Production - Operations Control

Managerial control of production-operations and financial activities is critical to

organizational performance. All other organizational activities, such as engineering,
personnel, marketing, and research and development, support and depend on the
primary activity of producing goods and services.
Recently term "production-operations management" is increasingly dropped in favour of
simply "operations management".
Operations management is the management of the productive processes that convert
inputs into goods and services. The concept applies to both manufacturing and service
industries, even though their characteristics differ to some degree. All organization
produced outputs, where these outputs are goods, services, or ideas. Regardless of
whether an organization produces a product or a service, operations managers need to
be acutely concerned about productivity.
Productivity is an efficiency concept that gauges the ratio of outputs relative to inputs
into a productive process.
Productivity is aimed at assessing the efficiency aspect of organizational performance
- the ratio of outputs relative to inputs. Organizational productivity is often measured by
using this equation:
 Productivity= goods and services produced (outputs) /labor + capital + energy +
technology + materials
 Productivity = goods and services produced (outputs) / labor + capital + energy +
technology + materials (inputs)
This approach considers all the inputs involved in producing outputs are sometimes
referred to as total-factor productivity. Managers also use partial-factor productivity, an
approach that considers the total output to a specific input, such as labour. For
example:
 Productivity = goods and services produced (output) / labour hours (labour input)
In addition, managers often develop specific ratios that gauge productivity for particular
outputs and inputs.
The Operations Management Process
The outputs are obtained by transforming certain basic inputs - raw materials, human
resources, capital, information and technology - through production, or operations,
processes. Such transformation processes involve several major elements: operating
strategy, operating systems, facilities, process technology.
Operating Strategy
Steven C. Wheelwright and Robert H. Hayes argue that operations management
plays different roles in determining strategy, depending on an organization's strategic
role stage. There are four stages:
Stage 1: Minimize Negative Potential. At stage 1, top managers attempt to neutralize
any negative impact that internal operations may have on the organization. Top
managers typically use detailed measures and controls to be sure that the operations
function does not veer too far off track before corrective action is taken.

Stage 2: Achieve Parity with Competition. At this stage, top managers seek to have
operations management maintain parity, or stay even, with competition. Companies at
this stage typically attempt to maintain equality with the competition by adopting industry
practices related to work-force matters (such as labour negotiations), equipment
purchases, and upgrades of capacity.
Stage 3 Support Overall Organizational Strategy. At stage 3, to managers expect the
operations management function to actively support and strengthen the organization's
overall strategy.
Stage 4: Pursue Operations Management-Based Strategy. At stage 4, top managers
include operations managers in the strategy development process and formulate a
strategy that depends to a significant degree on operations capabilities.
In strategic role stages 3 and 4, the two operations strategies that are most commonly
used are low-cost producer and innovative producer.
Operating Systems
The primary operating systems used in operation management are forecasting, capacity
planning, aggregate production planning, scheduling, material requirement planning,
and purchasing. Forecasting it will be discussed in Volume 2. Quality control, another
major system that is important in operation management, is discussed above.
Capacity planning is the process of determining the people, machines, and major
physical resources, such as buildings, that will be necessary to meet the production
objectives of the organization. Capacity is the maximum output capability of a
productive unit within a given period of time. Capacity planning involves three different
time horizons: long-range, medium, and short range.
Aggregate production planning is the process of planning how to much supply with
product or service demand over a time horizon of about 1 year. Operations managers
can use several approaches to meet short-term and intermediate-term fluctuating
demand: hiring and lying off employees, using overtime and idle time, building up
inventory, taking back orders, subcontracting, and combining approaches.
The master production schedule (MPS) translates the aggregate plan into a
formalized production plan encompassing specific products to be produced or services
to be offered and specific capacity requirements over a designate time period.
Materials requirements planning (MRP) is a computer-based inventory system that
develops materials requirements for the goods and services specified in the master
schedule and initiates the procurement actions necessary to acquire the materials when
needed.
Facilities
Facilities are the land, buildings, equipment, and other major physical inputs that
substantially determine productivity capacity, require time to alter, and involve
significant capital investments. Facilities issues confronting managers focus mainly on
expansion and contraction decisions, facilities location, and facilities layout.

Expansion and Contraction Decisions. Typically, the facilities decision process involves
four steps:

 First, managers use forecasts to determine the probable future demand for
products or services.
 Second, managers compare current capacity with projected future demand.
Current capacity is the maximum output rate possible from current operations.
 Third, when there is either insufficient or excess capacity, managers need to
generate and then evaluate alternatives.
 Finally, managers carefully consider the risks and decided on a plan that includes
the timing of capacity expansion or contraction.
In expanding capacity, top managers generally have three major policy options:

 First, with a capacity-leads-demand policy, a firm tries not to run short.

