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Soumitra ChowdhurySoumitra Chowdhury

Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

What is operations management?


Operations management is the activity of managing the resources which are devoted to the production and delivery of products and services.

Operations management defined


They are all

operations

Back office operation in a bank

Kitchen unit manufacturing

operation

Retail operation

Take-out / restaurant operation


The best way to start understanding the nature of ‘operations’ is to look around you

Everything you can see around you (except the flesh and blood) has been processed by an operation

Every service you consumed today (radio station, bus service, lecture, etc.) has also been produced by an operation

Operations Managers create everything you buy, sit on, wear, eat, throw at people, and throw away


A general model of operations management

Transformed resources …

Materials Information Customers

Transforming resources …

Facilities Staff

Customers

Output products

and services

Input resources

Planning and control

ImprovementDesign

Operations strategy

The operation’s strategic

objectives

The operation’s competitive role

and position

Operations management

Operations strategy


Design a store layout which gives smooth and effective flowDesign elegant

products which can be flat-packed efficiently

Site stores of an appropriate size in the most effective locations

Maintain cleanliness and safety of storage area

Arrange for fast replenishment of products

Monitor and enhance quality of service to customers

Continually examine and improve operations practice

Ensure that the jobs of all staff encourage their contribution to business success

Operations management at IKEA


All operations are transformation processes …

Transformation processInputs

that transform inputs …

Outputs

into outputs


Transformed resources …

Materials Information Customers

Transforming resources …

Facilities Staff

Customers

Output products

and services

Input resources

Some inputs are transformed resources

Some inputs are transforming resources

Outputs are products and services that add value for customers

Transformation process


The output from most operations is a mixture of products and services

Mixture of products and services – Outputs

that are a mixture of the tangible and the

intangible

Prêt a Manger

Acme Whistles

Mwagusi Safari Lodge

Crude oil production

Aluminium smelting

Specialist machine tool production

Restaurant

Information systems provider

Management consultancy

Psychotherapy clinic

Pure products – Outputs that are exclusively

tangible

Pure services – Outputs that are exclusively

intangible

IKEA


A Typology of Operations

Variation in demand

High Low

VisibilityHigh Low

VarietyHigh Low

HighVolumeLow High



Implications Implications

High

Low repetitionEach staff member performs more of jobLess systemizationHigh unit costs

High repeatabilitySpecializationCapital intensiveLow unit costs

VolumeLow High




FlexibleComplexMatch customer needsHigh unit costs

Well definedRoutineStandardizedRegularLow unit costs

VarietyHigh Low




Changing capacityAnticipationFlexibilityIn touch with demandHigh unit costs

StableRoutinePredictableHigh utilizationLow unit costs

Variation in demand

High Low




VisibilityHigh Low

Short waiting toleranceSatisfaction governed by customer perceptionCustomer contact skills neededReceived variety is highHigh unit costs

Time lag between production and consumptionStandardizationLow contact skillsHigh staff utilizationCentralizationLow unit costs


A Typology of OperationsImplications Implications

Changing capacityAnticipationFlexibilityIn touch with demandHigh unit costs

StableRoutinePredictableHigh utilizationLow unit costs

Variation in demand

High Low

VisibilityHigh Low

Short waiting toleranceSatisfaction governed by customer perceptionCustomer contact skills neededReceived variety is highHigh unit costs

Time lag between production and consumptionStandardizationLow contact skillsHigh staff utilizationCentralizationLow unit costs

FlexibleComplexMatch customer needsHigh unit costs

Well definedRoutineStandardizedRegularLow unit costs

VarietyHigh Low

High

Low repetitionEach staff member performs more of jobLess systemizationHigh unit costs

High repeatabilitySpecializationCapital intensiveLow unit costs

VolumeLow High


Volume

Important to understand how different operations are positioned on the 4 V’s.

Is their position where they want to be?

Do they understand the strategic implications?

Variety

Variation

Visibility

Low

High

High

High

High

Low

Low

Low

Mwagusi Safari Lodge

4 V’s profile of two operations

Formule 1 Hotel


Some interfunctional relationships between the operations function and other core and support functions

