C4: Operations Management

Module 4

Inventory, supply chain, projects

and measurements
Upon completion of this module students will be able to:
 Explain the reason for having inventory.
 Explain various inventory models including sales and
operations planning, material requirements planning (MRP)
and manufacturing resource planning (MRP II).
 Discuss the theory of constraints.
Outcomes
 Define supply chain management from a strategic view.
 Discuss the bullwhip effect or demand amplification.
 Define collaborative supply chains.
 Describe the nature of project management and the strategic
nature of projects.
 Describe project organisation structures.
 Discuss the critical chain method.
 Describe measurements for business excellence.
 Describe the Hoshin process for setting goals and using
measurement systems.
 Describe the balanced scorecard approach to performance
measurement.

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Unit 9

Unit 9

Inventory planning and

management
Upon completion of this unit students will be able to:
 Explain the reason for having inventory.
 Explain why the economic order quantity is not appropriate
for modern business.
 Describe a fixed-order quantity model and a periodic
review model.
Outcomes
 Describe how lead times and safety stock affect inventory
management.
 Describe the process for sales and operations planning.
 Describe material requirements planning (MRP).
 Describe manufacturing resource planning (MRP II).
 Explain a bottleneck process.
 Discuss the theory of constraints.
 Explain the theory of constraints logical thinking process.
 Discuss the drum-buffer-rope.
 Describe the operations scheduling process.
 Differentiate between backward and forward scheduling.

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Activity 4.1
Now that we have introduced the subject, reflect on what
inventory does for an organisation. Think of an organisation with
which you are familiar and try answering these questions:
1. How much inventory should the organisation have?
Activity
2. When should you pay for it?
3. How much should you pay for it?
4. What happens if you have too much inventory?
5. What happens if you have too little inventory?
6. Where is inventory stored?
7. How much storage space is required?
8. How is inventory transported?
9. How much inventory is transported at one time?
10. How is inventory stored?
11. What happens if the inventory is a hazardous substance (or
dangerous to handle)?
12. How do you keep track of what inventory you have?
13. What is the value of the inventory you have?
14. What can you do with the inventory you do have?
15. We could consider many more questions at this stage but the
above give some idea of where we are heading.

Activity 4.1 feedback

Inventory costs money so when an organisation obtains more
inventory it costs it more money. If it obtains a lot more inventory
it costs it a lot more money. That money is now tied up with the
inventory investment and cannot be used for any other purpose.
While inventory is being held it may appreciate in value but, more
than likely, it will depreciate. Appreciation arises in times of rising
prices and currency fluctuations. Depreciation is more common as
customers are not prepared to pay full price for something that is
not brand new or fresh.
Inventory hides problems and compensates for poor delivery
performance, high levels of scrap and rework, poorly maintained
equipment, incorrect quantities used and supplied, and poor buying

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Unit 9

decisions. Inventory, in this sense, encourages ineffective

behaviour and poor performance.
Inventory requires storage places. Warehouses, storage sheds, retail
shelves, containers and transport systems are built to hold and
manage inventory. This is a real concern when the items held are
large, bulky and carry little value. Foam used in packaging and
upholstery is an example of a product made almost entirely of air
that is relatively cheap to make but expensive to store.
Inventory slows production as batches of product move through
production systems. When more inventories are used, transport
systems are bigger, slower, clumsier and less able to cope with
changing customer demands.
Inventory encourages obsolescence or may even become obsolete.
The use-by date on supermarket items encourages households to
buy in smaller quantities and hold smaller quantities in their homes
to prevent the goods expiring.
Inventory requires special handling conditions and may be
hazardous to store. Dangerous chemicals and flammable liquids
need specially constructed storage areas and staff need specialist
training when handling and using these items.
Inventory is counted, administered, managed and may also be
insured against loss. These actions take time and money for the
people involved.

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Activity 4.2
Now that we have introduced the subject of material requirements
planning, try answering this question:
What data is required to develop a very basic MRP?

Activity

Activity 4.2 feedback

Material requirements planning (MRP) is a set of techniques that
uses the master production schedule, bills of material and inventory
data to calculate the requirements of component materials.
MRP uses the master production schedule which is the list of
products, quantities and dates for the next few months. It starts with
each specific item and quantity listed and calculates the quantities
of all components and materials required to make those items and
the date those items must be available for use.
To calculate the quantities of all components and materials required
it uses the bill of materials indicating the quantities of components
to be used to make each product. Bills of materials are also called
formulas, recipes, formulations or ingredient lists.
MRP explodes the bill of material, adjusts for inventory quantities
on hand or already on order, and calculates net requirements that
are offset by the lead time.
The inventory data needed for a basic MRP system includes lead
time required to obtain or manufacture all products and materials,
the quantity to order or the batch size and the quantity on-hand or
the current inventory balance.
The master production schedule entries are translated into gross
requirements for all materials by time period.
The gross requirement is the total requirement of an item generated
from the master production schedule and subsequent levels in the
bill of material. The gross requirement is balanced with inventory
on hand, scheduled receipts and safety stock to calculate net
requirements.
The net requirement is the result of applying a gross requirement
against inventory on hand, allocations, scheduled receipts and
safety stock. The net requirement is then lot-sized and offset for
lead time and becomes a planned order.