 Second, with a policy of capacity in approximate equilibrium with demand, and an
organization attempts to match as closely as possible to anticipated demand.
 Third, with a capacity-lags-demand policy, an organization tries to maximize
capacity utilization.
Facilities Location. The location of plants, warehouses, and service facilities is an
important aspect of facilities decisions. Most facilities location problems fall into one of
four categories:
 1. A single-facility location involves a facility that does not need to interact with
any other facilities that the organization might have.
2. Location for multiple factories and warehouses usually involve strong
consideration of distribution costs and effects on total production costs owing to
the various interfaces.
3. Locations for competitive retail outlets must be oriented toward consideration
of the revenue that can be obtained from various locations.
4. The location of emergency services often is connected to response time (e.g.,
police and fire departments must be located where they can provide an
acceptable level of service.
Facilities Layout. There are three main types of layouts for facilities:
1. A process layout is a production configuration in which the processing
components are grouped according to the type of function that they perform.
2. A product layout is a production configuration in which the processing
components are arranged in a specialized line along which the product or client
passes during the production process.
3. A fixed-position layout is a production configuration in which the product or
client remains in one location and the tools, equipment, and expertise are
brought to it, as necessary, to complete the productive process.
Process Technology
Process technology is the technology used in transforming inputs into goods and
services. It includes the tools, methods procedures, equipment, and various steps
involved in the production process. Recent innovation is process technology centre on
computer-integrated manufacturing.
Computer-integrated manufacturing (CIM) is the computerized integration of all
major functions associated with the production of a product (for example, designed and
engineering products, instructing machines, handling materials, controlling inventories,
and directing the production process).
CIM systems typically make extensive use of sophisticated material requirements
planning (MRP) systems and rely on several other types of computerized systems, such
as computer-aided design, computer-aided manufacturing, and flexible manufacturing
systems.
Computer-aided design (CAD) is a system that uses computers to geometrically
prepare, review, and evaluate product design.
Computer-aided manufacturing (CAM) is a system that uses computers to design
and control production processes.
A flexible manufacturing system (FMS) is a manufacturing system that uses
computers to control machines and the production process automatically so that
different types of parts or product configurations can be handled on the same
production line.

Although quality has been defined in many ways, The American Society for Quality Control offers this
standard definition: Quality is "the totality of features and characteristics of product or service that bear
on its ability to satisfy stated or implied needs?

David A. Garvin argues that quality can be used in a strategic way to

compete effectively. There are eight dimensions of quality that are Important from a strategic point of
view:

1. Performance Performance involves a product's primary operating characteristics. For an automobile,

performance would

include traits like acceleration, handling, cruising speed, and

comfort, for a television set, performance means sound and

picture clarity, and the ability to receive distant stations..

2. Features Features are supplements to the basic functioning characteristics of the product or service.
Examples include free drinks on a plane, permanent-press cycles on a washing machine, and automatic
tuners on a colour television set.

3. Reliability- Reliability addresses the probability of a product or service. Among the most common
measures of reliability are the mean time to first failures, and the failure rate per unit time.

4. Conformance- Conformance refers to the degree to which a product's design or operating

characteristics meet established standards. When new design or models are developed, dimensions are
set for parts and purity standards for materials. These specifications are normally expressed as a target
or "centre", deviance from the centre is permitted within a specified
range.

5. Durability-Durability is a measure of how much use a person gets from a product before it
deteriorates or breaks down to such a

point that replacement makes more sense than continual repair.

6. Serviceability- Serviceability refers to the promptness, courtesy, proficiency and ease of repair. Some
of these variables reflect differing personal standards of acceptable service. Others can be measured
quite objectively.

7. Aesthetics Aesthetics how a product looks, feels, sounds, tastes, or smells is clearly a matter of
personal judgment and a reflection of individual preferences. However, there appear to be some
patterns in consumers' rankings of products on the basis of taste.

8. Perceived- Perceived quality refers to individuals' subjective assessments of product's or service's

attributes: indirect measures may be their only basis for comparing brands. A product's durability, for
example can seldom be observed directly. In such circumstance, images, advertising, and brand names
can be critical.

A firm's first challenge is to use these eight dimensions of qualiO explore the opportunities it has to
distinguish its products from another firm's wares.

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explore the opportunities it has to distinguish its products from another firm's wares

Total Quality Control (TQC)

A number of organizations are adopting a quality stance known as total quality control Total quality
control (TOC) is a quality control approach that emphasizes organizational goals, and inclusion of quality
responsibility for the quality as a factor in performance appraisals. It represents a change in the way
quality is perceived.