Engineering/ technical function

Accounting and finance

function

Human resources function

Information technology (IT) function

Understanding of the capabilities and

constraints of the operations process

New product and service ideas

Understanding of the capabilities and

constraints of the operations process

Market requirements

Financial analysis for performance and decisions

Provision of relevant

data

Recruitment development and training

Understanding of human resource needs

Analysis of new technology options Understanding of

process technology needs

Provision of systems for design, planning and

control, and improvement

Understanding of

infrastructural and system

needs

Marketing function

Product/service development

function

Operations function


The strategic role and objectives of operations

Source: Honda Motor Company


What is the role of the Operations function?Operations as implementer

Operations implements strategy

Strategy

Operations

Operations drives strategy

Operations as driver

Strategy

Operations

Operations supports strategy

Operations as supporter

Strategy

Operations


The 3 key attributes of Operations

Operations contribution

Implementing Be dependable

Operationalize strategy

Explain practicalities

Supporting Be appropriate

Understand strategy

Contribute to decisions

Driving Be innovative

Provide foundation of strategy

Develop long-term capabilities

The strategic role of the Operations function


Internally neutral

STAGE 1 Correct the worst problems

Holding the organization back

Increasing contributio

n of operatio

ns

The four-stage model of Operations contribution

Externally neutral

As good as the competitors

STAGE 2 Adopt best practice

Implementin

g

strategy

Internally supportive

Clearly the best in the industry

STAGE 3 Link strategy with operations

Supporting

strategy

Externally supportive

Redefining industry expectations

STAGE 4 Give an operations advantage

Driving

strategy

Incr

easi

ng s

trat

egic

impa

ct

Increasing operations capabilities


Broad strategic objectives for an operation applied to stakeholder groups

SocietyIncrease employmentEnhance community well-beingProduce sustainable productsEnsure clean environment

CustomersAppropriate product or service specificationConsistent qualityFast deliveryDependable deliveryAcceptable price

SuppliersContinue businessDevelop supplier capabilityProvide transparent information

ShareholdersEconomic value from investmentEthical value from investment

EmployeesContinuous employmentFair payGood working conditionsPersonal development


Com

petit

iven

ess

The Operations function can provide a competitive advantage through its performance at the five competitive objectives

Quality Being RIGHT

Speed Being FAST

Dependability Being ON TIME

Cost Being PRODUCTIVE

Being ABLE TO CHANGEFlexibility


What do the terms quality, speed, dependability, flexibility and cost mean in the context of operations?

Which enables you to do things cheaply (cost advantage)?

Which enables you to change what you do (flexibility advantage)?

Which enables you to do things quickly (speed advantage)?

Which enables you to do things on time (dependability advantage)?

Which enables you to do things right (quality advantage)?


Minimum cost, maximum value

Minimum price, highest value

Fast throughput

Quick delivery

Reliable operation

Dependable delivery

Error-free processes

Error-free products and services

Ability to change

Frequent new products, maximum choice

The benefits of excelling

Dependability

Cost

Speed

Quality Flexibility


What does Quality mean in …

Patients receive the most appropriate treatment

… a hospital?

Treatment is carried out in the correct manner

Patients are consulted and kept informed

Staff are courteous, friendly and helpful



… an automobile plant?

All assembly is to specification

Product is reliable

All parts are made to specification

The product is attractive and blemish-free


… a bus company?


The buses are clean and tidy

The buses are quiet and fume-free

The timetable is accurate and user-friendly



… a supermarket?


The store is clean and tidy

Décor is appropriate and attractive

Goods are in good condition



Quality

‘Quality’ has several meanings. The two most common are …

Quality as the specification of a product or service

e.g. Lower Hurst Farm produces organic meat raised exclusively on its own farm

Quality as the conformance with which the product or service is produced

e.g. Quick-service restaurants like McDonald’s may buy less expensive meat, but its conformance must be high


Quality

Irrespective of a product or service’s specification quality, producing it so it conforms to its specification consistently brings benefits to any operation

Externally – it enhances the product or service in the market, or at least avoids customer complaints

Internally – it brings other benefits to the operation:

It prevents errors slowing down throughput speed

It prevents errors causing internal unreliability and low dependability

It prevents errors causing wasted time and effort, therefore saving cost


Depend-ability

FlexibilityQuality

Speed

Cost

QualityExternal and internal benefits

On-specification products and services


The time between requiring treatment and receiving treatment is kept to a minimum

… a hospital?

What does Speed mean in …

The time for test results, X-rays, etc. to be returned is kept to a minimum




The time between dealers requesting a vehicle of a particular specification and receiving it is minimized

The time to deliver spares to service centres is minimized



… a bus company?

The time between a customer setting out on the journey and reaching his or her destination is kept to a minimum



… a supermarket?

The time for the total transaction of going to the supermarket, making the purchases and returning is minimized

Goods are immediately available


Speed again has different interpretations, externally and internally

Externally – it means the elapsed time between a customer asking for a product or service and getting it (in a satisfactory condition)

It often enhances the value of the product or service to customers


It helps to overcome internal problems by maintaining dependability

It reduces the need to manage transformed resources as they pass through the operation, therefore saving cost

Speed


Depend-ability

FlexibilityQuality

Speed

Cost

SpeedExternal and internal benefits


Short delivery lead-time


What does Dependability mean in …

The proportion of appointments that are cancelled is kept to a minimum

… a hospital?

Keeping appointment times

Test results, X-rays, etc. are returned as promised




On-time delivery of vehicles to dealers

On-time delivery of spares to service centres



… a bus company?

Keeping to the published timetable at all points on the route

Constant availability of seats for passengers



… a supermarket?

