DSIOPMA

Operations Management
Definition
Goods-service Continuum
Refers to the Administration of Business Practices to create
the highest level of efficiency possible within a business or “Products are neither purely service or purely goods based.”
organization. It is also converting materials and labor into
goods and services.

Operations?

→ The part of a business organization that is responsible for

producing goods and services

Operations management?

→ The management of systems or processes that create

goods and provide services. Manufacturing vs. Service

Goods and services Characteristic Manufacturing Service

→ Goods are physical items that include raw materials, Output Tangible Intangible
parts, subassemblies, and final products
Customer Low High
→ Services are activities that provide some combination of Contact
time, location, form or psychological value.
Uniformity of High Low
Supply Chain Input

★ A sequence of activities and organizations involved Labor Content Low High

in producing and delivering a good or service.
Uniformity of High Low
Output

Measurement of Easy Difficult

Productivity

Opportunity to High Low

The Transformation Process correct quality
problems

Key Factors in Designing and Managing Operations

Systems

1. Degree of Customers’ involvement

2. Degree of technology used

Basic Functions of a Business Organization

★ Feedback
○ Measurements taken at various points in the
transformation process
★ Control
○ The comparison of feedback against
previously established standards
★ Value-Added
○ Cost - Value
★ Gap
○ Target vs. Actual
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Operations Management
How different organizational functions overlap Process Variation

Finance and Operations ★ Variations can be disruptive to operations and supply

chain processes
★ Budgeting ★ May result in additional costs, delays, shortages and
★ Economic analysis of investment proposals inefficiencies
★ Provision of funds
4 Sources of Variation:
Marketing and Operations
Variety of goods or services The greater the variety
★ Demand data being offered offered, the greater the
★ Product and service design variation in production or
★ Competitor analysis service requirements
★ Lead time data
Structural variation in These are generally
demand predictable, they are
important for capacity
planning

Random variation Natural variation that is

present in all processes.
Generally it cannot be
influenced by managers.

Assignable variation Variation that has

identifiable sources. This
type of variation can be
reduced or eliminated by
Process Management analysis and corrective
action.
Process - one or more actions that transform inputs into
outputs Role of the Operations Manager

3 Categories of Business Processes: The Operations function consists of all activities directly
related to producing goods or providing services
Upper-management Govern the operation of the
entire organization → primary function of the manager is to guide the system by
intellectual decision making
Operational Core processes that make
up the value stream ★ System design decisions
★ System operation decisions
Supporting Support the core processes
System Design Decisions
Supply & Demand ★ System designs are usually strategic decisions
○ Require a long-term commitment of
resources
○ Determine parameters of system operation
■ Capacity
■ Location
■ Layout
■ Product and service planning
■ Acquisition and placement of
equipment
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Operations Management
System Operations Decisions Systems Approach
★ Operations are generally tactical system : a set of interrelated parts that must work together
○ Management of personnel (a business organization is a system composed of
○ Inventory management and control subsystems – marketing, operations, finance)
○ Scheduling
○ Project management The Systems Approach
○ Quality assurance
★ Operation managers spend more time on system ★ Emphasizes interrelationships among subsystems
operation decision than any other decision area ★ Main theme is that the whole is greater than the sum
○ However they still have a vital stake in of its parts
system design ★ The output and objectives of the organization take
precedence of those of any one subsystem
General Approach in Decision Making
Establishing Priorities
★ Modeling is a key tool used by all decision makers
★ Common features of models: ★ Certain issues or items are more important than
○ Omit unimportant details of real-life systems others
they mimic so attention can be focused on ○ Recognizing this allows managers to focus
the most important aspects. their attention to efforts that will do the most
★ Benefits of Models: good
○ Generally models are easier to use and less
expensive than dealing with the real system Pareto Phenomenon
○ Increase understanding of the problem
○ Enable managers to analyze “what if?” → a few factors account for a high percentage of occurrence
questions of some event(s)
○ Serve a a consistent tool for evaluation and ★ The critical few factors should receive the highest
provide a standardized format for analyzing priority
a problem ★ This is appropriately applied to all areas and levels
★ Model Limitations of management
○ Quantitative information may be emphasized
at the expense of qualitative information Industrial Revolution
○ Models may be incorrectly applied and the
results misinterpreted
Pre-Industrial Revolution
○ Use of models does not guarantee good or
→ Craft Production
perfectly accurate decisions
★ System in which highly skilled workers use simple,
flexible tools to produce small quantities of
Quantitative Approaches customized goods
○ Management theory and practice did not
★ A decision-making approach that frequently seeks to advance appreciably during this period
obtain a mathematically optimal solutions
○ Supported by computer calculations Scientific Management
○ Often work together with qualitative
approaches
→ Movement was led by efficiency engineer, Frederick
Winslow Taylor
Metrics and Trade-Offs ★ Believed in a “science of management” based on
observation, measurement, analysis and
Performance Metrics improvement of work methods and economic
★ Profits incentives
★ Costs ★ Management is responsible for planning, carefully
★ Quality selecting, and training workers, finding the best way
★ Productivity to perform each job, achieving cooperation between
★ Flexibility management and workers, and separating
★ Inventories management activities from work activities
★ Schedules ★ Emphasis was on maximizing output
★ Forecast accuracy