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Unit 9

MRP calculates the net requirements by subtracting current stocks

and current on order quantities from the overall gross requirement.
The explosion process is controlled by the bills of material. If net
requirements are greater than zero, order receipts must be planned.
The order release is offset from the required order receipt date by
the lead time.
MRP outputs include planned orders, order release notices, changes
in open orders due to rescheduling, and inventory status data. The
resulting planned order releases which become the detailed
production schedules are examined for availability of resources for
each time period. If the capacity is inadequate to meet the schedule,
the MPS is modified and the MRP programme is run again. The
procedure is repeated until the MPS and available capacity have a
reasonable match.

Activity 4.3
Work through the following questions. You may need to go back
and re-read the unit to help you.
1. Explain why the economic order quantity model is not
appropriate for modern business.
Activity
2. Explain the difference between MRP and MRP II.
3. Explain the sales and operations planning process.
4. Explain why sales and operations planning is performed at the
aggregate level.
5. Explain the theory of constraints.
6. Explain how the drum-buffer-rope works.
7. Explain the difference between a capacity-constrained resource
and a bottleneck.
8. Explain why an organisation might carry safety stock.

Activity 4.3 feedback

All answers are in the learning material.

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 C4: Operations Management

Unit 10

Supply chain management

Upon completion of this unit students will be able to:
 Define supply chain management from a strategic view
 Discuss the bullwhip effect or demand amplification
 Define collaborative supply chains
 Explain the triple-A approach to supply chains
Outcomes
 Discuss the strategic role of inventory in supply chains
 Discuss the criteria for supplier selection.

Activity 4.4
Work through the following questions. You may need to go back
and reread the unit to help you.
1. Explain the bullwhip effect. In particular, explain how it
happens and what can be done to minimise adverse effects.
Activity
2. Describe the Triple-A supply chain approach.
3. Explain vertical integration as a means to secure more linkages
in the supply chain.
4. Evaluate the criteria for selecting a supplier.

Activity 4.4 feedback

All answers are in the learning material.

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Unit 11

Unit 11

Project management
Upon completion of this unit students will be able to:
 Define a project.
 Describe the nature of project management.
 Discuss the strategic nature of projects.
 Describe project organisation structures.
 Discuss the role of the project manager.
Outcomes
 Discuss project management processes.
 Define a critical path.
 Discuss project risk and uncertainty.
 Discuss the critical chain method.
 Outline what makes a project successful.

Activity 4.5
Work through the following questions. You may need to go back
and reread the unit to help you.
1. What is a project?
2. What makes a project different from other business activities?
Activity
3. What is project “creep” and what should be done to prevent it?
4. Explain the critical chain method.
5. What makes a project successful?
6. As a project manager, how would you ensure that your project
is successful?

Activity 4.5 feedback

All answers are in the learning material.

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Unit 12

Performance measurement
Upon completion of this unit students will be able to:
 Describe measurements for business excellence.
 Describe the Hoshin process for setting goals and using
measurement systems.
 Describe the balanced scorecard approach to performance
Outcomes measurement.
 Describe how the closed-loop management system links
strategy and operations.
 Describe benchmarking.

Activity 4.6
Work through the following questions. You may need to go back
and reread the unit to help you.
1. Describe the balanced scorecard approach.
2. Evaluate Hoshin planning as a strategic planning system.
Activity
3. Evaluate Hoshin planning as a performance measuring system.
4. What are some financial measurements for an organisation?
5. What are some operational measurements for an organisation?
6. How can innovation and learning be measured?
7. What is an appropriate measurement for internal processes?
8. What performance measurements are suitable for a call centre?
9. How does benchmarking benefit an organisation?

Activity 4.6 feedback

All answers are in the learning material.

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Operations Management Exam Questions

Operations Management Exam Questions

Guidelines
The allocated exam time is three hours.
The student should answer six questions from a choice of eight.
Each question should take about 30 minutes to answer.
Lecturer to choose eight questions from the 15 provided below.
Choose only one from each heading.