Predictable opening hours

Proportion of goods out of stock kept to a minimum

Keeping to reasonable queuing times

Constant availability of parking


Externally – it enhances the product or service in the market, or at least avoids customer complaints


It prevents late delivery slowing down throughput speed

It prevents lateness causing disruption and wasted time and effort, therefore saving cost

Dependability


Depend-ability

FlexibilityQuality

Speed

Cost

DependabilityExternal and internal benefits

Depend-ability

FlexibilityQuality

Speed

Cost



Reliable delivery


Flexibility has several distinct meanings but is always associated with an operation’s ability to change

Change what ?

The products and services it brings to the market – Product/service flexibility

The mix of products and services it produces at any one time – Mix flexibility

The volume of products and services it produces – Volume flexibility

The delivery time of its products and services – Delivery flexibility

Flexibility


What does Flexibility mean in …

Introducing new treatments

… a hospital?

Providing a wide range of treatments

The ability to adjust the number of patients treated

The ability to reschedule appointments




The introduction of new models

A wide range of options

The ability to adjust the number of vehicles manufactured

The ability to reschedule manufacturing priorities


… a bus company?


The introduction of new routes and excursions

A large number of locations served

The ability to adjust the frequency of services

The ability to reschedule trips


… a supermarket?


The introduction of new lines

A wide range of goods stocked

The ability to adjust the number of customers served

The ability to get out-of-stock items


Depend-ability

FlexibilityQuality

Speed

Cost

External and internal benefits

FlexibilityExternal and internal benefits

Depend-ability

FlexibilityQuality

Cost



Reliable deliverySpeed

Frequent new products/servicesWide rangeVolume and delivery changes


What does Cost mean in …

… a hospital?

Staff costs

Technology and facilities costs

Bought-in materials and services





Staff costs



… a bus company?


Staff costs




… a supermarket?


Staff costs




The cost of producing products and services is obviously influenced by many factors such as input costs, but two important sets are …

The 4 V’s: volume variety variation visibility The internal performance of the operation in terms of quality speed dependability flexibility

Cost


CostExternal and internal benefits

Depend-ability

FlexibilityQuality

Speed

Cost

Depend-ability

FlexibilityQuality

Cost



Reliable deliverySpeed

Frequent new products/servicesWide rangeVolume and delivery changes

Low price, high margin, or both


Operations strategy

Source: courtesy of Justin Waskovich


What is strategy?

Strategic decisions – means those decisions which …

Are widespread in their effect on the organization to which the strategy refers

Define the position of the organization relative to its environment

Move the organization closer to its long-term goals.


‘Operations’ is not the same as ‘operational’

‘Operations’ are the resources that create products and services

‘Operational’ is the opposite of strategic, meaning day-to-day and detailed

So, one can examine both the operational and the strategic aspects of operations


Top-down perspective

What the business wants operations

to do

Operations resources

perspective

What operations resources can do

What day-to-day experience suggests operations should do

Bottom-up perspective

Market requirement perspective

What the market position requires operations to do

Operations strategy

The four perspectives on operations strategy


Corporate strategy

Business strategy

Emergent sense of what the strategy should be

Operational experience

Top-down and bottom-up perspectives of strategy

Operations strategy


The strategy hierarchy

Key strategic decisions

Influences on decision making

Business strategy

What is the mission?What are the strategic

objectives of the firm?How to compete?

Customer/market dynamicsCompetitor activityCore technology dynamicsFinancial constraints

Corporate strategy

What business to be in?What to acquire?What to divest?How to allocate cash?

Economic environmentSocial environmentPolitical environmentCompany values and ethics

Functional strategy

How to contribute to the strategic objectives?

How to manage the function’s resources?

Skills of function’s staffCurrent technologyRecent performance of the

function


The effects of the product/service life cycle on the organization

Sal

es

volu

me

Introduction Growth Maturity Decline

Likely order winners

Product/service characteristics, performance or novelty

Availability ofquality products/services

Low priceDependable supply

Low price

Likely qualifiers

QualityRange

Price Range

QualityRange

Dependable supply

Dominant operations

performance objectives

FlexibilityQuality

SpeedDependabilityQuality

CostDependability

Cost


Different competitive factors imply different performance objectives

Competitive factorsIf the customers value these ...

Performance objectivesThen, the operations will need to

excel at these ...

Low price Cost

High quality Quality

Fast delivery Speed

Reliable delivery Dependability

Innovative products and services Flexibility (products and services)

Wide range of products and services Flexibility (mix)

Ability to change the timing or quantity of products and services Flexibility (volume and/or delivery)


‘… the decisions which shape the long-

term capabilities of the company’s

operations and their contribution to overall

strategy through the on-going

reconciliation of market requirements and

operations resources …’

Operations strategy is …


What you HAVE

in terms of operations capabilities

What you NEED

to ‘compete’ in the market

Operations resources

Market requirements

What you WANT

from your operations to

help you ‘compete’

What you DO

to maintain your

capabilities and satisfy markets

Strategic reconciliation


The challenge of operations strategy formulation

An operations strategy should be:

Appropriate ...

Comprehensive ...

Coherent ...

Consistent over time ...


An implementation agenda is needed

When to start?

Where to start?

How fast to proceed?

How to coordinate the implementation programme?