The total quality control approach is aimed at achieving zero defects, a quality thentality in which the
work force strives to make a product or services conform exactly to desired standards

Quality efforts typically make use of quality circles or the more recent employes involvement teams, as
well as statistical aid to quality control

A quality circle (OC) is a small group of employees who meet periodically to solve quality problems
related to their job. Participation is usually voluntary, although there may be considerable organizational
and peer pressure to become involved. Often, members are trained in problem solving, data gathering,
and statistical methods that help them with their innovative quality improvements efforts

A number of companies are moving toward a second generation of quality circles, often called
employees involvement teams, which use a more structured approach to quality innovations

Employee involvement teams are small groups of employees who work on solving specific problems
related to quality and productivity. often with targets for improvement

Statistical Approach

To statistical approach are most common: acceptance sampling and

statistical process control

Acceptance sampling is a statistical technique that involves evaluating random samples from a group, or
"tot," of produced materials to determine whether the lot meets acceptable quality levels.
An acceptable quality level (AQL) is a predetermined standard against which the random samples are
compared. If a certain number of the samples fall below the AOL, the entire lot will be rejected. It
normally represents feedback control.

Statistical process control is a statistical technique t to determine whether acceptable quality levels are
being met or production shoul stopped for remedial action

In contrast to acceptance sampling, statistical process assesses quality during actual production so that
problems can be

Inventory Central

Another major type of control system found in most organizations is inventory control Inventory refers
to the goods or materials that are available for use by a business.

There are three major types of inventory: raw materials, work in process, and finished goods.

Raw materials inventory is the stock of parts, ingredients, and other basic inputs to a production or
services process. Work-in- process inventory is the stock of items currently being transformed into a
final product or service

Finished-goods inventory is the stock of items that have been produced and are

awaiting sale or transit to a customer.

Inventory control serves a number of important purposes in organizations and involves a number of
significant costs. The major advantages of inventory are.

⚫ inventory helps deal with uncertainties in supply and demand; another purpose of inventory is to
facilitate more economic purchases, since it sometimes is more economical to purchase large amounts
of materials at one time:
finally, inventory may be a useful means of dealing with anticipated changes in demand or supply, such
as seasonal fluctuations or an expected shortage

Two major inventory control methods are the economic order quantity

and just-in-time inventory control.

Economic Order Quantity (EOQ)

The economic order quantity (EOO) method of inventory control is procedure for balancing ordering
costs and carrying costs so as to minimize total inventory costs. Ordering costs are administrative,
clerical, and other expenses incurred in initially obtaining inventory. items and placing them in storage.
There also is the carrying, on holding, cost, the expenses associated with keeping an item on hand (such
as storage, insurance, pilferage breakage). Finally, there are stock out costs They include the loss of
customer goodwill and possibly sales because an item requested by customers is not available

In order to determine the EOQ, calculus is used in the development of the mathematical model. The
method uses an equation that includes annual demand (D), ordering costs (0), and holding costs (H) The
basic equation for EDO is presented below.

EOG = square root[(2 annual demand ordering cos holding costs]

EDC=square foot2annual demand ordering costs/holding

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(such as storage, insurance, pilferage, breakage), Finally, there are stock out costs. They include the loss
of customer goodwill and possibly sales because an item requested by customers is not available
In order to determine the EOQ, calculus is used in the development of

the mathematical model. The method uses an equation that includes annual demand (D), ordering costs
(O), and holding costs (H) The- basic equation for EOQ is presented below:

EOD square root (2 annual demand ordering costs) ( holding costs]

•EOQ square root (2 annual demand ordering costs/holding c asts]

The EOQ equation helps managers decide how much to order However, managers also need to
determine the reorder point (RIP), the inventory level at which a new order should be placed. To
determine the reorder point, managers estimate lead time (L), the time between placing an order and
receiving it. In the formula for ROP, lead. time is multiplied be average daily demand

• Reorder level = Average daily usage rate lead-time in days

• Reorder level Average daily usage rate "lead-time in days

The model described is one of the simplest to develop. The sophistication level of the model depends on
the actual need of the company and demands of the environment

Just-in-time Inventory Control

During the last few years, a completely new concept of inventory management, which was started in
Japan, has begun to gain ground in North America. It is called the just-in-time inventory systems, or JIT.
The JIT is an approach to inventory control that emphasizes having materials arrive just as they are
needed in the production process

This system is based on the idea that very little inventory is necessary if it is scheduled to arrive at
precisely the right time. The JIT approach as applied to inventory allows a firm to minimize holdings
costs ind waiting also saves space that is usually taken up Mentory production area. The JIT system
requires a maj managers think about inventory in t
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