Strategy and competitiveness

Question 1
“The battle is won not in the boardroom but in the laboratories, on factory
floors, at service counters and in computer rooms. Companies that fail to
exploit fully the strategic power of operations will be both hampered in
their own attacks and vulnerable to those of competitors that do exploit
its power.”
Discuss.
Answer
The direct quotation in the following four paragraphs is sourced
from Robert H. Hayes and David M. Upton (1998) ‘Operations-
based strategy,’ California Management Review, 40(4): 8–25. This
provides the context on which the question is based.
The battle is won not in the boardroom but in the
laboratories, on factory floors, at service counters and in
computer rooms. Operations’ role is larger than just that of
implementer of strategy; it is the foundation for – indeed,
the driver behind – successful strategic attacks and
defences. The important implication for company leaders:
companies that fail to exploit fully the strategic power of
operations will be both hampered in their own attacks and
vulnerable to those of competitors that do exploit this
power.
Nowhere is this clearer than in cases where large companies
that have established a powerful, well-entrenched
competitive position (possibly by following a clear strategy)
are attacked successfully by competitors that lack both
position and strategy. Indeed, again and again we observe
small companies that – although lacking the advantages of
size, experience, established position and proprietary

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technology – take on big companies and in a relatively short

time push their way to industry dominance. Why were the
former leaders so vulnerable? Why didn’t they react more
promptly and vigorously to such attacks – even after
extended periods of time? And how are some companies, in
contrast, able to defend themselves successfully?
Most studies of this phenomenon focus on cases where the
key to the attacker’s success was the development of a new
technology and/or the identification of an emerging market.
Strategy then becomes primarily a matter of finding the
right ‘position’ in that market and then moving there. But
there are many other examples where radical new
technologies and markets play a minor role: the attackers
exploit technologies that are available to all and compete
for customers who already are being served by established
competitors. In such cases, the key to success is often an
operations-based advantage.
Superior operations effectiveness not only serves to buttress
a company’s existing competitive position, but, when based
on capabilities that are embedded in the company’s people
and operating processes, is inherently difficult to imitate.
For this reason it can provide the basis for a sustainable
competitive advantage even when the company adopts the
same competitive position as one or more of its competitors.
Moreover, this sort of competitive advantage tends to be
less visible to competitors than one that is based on staking
out a differentiating competitive position. As a result, they
are not prompted to respond as quickly. The sustainability
of a competitive advantage that is based on superior
operating skills is enhanced, therefore, both because it is
difficult to duplicate and because competitors may not
perceive its potential effectiveness, or even its existence,
until too late.
Guide to markers: This is a very open question and you should be
looking for an argument that suggests the operations function has a
major role to play in designing products and delivering solutions to
customers. Traditionally, the operations function has taken a back-
seat approach but the modern view is to treat operations as a
powerful weapon. Each of the quoted paragraphs above presents a
powerful story but the essence of the answer is in the final
paragraph, “Superior operations effectiveness…”

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Operations Management Exam Questions

Nature and role of operations

Question 2
“The customer wants quality, flexibility and service to increase
while variability, lead time and costs decrease.” Discuss the
customer and the six basic requirements of the customer.
Answer
The customer is the next process or where the work goes next. This
view can lead to internal and external customers, but the concept of
satisfying the customer can only be fully implemented when
considering the customer as the next process.
Most people will think of the customer as the person who buys the
product or service. The payment for products and services may
occur at any point in the supply chain or at the end. Essentially, the
payment recognises a change of ownership for a product or the
completion of the service. The person who pays for the product or
service is called the end customer or final customer or consumer.
Guide to markers: The objectives of operations management
should be viewed from the customer's point of view. The customer
is defined as the next process or where the work goes next. Thus
customers can be internal to the firm as well as external. Regardless
of the type of business, internal and external customers generally
have the following six basic requirements:
1. Higher level of quality.
2. Higher degree of flexibility.
3. Higher level of service.
4. Lower cost.
5. Less time or quicker response.
6. Less variability.
Customers determine the quality of the required output. So quality
in this sense is to understand exactly what the customers want,
when they want it, how they want it and why they want it, and then
delivering that to them.
Customers do change their minds. This does not mean they are
indecisive. Over a period of time they change their behaviours,
preferences, styles, ideas, desires, wants, needs and relationships.
Therefore, the supplier needs to understand these changes and have
the capability to react to whatever volume or product is required.
The merging of products and services often makes it difficult to
measure how well the customer is satisfied. Customers demand
higher levels of service. Suppliers are required to truly understand
the customer with objective and subjective measures.

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Lower cost is always mentioned as a customer requirement.