The five P’s of operations strategy implementation

Purpose – a shared understanding of the motivation, boundaries and context for developing the operations strategy

Point of entry – the point in the organization where the process of implementation starts

Process – how the operations strategy formulation process is made explicit

Project management – the management of the implementation

Participation – who is involved in the implementation


Trade-offs

“Do you want it good, or do you want it Tuesday?”

“No such thing as a free lunch.”

“You can’t have an aircraft which flies at the speed of sound, carries 400 passengers and lands on an aircraft carrier. Operations are just the same.” (Skinner)

“Trade-offs in operations are the way we are willing to sacrifice one performance objective to achieve excellence in another.”


Quality planning and control

Source: Archie Miles


The various definitions of quality

The transcendent approach views quality as synonymous with innate excellence.

The manufacturing-based approach assumes quality is all about making or providing error-free products or services.

The user-based approach assumes quality is all about providing products or services that are fit for their purpose.

The product-based approach views quality as a precise and measurable set of characteristics.

The value-based approach defines quality in terms of ‘value’.


Quality upQuality up

Profits upProfits up

Processing time down

Processing time down

Inventory down

Inventory down

Capital costs down

Capital costs downComplaint and

warranty costs down

Complaint and warranty costs

down

Rework and scrap costs

down

Rework and scrap costs

down

Inspection and test costs

down

Inspection and test costs

down

Productivity up

Productivity up

Service costs downService

costs down

Image upImage up

Scale economies up

Scale economies up

Price competition

down

Price competition

down

Sales volume up

Sales volume up

Revenue up

Revenue up

High quality puts costs down and revenue up

Operation costs down

Operation costs down


Customers’ expectations

for the product or

service

Customers’ perceptions

of the product or

service

Gap

Perceived quality is poor

Perceived quality is good

Expectations > perceptions

Expectations = perceptions

Expectations < perceptions

Perceived quality is governed by the gap between customers’ expectations and their perceptions of the product or service

Gap

Perceived quality is acceptable


for the product or

service


of the product or

service


for the product or

service


of the product or

service


The perception–expectation gap

Action required to ensure high perceived quality

Main organizational responsibility

Gap 1

Gap 2

Gap 3 Operations

Gap 4 Marketing

Ensure consistency betweeninternal quality specification andthe expectations of customers

Ensure internal specification meets its intended concept of design

Ensure actual product or service conforms to internally specified quality level

Ensure that promises made to customers concerning the product or service can really be delivered

Marketing, operations, product/service development

Marketing, operations, product/service development


Quality characteristics of goods and services

Functionality – how well the product or service does the job for which it was intended

Appearance – the aesthetic appeal, look, feel, sound and smell of the product or service

Reliability – the consistency of performance of the product or service over time

Durability – the total useful life of the product or service

Recovery – the ease with which problems with the product or service can be rectified or resolved

Contact – the nature of the person-to-person contacts that take place


Variablesthings you can measure

Attributesthings you can assess and accept or reject

Qualityfitness for purpose

Reliabilityability to continue

working at acceptedquality level

Quality

Quality of designdegree to which

design achieves purpose

Quality of conformancefaithfulness with which the

operation agrees with design


Operations improvement

Source: Courtesy of Lotus-Haed, www.pixelpusher.co.za


Performance measures at different levels of aggregation

Overall strategic objectives

Broad strategic measures

Market strategic

objectives

Financial strategic

objectives

Operations strategic

objectives

Functional strategic measures

Customer satisfaction

ResilienceAgilityComposite performance measures

Quality Dependability Speed Flexibility CostGeneric operations performance measures

Some detailed performance measures

Defects per unit

Mean time between failuresLateness complaints

Customer query timeOrder lead timeThroughput time

Time to marketProduct range

Transaction costs

Level of customer complaints

Scrap level

Labour productivity

Machine efficiency


Performance measures at different levels of aggregation

High strategic relevance and aggregation

High diagnostic power and

frequency of measurement

Detailed performance measures

Broad strategic measures

Functional strategic measures

Composite performance measures

Generic operations performance measures


Overall strategic objectives

Customer performance measures

To achieve strategic impact, how should we be viewed by customers?

Internal process performance measures

To achieve strategic impact, what aspects of performance should business process excel at?

Financial performance measures

To achieve strategic impact, how should we be viewed by shareholders?

Learning and growth performance measures

To achieve strategic impact, how will we build capabilities over time?

The measures used in the balanced scorecard


Prioritizing process objectives

Priorities should be determined by …

IMPROVEMENT PRIORITIES

The

IMPORTANCE

of each competitive

objective

Your

PERFORMANCE

in each competitive

objective


Order-winning objectives

For this product or service, does this performance objective …

9-point importance scale

1 …provide a crucial advantage with customers?

2 …provide an important advantage with most customers?

3 …provide a useful advantage with most customers?

4 …need to be up to good industry standard?

5 …need to be around median industry standard?

6 …need to be within close range of the rest of the industry?

7 …rate as not usually important but could become more so in future?

8 …very rarely rate as being important?

