues
- developed the first model: a - application of scientific discoveries to 1. Economic Conditions
mathematical model for inventory the development and improvement of
2. Innovating
order size goods and services
H.F. Dodge, H.G. Romig, W. Shewhart *High Technology - most advanced 3. Quality Problem
and developed machines and methods 4. Risk Management
- statistical procedures for sampling
and quality control (1930) 1. Product and Service Technology 5. Competing in A Global Economy
L.H.C. Tippett (1935) - discovery and development of new
products and services
- groundwork for statistical-sampling ENVIRONMENTAL CONCERNS
theory - done by researchers and engineers
Sustainability – using resources that
George Dantzig 2. Process Technology do not harm ecological systems that
- Linear Programming - methods, procedures, and equipment support human existence
used to produce goods and provide Green Initiatives – reducing packaging,
services materials, water, and energy use, and
INFLUENCE OF JAPANESE 3. Information Technology (IT) the environmental impact of the
MANUFACTURERS supply chain reconditioning used
- science and use of computers and equipment for resale and recycling
- developed/refined management other electronic equipment to store,
practices that increased the process, and send information.
productivity of the operations and
quality of products (W. Edwards & Ethics
Joseph Juran) - standard of behavior that guides how
Globalization
- emphasized quality and continual one should act
improvement, worker teams and - the need for global supply chains Codes of Ethics
empowerment, and achieving have broadened the scope of supply
chain management - organizational ethics that is
customer satisfaction
developed to guide employees
- “Quality Revolution” conduct
Operations Strategy
- Kaizen: continuous improvement 1. Utilitarian Principle
- Customer Satisfaction: no complaints, 1. Working with Fewer Resources
- good done by an action should
and no product returns 2. Revenue Management/Yield outweigh any harm
- Just-in-Time (JIT) Production: Management
2. Rights Principle
stockless management 3. Process Analysis and Improvement
- action should respect and protect
- worker teams and empowerment *Six Sigma Process – reducing cost, the moral rights of others
improving quality, and increasing
3. Fairness Principle
customer satisfaction
OPERATIONS TODAY - equals should be held to, or
*Total Quality Management (TQM) –
E-Business a quality focus emphasizes customer evaluated by, the same standards
satisfaction and often involves team- 4. Common Good Principle
- use of internet to transact business work
- action should contribute to the
E-Commerce *Agility – ability to respond quickly to common good of the community
- consumer-business transaction online demands or opportunities
5. Virtue Principle
*Lean System – use minimal amount
of resources to produce a high volume - action should be consistent with
of high-quality goods with variety certain ideal virtues
Ethical Framework Competitiveness *Organizational Strategies – strategy
for the entire organization
- sequence of steps intended to guide - how effectively an organization
thinking and subsequent decisions or meets the wants and needs of *Functional Strategies – strategies of
actions customers relative to competitors the functional areas of the
organization
1. Recognize an ethical issue. Marketing Influences:
2. Make sure the pertinent facts are 1. Identifying Customer’s Wants/Needs
known. What options are available? Tactics
2. Price and Quality
3. Evaluate the options. - methods and actions used to
3. Advertising and Promotion accomplish strategies
4. Identify the “best” option.
Operation Influences: - provide guidance and direction for
5. Consider the effect of your decision. carrying out actual operations
1. Product and Service Design
2. Cost - “how to” part of the process
The Need to Manage the Supply Chain
3. Location
1. The need to improve the operations.
4. Quality Different Strategies
2. Increasing level of outsourcing. 1. Low Cost – outsourcing operations
5. Quick Response
*Outsourcing – buying goods or 2. Scale-Based Strategies – capital
services instead of producing or 6. Flexibility intensive methods
providing them to save cost. 7. Inventory Management
3. Specialization – narrow product
3. Increasing transportation cost. 8. Supply Chain Management lines or limited service
4. Competitive Pressures. 9. Service 4. Newness – innovation
5. Increasing globalization. 10. Manager and Workers 5. Flexible Operations – quick
6. Increasing importance of e-business. response