However, it is not just the price that needs to be lowered; it is the
total cost to the customer. Some firms, especially in information
and communications technology, refer to this as the cost of
ownership.
Customers want products produced and delivered in less time. This
requires a shorter cycle time, shorter delivery times and faster
service response. However, the real measure is consistency of
performance. This requires less variability. The output from one
session is the same as the output from the next.
Demand management and forecasting
Question 3
Discuss the purpose of the demand forecasting process and the
advantages for an organisation that develops an effective demand
forecasting system.
Answer
The forecasting process is the business process that attempts to
predict demand for products and services so that sufficient
capacity, resources and materials are available in time to meet the
need.
Guide to markers: the following paragraph relates to the purpose
of demand forecasting. These points should be covered by the
student.
The real measure, or purpose, of these forecasts in the long term,
medium term and short term is to determine the level of
expenditure. It will cost money to buy capacity; it will cost money
to occupy a facility; it will cost money to buy raw materials and
components; it will cost money to train and educate employees to
perform production and service activities; and it will cost money to
deliver products and services to customers.
Guide to markers: the following paragraph relates to the
advantages for the organisation that develops an effective demand
forecasting system. These points should be covered by the student.
How much a firm or an organisation spends is a decision entirely
up to them. Depending on how much they spend and when will
determine how well, or how poorly, they are able to satisfy
customer demand. If they spend the right amount of money they
will satisfy customer demand at the minimum cost. If they spend
too much they may find they have under-utilised resources.

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Operations Management Exam Questions

Capacity planning and management

Question 4
Yield management can be very effective when balancing supply
with demand especially for service organisations. Discuss the
business environment for yield management and how it could be
used by an airline company.
Answer
Yield management is the application of discriminatory pricing to
various market segments so that relatively fixed capacity can be
used to satisfy customer requirements and simultaneously
maximise revenue.
The objective of yield management (also known as revenue
management) is to increase revenues for organisations that operate
with relatively fixed capacity. The subject comes under a variety of
terms including revenue management, pricing and revenue
optimisation, and demand chain management.
The concept of yield management was first applied in the airline
industry during the late 1970s.
The application of yield management is well practised in the airline
industry with airlines offering flights for as low as one dollar but
for flights at least six months later. Closer to the day of the flight,
airlines may offer discounted fares on lightly loaded sectors and
these bookings usually have to be paid in full, are non-transferrable
to another person, and non-refundable. In some cases they are
changeable, but with the payment of a change penalty fee and by
paying any applicable fare adjustment. Peak-hour flights are
unlikely to have many fares at lower rates since the airlines have
little trouble selling these at higher rates.
Guide to markers: The student should have discussed four or five
of the following bullet points and then used examples from the
airline industry to illustrate the points being made.
The business environment for yield management is most effective
when the following exist:
 Relatively fixed capacity and the same unit of capacity can
be used in a variety of ways.
 Demand can be segmented by market and each segment has
varying needs, behaviour, and willingness to pay.
 Demand is highly variable (seasonal fluctuations) and
uncertain.
 Inventory is perishable (hotel room by night, airline seat by
flight).
 Product can be sold in advance.
 Product can be forecast with relatively high accuracy.

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 Fixed costs are high.

 Marginal costs of selling one extra unit are low.
 Price is not an indicator of quality.
 Producers are profit-oriented and have freedom of action.
Designing processes
Question 5
Womack describes the perfect process as “a process in which every
step is valuable, capable, available, adequate and flexible”.
Discuss.
Answer
James Womack described the perfect process as one that creates
exactly the right value for the customer. He acknowledged that
value is hard to define for external processes and even harder to
define for internal (support) processes. Each step in the process
must be valuable, capable, available, adequate and flexible.
1. To be valuable it has to add value to the customer and to be
recognised by the customer as adding value and not adding
cost. Consider removing this step from the process and
check if it is absolutely necessary.
2. The capable qualifier comes from process capability and six
sigma capability. A capable process can be executed the
same way with the same satisfactory result every time it is
run.
3. The concept of being available is a derivative of total
productive maintenance and suggests it is able to be
executed every time it is necessary without waiting. This
implies that production machines are available for use and
not waiting for parts or maintenance.
4. The theory of constraints defines processes that are
adequate. An adequate process has enough capacity to
perform this step when it needs to be performed without
waiting.
5. Flexible processes are lean and are based on the Toyota
Production System. Each step in a flexible process occurs
only at the command of the next downstream step within
the time available.
Guide to markers: The student should state that the perfect
process creates exactly the right value for the customer. Then they
should discuss each of the five key points (valuable, capable,
available, adequate and flexible).