9 …never come into consideration?

Qualifying objectives

Less important objectives


For this product or service, is the achieved performance …

Better than competitors

1 …consistently considerably better than our nearest competitor’s?2 …consistently clearly better than our nearest competitor’s?3 …consistently marginally better than our nearest competitor’s?

9-point performance scale

4 …often marginally better than that of most competitors?

5 …about the same as that of most competitors?

6 …often close to that of our main competitors?

Same as competitors

7 …usually marginally worse than that of our main competitors?

8 …usually worse than that of most competitors?

9 …consistently worse than that of most competitors?

Worse than competitors

Similar processes

Similar processes

Similar processes

Customer

expectations

Customer

expectations

Customer

expectations


betterthan

sameas

worsethan

lessimportant qualifying

orderwinning

1

2

3

4

5

6

7

8

9

123456789

IMPORTANCEFOR

CUSTOMERSLOW HIGH

PE

RF

OR

MA

NC

EA

GA

INS

T

CO

MP

ET

ITO

RS

GO

OD

BA

D

URGENTACTION

IMPROVE

APPROPRIATE

EXCESS ?

X

X

Lower bound of acceptability


Short-term, dramaticLarge steps Intermittent Abrupt, volatile Few championsIndividual ideas & effort Scrap and rebuild New inventions/theories Large investment Low effort Technology Profit

Short-term, dramaticLarge steps Intermittent Abrupt, volatile Few championsIndividual ideas & effort Scrap and rebuild New inventions/theories Large investment Low effort Technology Profit

Effect Pace

TimeframeChange

Involvement Approach

Mode Spark Capex

Maintenance Focus

Evaluation

Long-term, undramaticSmall steps

Continuous, incrementalGradual and consistent

Everyone Group efforts, systematic

Protect and improveEstablished know-how

Low investment Large effort

People Process

Long-term, undramaticSmall steps

Continuous, incrementalGradual and consistent

Everyone Group efforts, systematic

Protect and improveEstablished know-how

Low investment Large effort

People Process

Innovation Kaizen


The plan–do–check–act (or ‘Deming’) improvement cycle,and the define–measure–analyze–improve–control

(or DMAIC) ‘six sigma’ improvement cycle

Define

Measure

AnalyzeImprove

Control

Plan Do

CheckAct

Plan


Define – identify the problem, define

requirements and set the goal

Measure – gather data, refine problem and measure inputs

and outputs

Analyze – develop problem hypotheses, identify ‘root causes’

and validate hypotheses

Improve – develop improvement ideas,

test, establish solution, and

measure results

Control – establish performance

standards and deal with any problems

The DMAIC cycle


Per

form

ance

Time

Planned ‘breakthrough’ improvements

Actual improvement pattern

‘Breakthrough’ improvement does not always deliverhoped-for improvements


Per

form

ance

Time

Continuous improvement

Standardize and maintain

Improvement


Per

form

ance

Time

PDCA cycle repeated to create continuous improvement

Continuous improvement

Plan

Do

Check

Act


Per

form

ance

Time

Combined ‘breakthrough’ and

continuous improvement

Combined improvement


Cost

Quality + dependability + speed + flexibility + cost

Flexibility

Quality + dependability + speed + flexibility

Speed

Quality + dependability + speed

The sandcone model of improvement

Dependability

Quality + dependability

Quality

Quality


Failure prevention and recovery

Source: Eurotunnel


Why systems fail

Design failures

Facilities failures

Staff failures

Failures inside the operation

Supply failures Customer

failures


How failure is detected and analyzed

– in-process checks

– accident investigation

– failure mode-and-effect analysis

– fault-tree analysis

Failure detection mechanisms include:

Failure analysis procedures include:

– point-of-departure interview

– machine-diagnostic checks


The three tasks of failure prevention and recovery

Failure detection and analysis

Finding out what is going wrong and why

Improving system reliability

Stopping things going wrong

Recovery

Coping when things do go wrong


Severity of consequence

Effect on customer

Normal operation

Failure

Prevention Mitigation Recovery

Failure management


What’s happened

What consequences

Inform

Contain

Follow up

Find root cause

Engineer out

Analyze failure

Plan recovery

The stages in failure planning

Discover Act Learn Plan


Managing improvement – the TQM approach

Source: Corbis/Munshi Ahmed


Total quality management can be viewed as a natural extension of earlier approaches to quality management

•Quality is strategic•Teamwork•Staff empowerment•Involves customers and suppliers

•Quality systems•Quality costing•Problem solving•Quality planning

•Statistics•Process analysis•Quality standards

•Error detection•Rectification

Prevents ‘out of specification’ products and services reaching market

Solves the root cause of quality

problems

Broadens the organizational responsibility

for quality

Makes quality central and strategic in the

organization

InspectionQuality control

Quality assurance

Total Quality Management


The internal customer–supplier concept involves understanding the relationship between processes

Process 1

Process 3

Process 2

Process 4

Process 5

Process 6

External supplier

External customer

Between each process, the requirements of the ‘customer’ process must be understood and met by the 'supplier’ process


Total Quality Management

Includes all parts of the organization

Includes all staff of the organization

Includes consideration of all costs

Includes every opportunity to get things right

Includes all the systems that affect quality

Never stops

Source: Corbis/Richard T Nowitz


Porter’s Value Chain

Source: Joe Schwarz, www.joyrides.com


Main aspects of Value Chain Analysis

Value chain analysis is a powerful tool for managers to identify the key activities within the firm which form the value chain for that organisation, and have the potential of a sustainable competitive advantage for a company.