→ trade-off is giving up one thing in return for something

else
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Operations Management
Influence of Japanese Manufacturers Competitive Strategy and Productivity
★ Refined and developed management practices that Businesses Compete Using Operations:
increased productivity ★ Product and Service design
○ Credited in fueling the “quality revolution” ★ Cost
○ Just-in-Time Production ★ Location
★ Quality
Key Issues for Operation Managers Today ★ Quick response
★ Flexibility
★ Economic conditions ★ Inventory management
★ Innovating ★ Supply chain management
★ Quality problems ★ Service
★ Risk management ★ Managers and workers
★ Competing in a global economy
Why some organizations fail:
Key Issues for Supply Chains ★ Neglecting operations strategy
★ Failing to take advantage of strengths and
★ Need to improve operations opportunities, and/or failing to recognize competitive
★ Increasing levels of outsourcing threats
★ Increasing transportation costs ★ Too much emphasis on short-term financial
★ Competitive pressures performance at the expense of R&D
★ Increasing globalization ★ Neglecting investments in capital and human
★ Increasing importance of e-business resources
★ Complexity of supply chains ★ Failing to establish good internal communications
★ The need to manage inventories and cooperation
★ Failing to consider customer wants and needs

Hierarchical Planning

Mission

Goals

Organizational Strategies

Functional Strategies

Tactics

Mission

★ The reason for an organization’s existence

○ States the purpose of the org
○ “What business are we in?”

Goals

★ Provide details and the scope of the mission

★ Goals can be viewed as “destinations”
★ Serve as basis for organizational strategies

Strategy

★ Plan for achieving organizational goals

★ Serves as a roadmap for reaching the “destination”
○ Organizational strategies
○ Functional level strategies
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Operations Management
Key External Factors ★ Top-down management system that organizations
can use to clarify their vision and strategy, and
★ Economic Conditions transform them into action
★ Political Conditions ○ Develop objectives
★ Legal Environment ○ Develop metrics and targets for each
★ Technology objective
★ Competition ○ Develop initiatives to achieve objectives
★ Markets ○ Identify links among the various
perspectives
Key Internal Factors ■ Finance
■ customer
★ Human resources ■ Internal business processes
★ Facilities and Equipment ■ Learning and growth
★ Financial Resources ○ Monitor results
★ Customers
★ Products and services Productivity
★ Technology
★ Suppliers → measure of effective use of resources, usually
★ Other expressed as the ratio of output to input

Operations Strategy Productivity measures are useful for:

★ Tracking an operating unit’s performance over time
★ Judging the performance of an entire industry or
Quality-based strategy country
★ Strategy that focuses on quality in all phases of an
organization
○ Trying to overcome a poor quality reputation
○ Desire to maintain a quality image
○ A desire to catch up with the competition
○ A part of a cost reduction strategy

Time-based strategy
★ Strategy that focuses the reduction of time needed
to accomplish tasks
○ By reducing time:
■ Lower costs
■ Higher quality
■ Higher productivity
■ Faster time-to-market
■ Improved customer service

Agile Operations
Factors Affecting Productivity
★ A strategic approach for competitive advantage that
emphasizes the use of flexibility to adapt and
Methods
prosper in an environment of change
○ Involves the blending of several core Capital
competencies
■ Cost Quality
■ Quality
■ Reliability Technology
■ Flexibility
Management
Balanced Scorecard Approach
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Operations Management
Forecasting Steps in the Forecasting Process
A forecast is a statement about the future value of a variable ★ Determine the purpose of the forecast
of interest ★ Establish a time horizon
★ Forecasts can be done on weather, demand and ★ Obtain, clean, and analyze appropriate data
resource availability ★ Select a forecasting technique
★ Forecasts are important to making informed ★ Make the forecast
decisions ★ Monitor the forecast errors