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Operations Management Exam Questions

Improving processes – lean thinking

Question 6
One of the aims of lean thinking is the elimination of waste.
Discuss the seven categories of waste.
Answer
Waste is any activity that does not add value to the product or
service as valued by the customer.
There are seven categories of waste:
1. overproduction — excess quantity or too early
2. waiting — queues or delays
3. transportation — unnecessary movement
4. processing — poor process design
5. motion — activities that do not add value
6. inventory — items that are adding cost and not value
7. defects — scrap or rework.
Overproduction is producing a quantity greater than required.
Overproduction occurs for a number of reasons. The worst reason
is that management believes that the cost of set-up can be
amortised over a longer production run and that this lowers the unit
cost of production.
The waste of waiting occurs whenever the flow of production is
interrupted. Job shop processes are referred to as intermittent
because they stop-start-stop-start. Lean thinking endeavours to
eliminate the stop and make sure that materials and production flow
all the way from initial process to final process.
The waste of transport is any unnecessary movement of materials
or products. Inwards goods delivered to the wrong part of the
building that have to be transported to the correct place is waste.
Products sent in bulk to a remote location then called back to the
main centre to meet customer needs represents waste of transport.
The waste of processing is the inclusion of any processing step that
does not add value. It usually arises from poor process design.
Examples include heating ingredients to a temperature and
allowing them to cool and then having to heat them again when the
rest of the process is ready. This is poor co-ordination of processing
steps.
Waste of motion is the use of activities that do not add value, such
as placing heavy items on the floor rather than at waist height.
Assuming an operator can lift the items it is better to place them on
a table rather than bending to place them on the floor and then
subsequently bending to pick them up.

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Inventory waste is the storage of items that are not needed. This
requires storage in a warehouse and that requires additional cost
which would not occur if the inventory did not exist.
Producing defects, scrap and rework is waste. Scrap is an output
that is dumped at the end of processing because it does not meet
customer specification. Why is that product made in the first place?
It may be quicker to just throw money away or flush it down the
toilet. Rework occurs when a product is made and it is determined
that a defect can be corrected if it passes through the processing
step again. Painting and repainting is an example. When this waste
occurs the item is made twice but the customer only pays once.
That is waste.
Guide to markers: Students should have clearly described each of
the seven categories of waste and included the key points noted
above.
Question 7
“A big breakthrough in the development of lean thinking systems
was to realise the difference between process and operations;
process is the total flow of production from the customer’s order to
the finished product while operations is a set of machines.” Discuss
how a focus on the process teaches us to smooth out our operations
and make us more effective. (Note: Lean thinking systems are
synonymous with lean production systems and just-in-time
production systems.)
Guide to markers: Students should focus discussion on
elimination of waste to make production flow. They should
highlight inefficiencies in particular areas and how these can be
improved. If companies just concentrate on individual machines it
becomes too disjointed and unconnected. They need connection
and flow.
Product design
Question 8
What is quality function deployment?
Answer
Quality function deployment is a methodology that identifies
customer needs (the voice of the customer) and ensures these needs
are met or exceeded with the technical (design) requirements
throughout the product development and production process.
Quality function deployment can be viewed as a set of
communication and translation tools. It tries to eliminate the gap
between what the customer wants in a new product and what the
product is capable of delivering.

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Operations Management Exam Questions

Quality function deployment is a methodology to:

 Prioritise spoken and unspoken customer excitement,
performance wants and basic needs.
 Translate these needs into actions and designs such as
technical characteristics and specifications.
 Build and deliver quality products and services by focusing
business functions on a common goal of achieving customer
satisfaction.
Quality function deployment picks up the spoken and unspoken
customer requirements and maximises positive excitement such as
ease of use, fun and luxurious feel. This creates value in the
customers’ eyes.
Traditional design aims at minimising negative aspects such as
defects and poor service. The aim of traditional design in this sense
is to obtain zero defects. What is the point of difference when all
organisations have zero defects?
Quality function deployment is a system that implements elements
of systems thinking and psychology. The systems view looks at the
whole system and the psychology part looks at the customer needs,
how they evaluate value and what makes a customer choose one
product or service over another.
The performance wants and excitement characteristics provide an
excellent opportunity for an organisation to gain competitive
advantage. Knowledge about each market segment and changing
customer requirements helps to hit the customer targets. Quality
function deployment is epistemic and allows the invisible customer
requirements to become visible.
Guide to markers: This is a fairly high-level question and the
answer above is rather strategic in nature. Students could quite
easily answer by discussing the house of quality which takes
customer requirements and translates them into technical
requirements. They may also discuss the four levels of the house of
quality which eventually derives process control characteristics.
When marking you should be looking for the three bullet points
above.
Concept of quality
Question 9
Six sigma quality has developed from a simple way of measuring
quality to an overall strategy for an organisation. Describe the six
sigma approach to quality.