Therein, competitive advantage of an organisation lies in its ability to perform crucial activities along the value chain better than its competitors.

When the system is managed carefully, the linkages can be a vital source of competitive advantage.


Main aspects of Value Chain Analysis

The value chain analysis essentially entails the linkage of two areas.

1.Firstly, the value chain links the value of the organisations’ activities with its main functional parts.

2.Then the assessment of the contribution of each part in the overall added value of the business is made.

In order to conduct the value chain analysis, the company is split into primary and support activities.

Primary activities are those that are related with production, while support activities are those that provide the background necessary for the effectiveness and efficiency of the firm.


1–108

Porter’s Value Chain

Firm’s infrastructure

Human resource managementHuman resource managementTechnology and development

ProcurementProcurement

Inb

oun

dlogistics

Op

erations

Op

erations

Ou

tbou

nd

logistics

Mark

eting

&S

ales

Mark

eting

&S

ales

Service

PROFIT

Primary activities

Su

pp

ortactivities


Primary Activities

Inbound Logistics.Here goods are received from a company's suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organisation.

Operations.This is where goods are manufactured or assembled. Individual operations could include room service in an hotel, packing of books/videos/games by an online retailer, or the final tune for a new car's engine.

Outbound Logistics.The goods are now finished, and they need to be sent along the supply chain to wholesalers, retailers or the final consumer.


Primary Activities

Marketing and Sales.In true customer orientated fashion, at this stage the organisation prepares the offering to meet the needs of targeted customers.

This area focuses strongly upon marketing communications and the promotions mix.

Service.This includes all areas of service such as installation, after-sales service, complaints handling, training and so on.


Support Activities

Procurement.This function is responsible for all purchasing of goods, services and materials.

The aim is to secure the lowest possible price for purchases of the highest possible quality.

They will be responsible for outsourcing (components or operations that would normally be done in-house are done by other organisations), and ePurchasing (using IT and web-based technologies to achieve procurement aims).


Support Activities

Technology Development.Technology is an important source of competitive advantage.

Companies need to innovate to reduce costs and to protect and sustain competitive advantage.

This could include production technology, Internet marketing activities, lean manufacturing, Customer Relationship Management (CRM), and many other technological developments.


Support Activities

Human Resource Management (HRM).Employees are an expensive and vital resource.

An organisation would manage recruitment and s election, training and development, and rewards and remuneration.

The mission and objectives of the organisation would be driving force behind the HRM strategy.

Firm Infrastructure.This activity includes and is driven by corporate or strategic planning. It includes the Management Information System (MIS), and other mechanisms for planning and control such as the accounting department.


Supply network design

Source: Getty Images


Operations in practice

Michael Dell started in 1984 by cutting out the ‘middle man’ and delivering computers direct to the customer

Using its direct selling methods, Dell went on to become the number one computer maker

There are many reasons for Dell’s success but most of them comefrom the way Dell configures its supply networks

Source: Corbis/ Gianni Giansanti/ Sygma


Plastic homeware

manufacturer

Operations network for a plastic homeware company

First-tier suppliers

Packaging supplier

Plastic stockist

First-tier customers

Wholesaler

Second-tier suppliers

Ink supplier

Cardboard company

Chemical company

Second-tier customers

Retailer

Retailer

Direct supplyInformation


Operations network for a shopping mall

First-tier suppliers

Cleaning services

Security services

Maintenance services

Shopping mall

First-tier customers

Retailers

Second-tier customers

Retail customers

Direct supplyInformation

Second-tier suppliers

Recruitment agency

Cleaning materials supplier

Equipment supplier


Operations performance should be seenas a whole supply chain issue

Benefits of looking at the whole supply chain include

It helps an understanding of competitiveness

It helps to identify the significant links in the network

It helps focus on long-term issues


Direction, extent and balance of vertical integration

Extent – Narrow process span

Extent – Wide process span

Direction – Upstream vertical integration

Direction – Downstream vertical

integration

WholesalerRaw

material suppliers

Component maker

Assembly operation

Retailer

Balance – Should excess capacity be used to supply other companies?


The decision logic of outsourcing

Is activity of strategic

importance?

Explore keeping this activity in-house

Yes Yes

Does company have

specialized knowledge?

NoIs company’s

operations performance

superior?

Yes

NoIs significant operations

performance improvement

likely?