7. The complexity of supply chains. To Successfully compete: 6. High Quality – higher quality

8. The need to manage inventories. First: What do customers wants? 7. Service – helpful, courteous, reliable

Second: What is the best way to satisfy 8. Sustainability – environmental

those wants? friendly
Major Decision Areas in Supply Chain
1. Location – choice of location for
both production and distribution MISSION AND STRATEGIES Core Competencies – special attributes
facilities or abilities possessed that gives
Mission – reason for existence competitive edge
2. Production – what customer wants,
when they want it, and how much is Mission Statement – states the
needed purpose of an organization
STRATEGY FORMULATION
3. Distribution – transportation cost Goals – provide more detail and SWOT
and delivery times describe the scope of the mission
- analysis of internal (Strengths and
4. Operational – scheduling, Strategies – plans for achieving Weaknesses) and external (Threats
maintaining equipment, and meeting organizational goals and Opportunities)
customer demand  Low Cost
Michael Porter’s Five Forces Model
5. Inventory - determining inventory  Responsiveness – ability to
needs and coordinating production respond to changing demands - analysis of threats of new entrants,
and stocking decisions  Differentiation threat of substitute products,
bargaining power of buyers, and - helps managers understand ad react Scheduling Flexibility, Efficiency
intensity of competition to the business environment Supply Chains Costs, Quality,
Agility, Shortages,
Order Qualifiers *Database – collection of statistically Vendor Relations
Projects Costs, New
documented experiences that help
- perceive as minimum standard of understand what strategy works best Products, Services,
acceptability for a product or Operating
Systems
Order Winners
Supply Chain Strategy
- perceived as better than the QUALITY AND TIME STRATEGIES
competitor’s - specifies how it should function to
Quality-Based Strategies
achieve supply chain goals
- maintaining or improving the quality
Sustainability Strategy
Environmental Scanning of a product or service
- sustainability to the level of the org’s
- monitoring of events and trends that governance, formulating goals, and Time-Based Strategies
present either threats or opportunities striving for improvements
- reducing the time required to
External Factors: accomplish various activities
Global Strategy
1. Economic Condition – general - what works in one country/region - seek to improve service
health and direction of the economy may not work in another
2. Political Condition – favorable or
To Achieve Time Reduction:
unfavorable attitudes
Operations Strategy Planning Time: time needed to react,
3. Legal Environment – laws
develop, select, approve, and adopt
- deals primarily with the operations
4. Technology – rate at which product aspect strategy
Product/Service Design Time: time
innovations are occurring
needed to develop and market
- should consider the realities of
5. Competition – the number and operations’ strengths and weaknesses
Processing Time: time needed to
strength of competitors, basis of
produce
competition, ease of market entry - must be consistent with the overall
strategy Changeover Time: time needed to
6. Markets – knowledge on customers
change from one type to another
Internal Factors:
Delivery Time: time needed to fill
Strategic Operations Management
1. Human Resources order
Decision Areas
2. Facilities and Equipment Response Time: time to address
Decision Area What it Affects
complaints
3. Financial Resources Product and Service Costs, Quality,
Design Liability and
4. Customers Environmental Issue
Capacity Cost Structure, Agile Operations
5. Products and Services Flexibility
Process Selection Cost, Flexibility, Skill - emphasize the use of flexibility to
6. Technology and Layout Level Needed,
adapt and prosper in an environment
Capacity
7. Suppliers Work Design Quality of Work Life, of change
Employee Safety,
Productivity
Location Costs, Visibility
Profit Impact of Market Strategy Quality Ability to meet or
(PIMS) exceed customer
expectations
- used to guide strategic thinking Inventory Costs, Shortages
Maintenance Costs, Equipment
- allows subscriber answer strategy Reliability,
questions Productivity
 Output 13. Design of the Workplace – may
Labor save up time
TRANSFORMING STRATEGY INTO
ACTION 2. Multifactor Productivity – more 14. Incentive Plans that Reward
than one input Productivity – boost productivity
Balance Scoreboard (BSC)
Output Improving Productivity
- Robert Kaplan and David Norton,
1990 Labor+ Machine 1. Develop productivity measures for
all operations.
- top-down management system that 3. Total Productivity – all inputs
is use to clarify their vision and goods∨service produced 2. Look at the system as a whole in
strategy and transform them into produce ¿ deciding which operations are most
all inputs used ¿
action critical.
- results used to improve strategic 3. Develop methods for achieving
performance Productivity in the Service Sector productivity improvements.
- no role in strategy formulation - more difficult to measure 4. Establish reasonable growth.
- involves intellectual activities and 5. Management supports and
high degree of variability encourages productivity improvement.
Productivity
*Process Yield – used in 6. Measure improvements and
- measure of the effective use of manufacturing to measure publicize them.
resources, usually expressed as the performance of the process
ratio of output and input
Productivity Ratios Forecast
Factors that Affect Productivity
- used for planning workforce - estimate about the future value of a
requirements, scheduling equipment, 1. Technology – reduce tasks variable such as demand
financial analysis, and other
2. Standardizing – reduce variability - determines how much capacity or
*Nonprofit Organization supply will be needed to meet demand
3. Quality Differences – distort
- higher productivity, lower cost productivity measurements - made with reference to a specific
time horizon
*Profit-Base Organization 4. Use of the Internet – lower costs of
a wide range transactions - enable managers anticipate the
- determines competitiveness future to plan accordingly
5. Computer Viruses – slow computer
Productivity Growth performance *Short-Term Forecast
- increase in productivity from one 6. Lost Items – waste of time - ongoing operations
period to the next relative to the
productivity in the preceding period 7. Scrap Rates – inefficient use of *Long-Term Forecast
resources
current − previous - require long lead time to develop,
Productivity= x 1008. New Workers – productivity lag
previous construct, or implement