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Answer
Six sigma quality is a business improvement approach that seeks to
find and eliminate causes of defects and errors in manufacturing
and service processes by focusing on outputs that are critical to
customers and a clear financial return for the organisation. It is a
business process that allows organisations to improve bottom-line
performance, creating and monitoring business activities to reduce
waste and resource requirements while increasing customer
satisfaction.
Six sigma quality is a proven methodology for driving and
achieving transformational change within an organisation. It is a
business improvement process that focuses on customer
requirements, process alignment, analytical rigour and timely
execution.
In its original form it concentrated on manufacturing variables,
both controlled and uncontrolled, such as temperature, pressure,
flow rate and time. It also improved the process output variables
such as yield, waste, capacity, downtime and production rate.
This has now been extended to include non-manufacturing
variables, both controlled and uncontrolled, such as communication
methods, completeness, accuracy, training, inventory levels,
shipping methods, promise dates, days of the week, seasons of the
year and customer required date. It improves output variables such
as order correctness, delivery time and package quality.
Six sigma quality aims to align executives to the right objectives
and targets, to mobilise improvement teams, to accelerate results
and to govern sustained improvement.
It has been practised by Motorola for more than 30 years and other
large organisations have since unravelled the mysteries and applied
the gains to their operations. It has been rather slow to be
implemented within smaller companies. However, now the basic
concepts are more widespread within small to medium enterprises
despite the start-up costs and commitment required. In fact, some
of the real benefits are being achieved with service companies.
It has its foundations in statistics — well, that is where the name
comes from. Originally it was termed ± six sigma capability and it
measured the variation of each process. The process had to be
designed such that it was capable of producing ± six standard
deviations (sigma) of the process within the customer-defined
process limits.
Six sigma quality allows organisations to identify customer
requirements and to design, and subsequently modify, business
processes to consistently achieve nothing less than the minimum of
customer requirements. Keep the customer happy, supply them

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Operations Management Exam Questions

with exactly what they want, when they want it and they will come
back for more.
A concentration on increased reliability by making processes more
repeatable helps improve production, yield and efficiency.
Resources are focused on the right products and the right projects.
Guide to markers: Look for at least five of the paragraphs above.
If a student described any five paragraphs then that would
constitute an excellent answer.
Inventory planning and management
Question 10
Discuss the theory of constraints and how it can be applied to
operations.
Answer
Goldratt explains that the goal of the firm is to make money by:
 Increasing throughput, which is the rate at which money is
generated by sales.
 Reducing inventory, which is the money spent on buying
items for subsequent sale.
 Reducing operating expense, which is the money spent to
convert inventory into throughput.
Traditionally, management emphasises reducing operating expense
and reducing inventory. Organisations take pride in proclaiming
that they are on a “cost-cutting drive”. They target opportunities to
cut expenses and reduce inventory. Expenses are easy to cut when
the organisation stops spending money. Likewise inventory is easy
to reduce when the organisation stops replenishing supplies.
Looking at both operating expenses and inventory, what happens
when the organisation reaches zero? Managers argue that they will
not actually reach zero and they will stop before they reach that
limit. But they do not tell anyone where to stop, when to stop or
how to stop. They just say, “Reduce operating expenses and
inventory!” The finite limit is zero.
What kind of organisation have you built when operating expense
is zero and inventory is zero?
There is no finite limit to increasing throughput, which is defined
as the rate at which money is generated by sales. Having raw
materials sitting in the yard waiting to be processed does not make
the manufacturer successful. Having products sitting in a
warehouse does not make an organisation profitable. Having
products sitting on the shelf in a retail store does not make the
retailer wealthy.

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The only way to get rich, according to Goldratt, is to make the

products, sell them and get paid for them and make sure that the
amount you receive exceeds the amount spent on inventory and
operating expenses.
The theory of constraints requires the entire production process
working together to achieve the goals of the firm. Measurement
systems should encourage the increase in net profits, return on
investment and cash flow. Organisations can achieve this when, at
the operations level, it recognises and rewards performance based
on the amount of throughput, inventory and operating expenses
created.
Guide to markers: Students should have highlighted four of the
key points noted above.
Supply chain management
Question 11
Discuss how the bullwhip effect (or demand amplification) occur in
supply chain management.
Answer
The bullwhip effect creates large oscillations of inventory in the
supply chain network. Large changes in the supply position
upstream are caused by small changes in downstream demand. The
effect, also known as demand amplification, can be eliminated (or
minimised) by synchronising the supply chain.
The consumer sales pattern that occurs at the final retail points gets
distorted and amplified as the demand is transmitted up the supply
chain, especially when each link in the supply does not fully
understand the dynamics of the consumer sales pattern.
The effect can occur with any range of products and at any level in
the supply chain but is most noticeable with consumer commodity
products. If demand for an item is relatively constant at final retail
points, then the available inventory in the retail store gradually
diminishes until it is time for the retailer to place a replenishment
order with the wholesaler.
The wholesaler is expected to hold relatively large quantities of
products so they can meet supply demands from multiple retailers.
The wholesaler will usually be required to order from the
manufacturer in large quantities if they want to secure favourable
pricing arrangements. The wholesaler may even hold off ordering
from the manufacturer until they have a very large order and thus
secure even better payment and delivery terms.
At this stage the manufacturer is removed from the actual demand
at retail and is confronted with a large order coming in from the