Yes

No Explore outsourcing this activity

No


Supply-side and demand-side factorsin location decisions

Theoperation

Examples of supply-side factors that vary with location, influencing costs

labour costsland costsenergy coststransportation costscommunity factors

Examples of demand-sidefactors that vary withlocation, influencingcustomer service/revenue

labour skillssuitability of siteimageconvenience for customers


Labour

Transport

Fabric

Supplies

Customs duties

€15.55France

€14.33Portugal

€11.43Turkey

€11.43Thailand

€11.13Morocco

€10.82Romania

€10.37China

€9.60Myanmar

Cost in euros2 4 6 8 10 12 14 160

Cost breakdown of a shirt made in various countriesand sold in France


Location – Where is the market?

Population density

Low High


The balance of capacity

Capacity can either lead or lag demand

Inventory can be used to smooth out the peaks

Spare capacity can be used to supply other operations

The danger of this is that the original operation may receive a lower level of service


Capacity lags demand

Vo

lum

eTime

Capacity leads demand

Vo

lum

e

Time

Capacity leading demand and capacity lagging demand

DemandDemand

Capacity

Capacity


Vo

lum

e

Time

Smoothing with inventory

Demand

Capacity


The nature of planning and control

Source: Arup


Planning is a formalization of what is intended to happen at some time in the future.

A plan does not guarantee that an event will actually happen;it is a statement of intention.

Although plans are based on expectations, during their implementation things do not always happen as expected.

Control is the process of coping with any changes that affect the plan.It may also mean that an ‘intervention’ will need to be made in the operation to bring it back ‘on track’.



Planning is deciding

Control is

what activities should take place in the operation

when they should take place

what resources should be allocated to them

understanding what is actually happening in the operation

deciding whether there is a significant deviation from what should be happening

(if there is deviation) changing resources in order to affect the operation’s activities



Significance of planning and controlT

ime

ho

rizo

n

Hou

rs/d

ays

Day

s/w

eeks

/mon

ths

Mon

ths/

year

s Long-term planning and controlUses aggregated demand forecasts

Determines resources in aggregated form

Objectives set in largely financial terms

Medium-term planning and controlUses partially disaggregated demand forecasts

Determines resources and contingencies

Objectives set in both financial and operations terms

Short-term planning and controlUses totally disaggregated forecasts or actual demand

Makes interventions to resources to correct deviations from plans

Ad hoc consideration of operations objectives

PLANNING

CONTROL


Dependent and independent demand

Dependent demande.g. input tyre store in car plant

Demand for tyres is governed by the number of cars planned to be made


Dependent demand

Independent demand

Resource to order Each product or service is large compared with total capacity of the operation

Make to stock

Make to order

Each product or service is small compared with total capacity of the operation

P:D ratios


Scheduling Loading

Sequencing Monitoring and control

When to do things?

In what order to do

things?

How much to do?

Are activities going to plan?

The activities of planning and control


Quality losses Slow-

running equipment

Equipment ‘idling’ ‘Breakdown’

failure

Set-up and changeovers

Not worked (unplanned)

Valuable operating time

Maximum available time

Loading –The reduction of time available for ‘valuable’ operating time

Not worked (planned)


Finite and infinite loading of jobs on three work centres A, B and CFinite loading limits the loading on each centre to their capacities, even if it means that jobs will be late.

Infinite loading allows the loading on each centre to exceed their capacities to ensure that jobs will not be late

12

34

56

0

Work centre Work centreA B C A B C

Finite loading Infinite loading

Wee

ks


In Accident and Emergency departments, patients arrive at random. Medical staff must rapidly devise a schedule. Patients with serious illness need urgent attention. Less urgent cases will have to wait. Routine non-urgent cases will have the lowest priority of all.

The hospital triage system


Process stage

Week 12

Week 13

Week 14

Week 15

Week 16

Week 17

Week 18

Job A Job B Job C Job D Job E

Job A Job BJob Y Job X

Job A Job BJob Z Job XJob Y

Job A Job BJob X Job C

Gantt chart showing the schedule for jobs at each process stage

Initial spec.

Pre-coding

Coding

Compact. check

Final test

Job A Job BJob W Job C Job D


Pull and push philosophies of planning and control

PUSH CONTROL

Work centre

Work centre

Work centre

Work centre

Instruction on what to make and where to

send it

DEMAND

FORECAST

OR

CENTRAL OPS. PLANNING AND CONTROL SYSTEM


PULL CONTROL

Work centre DEMAND

Pull and push philosophies of planning and control

Work centre

Work centre

Work centre

Request Request Request Request

Delivery Delivery Delivery Delivery


Operation or process

Input Output

Compare / re-plan

Intervention

Plans

A simple model of control

Monitor


Capacity planning and control

Source: Arup


Objective

To provide an ‘appropriate’ amount of capacity at any point in time

The ‘appropriateness’ of capacity planning in any part of the operation can be judged by its effect on …