Productivity Measures 9. Safety – accidents are inevitable Aspects of Forecast

- used to track performance over time 10. Shortage of technology-savvy 1. Expected Level of Demand
workers – hampers the ability to
- used to judge performance of entire update - trend or seasonal variation
industry or productivity of the country
11. Layoffs – take so much time 2. Forecast Accuracy
- scorecards of the effective use of
12. Labor Turnover – replacement - ability of forecasters to correctly
resources
takes time to speed up model demand, random variation, and
1. Partial Productivity – single input unforeseen events
 - inaccurate forecast lead to shortages - difference between the actual value
and excesses and the predicted value for a given
Yield Management period
- inaccurate forecast can result to
- percentage of capacity being used temporary increase and decrease in Error= Actual−Forecast
Uses for Forecast orders
*Positive Error: forecast is too low
1. Plan the System To reduce occurrence:
*Negative Error: forecast is too high
- long-range plans about the types of - strive to develop the best possible
the products to offer, facilities and forecasts
equipment to have, where to locate… - collaborative planning and Summarizing Forecast Accuracy
2. Plan the Use of the System forecasting - to compare the accuracy of
alternative forecasting methods
- short-range and intermediate-range - information sharing
planning - to track error performance
- increasing supply chain visibility
- rapid communication about poor 1. Mean Absolute Deviation (MAD)
Forecast Features Common to All forecasts - the average absolute error
1. Same underlying causal system in MAD=Σ∨Actual t−Forecast t ∨ ¿ ¿
the past will continue to exist in the Steps in the Forecasting Process n
future.
2. Mean Squared Error (MSE)
1. Determine the purpose of the
2. It is not perfect. Actual results forecast
- the average of squared errors
usually differ from predicted value.
3. Forecast for group items tend to be
2. Establish a time horizon Σ ( Actualt −Forecast t )2
MSE=
more accurate than individual items. 3. Obtain, clean, analyze appropriate n
data 3. Mean Absolute Percent Error
4. Forecast accuracy decreases as time
period increases. 4. Select a forecasting technique (MAPE)

5. Make the forecast - the average absolute percent error

Elements of A Good Forecast 6. Monitor the forecast errors ¿ Actualt −Forecast t ∨ ¿ x1

Actualt
1. Timely – certain amount of time is MAPE=Σ
n
needed to respond to information
Forecast Accuracy
2. Accurate – enable users plan for
- the complex nature of most real- Approaches to Forecasting
possible errors
world variables makes it almost
3. Reliable – work consistently impossible to correctly predict future 1. Qualitative – subjective inputs that
values defy precise numerical description
4. Expressed in Meaningful Units – to
know the specific unit needed - because of random variation, there 2. Quantitative – attempt to utilize
will always be some residual error causal (explanatory) variables to make
5. In writing – objective basis for a forecast
evaluating the forecast - it is necessary for the success of daily
activities
6. Simple – more comfortable to work
with *Series of Forecast – weekly tasks Judgmental Forecast

7. Cost-Effective – benefits should *Single Forecast – used for one-time - analysis of subjective inputs obtained
outweigh the cost decision from various sources
- provide insights that are not available