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wholesaler. This may indicate that the demanded product is

experiencing an increase in popularity and, to compensate for that
popularity, the manufacturer schedules larger production runs.
However, to be able to make the larger production runs the
manufacturer must secure raw materials from their supplier.
Original suppliers supply in bulk and often have large minimum
and large multiple orders. Therefore, the manufacturer orders even
larger quantities of raw materials from the supplier.
The bullwhip effect is a direct result of individuals making rational
decisions within the supply chain infrastructure. If firms want to
mitigate the effects they first have to examine the infrastructure of
the supply chain rather than attempt to change the rational
behaviour patterns.
Guide to markers: Students should describe many of the points
above and their application to the supply chain.
Question 12
Discuss how to overcome the problems created in a supply chain
when individual participants do not have communication with their
suppliers beyond the first tier and do not have communication with
their customers beyond the first tier.
Answer
The way to overcome these problems is to be part of a collaborative
supply chain. Firms that form part of a supply chain that eventually
supplies supermarkets or large retail chains should be fully aware
of collaborative supply chains.
In its simplest form, collaborative supply chains eliminate internal
barriers that result in costs and time that add little or no value to
end consumers.
While possibly the best example of collaborative supply chains is
practised by Wal-Mart Stores in the United States, most recent
developments have occurred in Europe with a true focus on the
consumer.
There are two distinct parts — the supply side and the demand side.
The supply side of collaborative supply chains addresses the need
for rapid and efficient replenishment of products in the overall
supply chain.
Traditionally, the retailer generates replenishment orders from the
wholesaler or manufacturer. With collaborative supply chains, the
suppliers determine the replenishment quantities based on
information on stock and sales received from the retailer.
With a refined application of this process, all suppliers in the
supply chain have access to current details of consumer demand at
the retail level. This information may be sent electronically to

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them, or they can access it themselves from the retailers’ web sites.
Thus, all suppliers know the true demand and they can initiate
replenishment before the actual request filters through the supply
chain. This allows all suppliers, not just the first tier suppliers,
throughout the entire supply chain to prepare goods for despatch,
confident that replenishment is required.
The delivery process speeds up and suppliers have a better
understanding of true consumer demand.
Information about product movement (as recorded at the point of
sale), outside factors that affect demand (such as seasonal changes),
actual inventory levels, product receipts, and an acceptable agreed
safety stock level are integrated electronically.
Guide to markers: Students should discuss the two distinct parts
— the supply side and demand side and provide at least three
strategies that could overcome the problem.
Project management
Question 13
Discuss how a project manager should manage a project to meet
the various time, cost and quality constraints.
Answer
The role played by the project manager is critical to the success of
every project and it is not easy to find really good project managers
for every project. It certainly helps when the project manager has
an understanding and an appreciation of the technical aspects
associated with the project but the project manager does not have to
be an expert in the field. A project manager for a project assembled
to set up new information and communications technology, for
example, should have an appreciation of the strategic role
computers play in a business environment, but the manager does
not have to be a computer technician. The technical knowledge,
though, must be sufficient to be able to ask the right questions and
make the right decisions.
The project manager should be able to ask penetrating questions,
have credibility, sensitivity and the ability to handle stress.
Leadership and expertise in strategy are essential attributes for the
project manager. The leadership is necessary to provide direction,
motivation and help to all project team members and the strategy
expertise is required to gain the overall perspective of the business
need for the project.
A defining characteristic of the project manager is communication
and people skills displayed at all times. The project manager may
be dealing, at times, with a personal issue with one individual and,

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at others, communicating project progress to the media and

