Operations Management and Supply Chain Strategy
Operations Management Functions and Mission
Operations Management (OM) is one of the three major functions of any organization and is integrally related to all other business functions. We need to know how goods and services are produced, as OM is a significant part of an organization’s costs and provides a major opportunity to improve profitability.
The OM Mission
- To design products with outstanding quality.
- To attain exceptional value.
- To determine and design a suitable production process.
- To locate and build efficient and economical facilities.
- To collaborate with suppliers.
- To achieve low investment in inventory.
Operational Decisions
Key decisions include: Design of goods and services, Managing quality, Process and capacity design, Location strategy, Layout strategy, Human resources and job design, Supply-chain management, Inventory management, Scheduling, and Maintenance.
Tactical decisions (mid-to-short term) involve: Flowcharts and process charts, equipment maintenance, overtime, activity programming, determining when and how much to order, human resources control, and quality control.
Operating Leverage (OL): With known sales, operating leverage becomes higher as the break-even point increases. With a known break-even point, operating leverage becomes higher as sales decrease.
Process Analysis and Work Measurement
A Process is a sequence of interdependent and linked procedures which, at every stage, consume resources to convert inputs into outputs. It has a beginning and an end, implies a transformation (the “black-box”), and adds value when outputs exceed inputs. It is a systematic series of actions where tasks are logically organized, feedback is provided, and it can be divided into sub-processes.
Determinants of Process Efficiency
Process design has long-term effects on efficiency, production flexibility, costs, and quality. Determinants include: Capital intensity, flexibility, finance planning, learning effects, quality levels, vertical integration, customer participation, and the nature of demand.
Labor Standards and Work Measurement
Labor standards represent the time required to perform a job. They are used for: 1) Labor content of items, 2) Staffing needs, 3) Cost and time estimates, 4) Crew size and work balance, 5) Expected production, 6) Wage-incentive plans, and 7) Efficiency supervision.
Capacity Planning and Layout Strategy
When demand exceeds capacity, firms may curtail demand by raising prices, scheduling longer lead times, or increasing capacity as a long-term solution. When capacity exceeds demand, firms should stimulate the market or change products. Seasonal demands can be managed by producing products with complementary demand patterns.
Vertical Integration and Expansion
Vertical Integration offers benefits like coordinated quality management, better design-marketing coordination, and economies of scale. However, drawbacks include high investment requirements, increased complexity, and loss of supplier know-how. When expanding, firms avoid labor force dispersion but face more hierarchical levels and rigidity. Adding plants can follow product, market, or process strategies.
Layout Strategy and Clustering
Clustering (being near competitors) is beneficial for the labor market, common suppliers, and knowledge flow. The objective of layout strategy is to develop an effective layout that improves the flow of information, materials, and people while increasing space utilization.
- Fixed-position layout: For large projects like ships.
- Process-oriented layout: For low-volume, high-variety production.
- Work cell layout: Focuses on a single product group.
- Product-oriented layout: For repetitive or continuous production.
- Retail layout: Responds to customer behavior.
- Warehouse layout: Manages trade-offs between space and handling.
Quality Management and TQM Tools
Quality is the totality of features that satisfy needs, viewed from user-based, manufacturing-based, and product-based perspectives. It increases sales through reputation and reduces costs by lowering rework and warranty expenses.
Costs of Quality
- Conformance costs: Prevention (planning/training) and Appraisal (testing).
- Nonconformance costs: Internal failure (rework/scrap) and External failure (returns/liabilities). External failures are the most damaging.
Total Quality Management (TQM)
TQM involves Deming’s 14 points, Continuous Improvement (PDCA cycle), Employee Empowerment, and Benchmarking. Tools include the Kaizen 5S system (Sort, Set in order, Shine, Standardize, Sustain) and standards like ISO 9000 or the EFQM model.
The Seven Tools of TQM
Managers use Check Sheets, Scatter Diagrams, Cause-and-Effect Diagrams (Fishbone), Pareto Charts (80/20 rule), Flowcharts, Histograms, and Statistical Process Control (SPC). SPC distinguishes between Natural Variations and Assignable Variations.
Supply Chain Management and Sourcing
Supply chain management integrates procurement, transformation, and delivery. Outsourcing utilizes specialist efficiency. Sourcing strategies include: Many Suppliers (price-based), Few Suppliers (JIT partnering), Vertical Integration, Joint Ventures, Keiretsu Networks, and Virtual Companies.
Risks and Logistics
A major risk is the Bullwhip Effect, where demand fluctuations increase as they move up the chain. Logistics strategies include Cross-Docking (direct shipping without storage), Postponement (finishing products later), and Third-Party Logistics (3PL).
Inventory Management and Classification
Inventory can represent up to 50% of invested capital. It serves to decouple production, provide safety stock, and protect against inflation. However, it can hide problems like poor quality (the “boat on water” analogy).
ABC Analysis and Record Accuracy
ABC Analysis divides inventory by annual euro volume: Class A (high/critical), Class B (medium), and Class C (low). Cycle Counting is used to audit items periodically, eliminating the need for annual shutdowns.
Inventory Models
Demand is either Independent (final products) or Dependent (components). Systems are either Fixed-Quantity (Q) or Fixed-Period (P). Relevant costs include holding, ordering, setup, and stockout costs.
Production Planning and Scheduling
Planning horizons include Long-range (R&D), Intermediate (Aggregate Planning), and Short-range (Scheduling). Aggregate Planning aims to minimize costs while meeting demand by adjusting production rates and labor.
MRP and ERP Systems
Material Requirements Planning (MRP) is used for dependent demand and requires a Master Production Schedule (MPS), Bill of Material (BOM), and lead times. ERP systems integrate all business processes in real-time.
Scheduling and Sequencing
Tools like Gantt Charts monitor progress. Priority rules for sequencing include: FCFS (First come, first served), SPT (Shortest processing time), EDD (Earliest due date), and LPT (Longest processing time).
Project Management and Network Diagrams
A project is a temporary organization with specific cost, time, and quality goals. The Project Manager often works within a Matrix Organization. The process involves Planning (WBS), Scheduling (Gantt/Network Diagrams), and Controlling.
CPM and PERT
CPM assumes fixed times, while PERT uses a probability distribution (Optimistic, Pessimistic, and Most Likely times). The Critical Path is the longest path; activities on this path have zero Slack. While mathematically simple, these methods rely on subjective time estimates.
Lean Operations and Just-in-Time Systems
Just-in-Time (JIT) is defined as the forced resolution of problems by focusing on throughput and inventory reduction. Lean operations encompass JIT and TPS, driven by a Pull system to provide what the customer wants without waste.
Eliminating Waste and the 5S System
Waste is anything that does not add value. According to Ohno, there are Seven Wastes (overproduction, inventory, etc.). Shingo states that “Inventory is evil” because it hides problems. To combat this, firms use the Kaizen 5S: Sort, Simplify, Shine, Standardize, and Sustain.
JIT Layout and Kanban
JIT layouts use work cells and U-shaped lines to minimize distance. Kanban is a signal card that authorizes production, limiting Work-in-Process (WIP) and making problems evident. JIT provides a competitive advantage by exposing poor quality quickly and reducing costs.