2 important aspects of forecasts: Forecast Accuracy and Control

1. Expected level of demand ★ Allowances must be made for forecast errors

a. Level of demand may be a function of some ★ Forecast errors must be monitored
structural variation such as a trend, or ○ Error = Actual - Forecast
seasonal variation ○ If errors fall beyond acceptable bounds,
2. Accuracy corrective actions may be necessary
a. Related to the potential side of forecast error
Forecast Accuracy Metrics
Forecast Uses
MAD = Weights all errors evenly
Plan the system MSE = Weights errors according to their squared values
★ Generally involves long-range plans related to: MAD = Weights errors according to relative error
○ Types of products and services to offer
○ Facility and equipment levels Forecasting Approaches
○ Facility location
★ Qualitative forecasting - Soft Info
Plan the use of the system ○ Permits the inclusion of soft information
★ Generally involves short and medium range plans such as:
related to: ■ Human factors
○ Inventory management ■ Personal opinions
○ Workforce levels ■ Hunches
○ Purchasing ○ Uses subjective inputs such as opinions
○ Production from consumer surveys, staff, managers and
○ Budgeting experts
○ Scheduling ○ These factors are difficult / impossible to
quantify
Common Features in all Forecasts ★ Quantitative forecasting - Hard Data
○ Rely on hard data
★ Techniques assume some underlying causal system ○ Involves either the projection of historical
that existed in the past will persist into the future data, or development of associative
★ Forecasts are not perfect methods that attempt to use casual
★ Forecast for groups of items are more accurate than variables to make a forecast
those for individual items
★ Forecast accuracy decreases as forecasting horizon Time-Series Forecasts
increases
★ Forecasts that project patterns identified in recent
Elements of a Good Forecast time-series observations
○ Time series : a sequence of observations
★ Must be timely taken at regular time intervals
★ Should be accurate ★ Assume that future values of the time-series can be
★ Should be reliable estimated from past values of the time series
★ Should be expressed in meaningful units
★ Should be in writing Time Series Behaviors
★ Technique should be simple to understand and use
★ Should be cost-effective ★ Trend
○ Long-term upward or downward movement
in data
★ Seasonality
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Operations Management
○ Short-term, fairy regular variations related to
Exponential Smoothing
the calendar or time of day
A weighted average method that is based on the previous
○ Ex. restaurants, theaters and service
forecast + a percentage of the forecast error
centers experience seasonal demand
★ Cycle
○ Wave-like variations lasting for more than a
year
○ Often related to a variety of economic,
political, or even agricultural conditions
★ Irregular variation
○ Due to unusual circumstance that do not
reflect typical behavior
★ Random Variation
○ Residual variation that remains after all
other behaviors have been accounted for.

Time-Series Forecasting - Naive Forecast Techniques for Seasonality

Seasonality : Regularly repeating movements in series
★ Uses a single previous value of a time series as the
values that can be tied to recurring events
basis for a forecast
○ Forecast for a time period is equal to the
★ Expressed in terms of the amount that actual values
previous time period’s value
deviate from the average value of a series
★ Can be used with
○ A stable time series
Models of seasonality
○ Seasonal variations
★ Additive
○ Trend
○ Seasonality is expressed as a quantity that
gets added or subtracted from the
Time-Series Forecasting - Averaging
time-series average
★ Multiplicative
★ Works best when a series tends to vary about an ○ Expressed as a percentage of the average
average amount, which is then used to multiply the
○ Smooth variations in data value of a series in order to incorporate
○ Can handle step changes or gradual seasonality
changes in the level of a series
Seasonal Relatives
Techniques: → seasonal percentage used in the multiplicative seasonally
adjusted forecasting model
Moving Average
As new data becomes available, forecast is updated by
adding the newest value and dropping the oldest, and
then re-computing the average

→ Fewer data points used : more responsive

→ More data points used : less responsive

Weighted Moving Average

The most recent values in a time series are given more
weight in computing a forecast

The choice of weights, w, is somewhat arbitrary and Associative Forecasting Techniques

involves some trial and error
★ Based on the development of an equation that
summarizes the effects of predictor variables
○ Predictor variables are variables that can be
used to predict values of the variable of
interest
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Operations Management
Simple Linear Regression
★ Regression is a technique for fitting a line to a set of
data points
★ The simplest form of regression that involves a linear
relationship between two variables.
○ Obtain an equation of a straight line that
minimizes the sum of squared vertical
deviations from the line

Simple Linear Regression Assumptions

★ Variations around the line are random

★ Deviations around the average value (line) should be
normally distributed
★ Predictions are made only within the range of
observed values

Monitoring the Forecast

★ Tracking forecast errors and analyzing them can
provide useful insight into whether forecasts are
performing satisfactorily
★ Sources of forecast errors:
○ The model may be inadequate due to
■ Omission of an important variable
■ A change or shift in the variable the
model can’t handle
■ The appearance of a new variable
○ Irregular variations may have occurred
○ Random variation
★ Control charts are useful for identifying the presence
of non-random error in forecasts
★ Tracking signals can be used to detect forecast bias

Choosing a Forecasting Technique

Factors to consider:
★ Cost
★ Accuracy
★ Availability of historical data
★ Availability of forecasting software
★ Time needed to gather and analyze data, and
prepare a forecast
★ Forecast horizon

→ the better forecasts are, the more able organizations will

be to take advantage of future opportunities and reduce
potential risks