stakeholders. The project manager must be able to resolve
interpersonal conflicts. This range of skills makes this role
challenging and rewarding to the point that a good project manager
should never complain about having a boring job.
The project basics of planning, executing and controlling resources
such as people, equipment and material need to be managed to
meet the quality, cost and time constraints of the project.
Monitoring and control activities include measuring the volume of
work being completed, the quality of work, the costs compared to
budget, the attitudes of those involved including team members and
customers, the co-operation of the team and the status of the work
being performed compared to plan.
Management resource is often applied to the cost and time
constraints, and trying to keep the project within budget. Unless the
project is quite similar to other projects, or contains quantifiable
work packages, the original time and cost budget is a guess and
wishful thinking. Instead of concentrating solely on cost and time
elements, a good project manager is managing change and risk.
A change request seeks to expand or reduce the project scope,
modify policies, processes, plans or procedures, modify costs or
budgets, or revise schedules. Only formally documented change
requests are processed and only approved change requests are
implemented.
A change of scope is allowed but it has to be approved by the
customer and the project plan has to be updated to reflect the
change. Project danger arises from scope creep that allows changes
to creep into the project without customer approval, without an
allocation for additional resources and without adjusting the project
duration. Most projects have creep of some form or other and a
good project manager does not allow it to happen.
The best way to prevent project creep is to establish a clear project
charter and an agreed project scope statement before detailed work
commences.
As for risk, the project manager should be planning all risk
elements, identifying risk, performing a qualitative risk analysis,
performing a quantitative risk analysis and developing a risk
response plan. The project manager should be able to spot unstated
assumptions. These risk elements are strategic. They may be
boring, but when identified risk occurs as an event the project is
able to handle it within the scope of the project. It does not arrive
out of the blue.
With project management, the objectives are often unclear,
measurements of success are ambiguous and the process used to
manage the project does not affect success or failure. Risk develops

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as a result of uncertainty and the good project manager focuses on

reducing uncertainty and therefore minimising risk. The successful
project manager reduces risk by ensuring all communication
channels are open and by allowing all team members to express
opinions and concerns.
Guide to markers: Students should discuss the attributes of a good
project manager as noted above as well as the use of processes to
effectively manage projects.
Question 14
Projects often exceed budgeted cost and allocated time. The
reasons for exceeding cost and time are usually unexpected. A
project manager may attempt to compromise on quality in order to
complete on time and/or within cost. Discuss three sources of
unexpected problems that eventually cause the project to exceed
cost estimates and three sources of unexpected problems that
eventually cause the project to exceed time estimates.
Answer
For a variety of reasons projects have a habit of running behind
schedule. Most of the reasons fall back on the shoulders of the
project manager who should perform a better job. Initial time
estimates may be too optimistic, resources may not be available
when required, activity sequencing may be incorrect, technical
problems may occur, scope creep may occur, or the customer may
request changes.
Unexpected problems resulting in cost increases:
 difficulties require more resources
 scope of work increases
 initial bids or estimates were too low
 reporting was poor or untimely
 budgeting was inadequate
 there were price changes of inputs.
Unexpected problems resulting in time increases:
 delays owing to technical problems
 initial time estimates were optimistic
 task sequencing was incorrect
 required resources were not available as needed
 necessary preceding tasks were incomplete
 there were client-generated changes
 there were unforeseen government regulations.
Guide to markers: Students must competently discuss all six
aspects relating to cost and time increases.

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Performance measurement
Question 15
Discuss the four perspectives of the balanced scorecard approach
and outline how the balanced scorecard approach could be used for
performance measurement.
Answer
The balanced scorecard measures business performance from four
perspectives:
1. Customer
2. Internal
3. Innovation and learning
4. Financial.
1. Customer perspective
The customer perspective asks, “How do customers see us?”.
Organisations may have a strategic objective to add value to
customers, to satisfy customer needs, to listen to customer wants, to
allow customers to participate in process and product design and to
act and think from a customer’s viewpoint. This needs measuring.
This needs measuring from a customer perspective by asking
customers for their views.
2. Internal perspective
The customer perspective looks at the organisation from the outside
while the internal perspective looks at the organisation from the
inside and asks, “At what aspects of business should we excel?”.
Process design and improvement all occur internally and the results
affect customers.
Processes measured as part of the balanced scorecard have the most
impact on customer satisfaction. Clearly these affect lead time,
throughput time, employee skills and attitudes, flexibility,
availability, responsiveness and information systems.
3. Innovation and learning perspective
Innovation and learning perspective asks, “Can we continue to
improve and create value?”. Competitive activities constantly
challenge every organisation’s position. All other organisations
challenge the organisation at the top of the league. Even
organisations positioned somewhere in the middle have to face
constant challenges for their position. Customer expectations
constantly change and force organisations to be totally aware of the
range and scope of those changes.
4. Financial perspective
The financial perspective asks, “How do shareholders see us?”. In
the end it is the bottom line that counts. Firms can have any amount

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of customer satisfaction, close to perfection with internal processes,

unlimited innovation and learning and still fail on financial
measures.
The trick is to capitalise on the other perspectives and translate
gains made into financial achievements.
Guide to markers: Key aspects of each of the four perspectives
must be discussed.

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References

References
Gardiner, D. (2010). Operations Management for Business
Excellence (2nd ed.). North Shore, New Zealand: Pearson
Education.
Reading

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