Forecasting and Supply Chain Forecast Error Time-Series Forecast

- attempt to project past experience
into the future

Forecasts Based on Time-Series Data Techniques for Averaging

Associative Models
Time-Series - averaging techniques generates
- use equations that consist of one or forecasts that reflect recent values of a
more explanatory variables that can be - time-ordered sequence of time series
used to predict demand observations taken at regular intervals
1. Moving Average – averages a
- made on the assumption that future number of recent actual values,
values of the series can be estimated updated as new values become
Qualitative Forecast from past values available
Executive Opinions Analysis of Time-Series Data
- group of upper level managers - identify the underlying behavior of
develop a forecast the series
- part of long-range planning and new - through plotting the data and visually
product development examining it
- advantage: knowledge and talents of Behaviors Variation 2. Weighted Moving Average – more
managers recent values in a series are given
1. Trend – long-term upward or more weight in computing forecast
- risk: may result to less pressure in downward movement
producing good forecast
2. Seasonality – regular variations
Salesforce Opinions relative to the calendar or time
- may unable to distinguish what 3. Cycles – wavelike variations of more
customers like to do and what they will than one year’s duration
3. Exponential Smoothing – based on
actually do
4. Irregular Variations – caused by a previous forecast plus a percentage
- low sales or good sales may make unusual circumstances, does not of the forecast error
them pessimistic or optimistic with reflect typical behavior
their forecast
5. Random Variations – remain after
Consumer Surveys all other behaviors
- can tap information that is not
available in others
Naïve Methods
- surveys are expensive and time- Selecting a Smoothing Constant:
Naïve Forecast
consuming
- a constant that balances the benefits
Delphi Method - uses a single previous value of a time
series as the basis of a forecast of smoothing random variations with
the benefits of responding to real
- iterative process intended to achieve
a consensus forecast - advantages: no cost, easy to prepare, change if it occurs
and understandable
*Low Values = average is stable
- circulating a series of questionnaires
to knowledgeable and could - objection: inability to provide high *Higher Values = susceptible to change
accurate forecast
meaningfully contribute individuals
- developed using the previous
information extracted Other Forecasting Methods

- useful for technological forecasting; Focus Forecasting

assessing changes in technology and - Bernard T. Smith
its impact
- uses the forecasting method that - development of an equation that
shows the best recent success summarizes the effects of predictor
1. Additive variables (used to predict variables of
Diffusion Models
- expressed as quantity the variable of interest)
- based on rates of product adaption
and usage spread - added to or subtracted from the Regression Technique
series average - fitting a line to a set of points
- used in marketing and to assess the
merits of investing in new technologies 2. Multiplicative Simple Linear Regression
- expressed as a percentage of the - simplest and most widely used
average amount
Techniques for Trend - obtain an equation of a straight
- used to multiply the value of series line
Trend Equation
*Least Squares Line
Seasonal Relative - minimizes the sum of the
- percentage of average or trend squared vertical deviations around the
line
1. Deseasonalize Data
- to remove the seasonal component
from the data in order to get a clearer
picture of the nonseasonal
Trend-Adjusted Exponential Smoothing components
- “double smoothing” *Standard Error of Estimate
- dividing each point by corresponding
- various of exponential smoothing seasonal relative - a measure of the scatter of
used when a time series exhibits a 2. Incorporate Seasonality points around a regression line
linear trend
- obtain trend estimates
- add seasonality to trend estimates

Computing Seasonal Relatives

Centered Moving Average
Correlation
- a moving average positioned at the
center of the data that were used to - measure of the strength and
compute it direction of relationship between two
variables
Simple Average Method

Techniques for Seasonality - seasonal relative is the average for

that season divided by the average of
Seasonal Variations all seasons
- regular annual variations
Monitoring Forecast Error
- regularly repeating movements in Associative Forecasting Techniques
series values that can be tied to Possible Sources of Forecast Error
recurring events - identification of related variables that
can be used to predict valued of the 1. Inadequate Model:
- expressed in terms of the amount variable of interest - omission of an important variable
that actual values deviate from the
average value of a series
 - change or shift that cannot be dealt
with
- appearance of a new variable
2. Irregular variations due to natural
phenomena
3. Random Variation
Control Chart
- visual tool for monitoring forecast
errors
“In Control” Errors
- it is within the control limit and no
patterns are present

Tracking Signal
- cumulative forecast error to the
average absolute error
*Bias – persistent tendency for
forecast to be greater or less than the
actual values of a time series

CHOOSING A FORECASTING
TECHNIQUE
- cost and accuracy must be
considered
*How much money is budgeted for
generating the forecast?
*What are the possible costs of
errors, and what are the benefits that
may accrue from an accurate forecast?

USING FORECAST INFORMATION

1. Reactive – probable future demand
and a manager reacts to meet the
demand
2. Proactive – requires explanatory
model or subjective assessment of the
influence on demand