Costs

Revenue

Working capital

Service levelSource: British Airways London Eye


Objectives of capacity planning and control

Forecast demand

Time

Agg

rega

ted

outp

ut

Estimate of current capacity

Measure aggregate capacity and demand

Identify the alternative capacity plans

Choose the most appropriate capacity plan


The nature of aggregate capacity

– rooms per night

– ignores the numbers of guests in each room

– tonnes per month

– ignores types of alloy, gauge and batch variations

Aggregate capacity of a hotel:

Aggregate capacity of an aluminium producer:


Climatic Festive Behavioural Political Financial Social

Causes of seasonality

Construction materialsBeverages (beer, cola)

Foods (ice-cream, Christmas cake)Clothing (swimwear, shoes)Gardening items (seeds, fertilizer)

Fireworks

Travel servicesHolidaysTax processingDoctors (influenza epidemic)Sports servicesEducation services

Source: Alamy/Medical-on-line


Demand fluctuations in four operations


Good forecasts are essential for effective capacity planning …

… but so is an understanding of demand uncertainty, because it allows you to judge the risks to service level

When demand uncertainty is high, the risks to service level of under-provision of capacity are high

DE

MA

ND

TIME

Only 5% chance of demand being lower than this

DE

MA

ND

TIME

Distribution of demandOnly 5% chance of demand being higher than this


How capacity and demand are measured

Design capacity

168 hours per week

Effective capacity

109 hours per week

Planned loss of 59 hours

Actual output – 51 hours per

week

Avoidable loss – 58 hours per

week

Efficiency

Actual output

Effective capacity=

Utilization Actual output

Design capacity=


Ways of reconciling capacity and demand

Level capacity

Demand

Capacity

Chase demand Demand management

CapacityCapacity

Demand Demand


How do you cope with fluctuations in demand?

Absorb demand

Change demand

Adjust output to match demand

Level capacity

Chase demand

Demand management

Ways of reconciling capacity and demand


Absorb demand

Part finishedFinished goods, orCustomer inventory

QueuesBacklogs

Have excess

capacity

Make to stock

Keep output level

Make customer

wait

Source: Madam Tussaud’s


Adjust output to match demand

Hire Fire

Temporary labour Lay-off

Overtime

Subcontract

Short time

Third-party work

Source: Corbis/Photocuisine


Change demand

Change pattern of demand

Develop alternative products and/or services

Source: Empics


Supply chain planning and controlSource: Tibbett and Britten


What is supply chain management?

‘Supply chain management is the management of the

interconnection of organizations that relate to each other

through upstream and downstream linkages between the

processes that produce value to the ultimate consumer in

the form of products and services.’


Supply chain management is concerned with the flow of information as well as the flow of products and services

•Products and services•New products and services•Delivery information•Payment request / Credit

‘Downstream’ flowof products and

servicesfor customer

fulfilment

‘Upstream’ flowof customer

requirements

•Long-term plans and requirements•Market research information•Individual orders•Payment•Potential new products and services

Flow between processes

Consumer




First-tier supplier

Second-tier supplier

First-tier customer

Second-tier customer

End customer

Demand side

Supply side

Purchasing and supply

management

Physical distribution management

Logistics

Materials management

Supply chain management

Information flow

Physical flow


The operationPurchasing functionSuppliers

Request for

products and

services

Demand from

customers

Supply to customer

s

Request for

quotations

Prepare purchase

order

Prepare quotation for specification,

price, delivery, etc.

Requests

Select supplier(s

)Quotations

Produce products

and services

Order Receive products

and servicesDeliver

Liaison between

purchasing and the

operation

The purchasing function brings togetherthe operation and its suppliers


Short-term ability to supply Longer-term ability to supply

•Range of products or services provided

•Potential for innovation

•Quality of products or services •Ease of doing business

•Responsiveness •Willingness to share risk

•Dependability of supply •Long-term commitment to supply

•Delivery and volume flexibility •Ability to transfer knowledge as well as products and services

•Total cost of being supplied •Technical capability

•Ability to supply in the required quantity

•Operations capability

•Financial capability

•Managerial capability

Factors for rating alternative suppliers


Factor Weight Supplier A score Supplier B score

Cost performance 10 8 (8 x 10 = 80) 5 (5 x 10 = 50)

Quality record 10 7 (7 x 10 = 70) 9 (9 x 10 = 90)

Delivery speed promised 7 5 (5 x 7 = 35) 5 (5 x 7 = 35)

Delivery speed achieved 7 4 (4 x 7 = 28) 8 (8 x 7 = 56)

Dependability record 8 6 (6 x 8 = 48) 8 (8 x 8 = 64)

Range provided 5 8 (8 x 5 = 40) 5 (5 x 5 = 25)

Innovation capability 4 6 (6 x 4 = 24) 9 (9 x 4 = 36)

Total weighted score 325 356

Weighted supplier selection criteria for the hotel chain


‘Partnership’ supply

management

Cha

ract

er o

f in

tern

al o

pera

tions

act

ivity

Do

noth

ing

Do

ever

ythi

ng

impo

rtan

tD

o ev

eryt

hing

Transactional – many suppliers

Close – few suppliers

Type of inter-firm contact

Virtual spot

trading

Long-term virtual

operation

Vertically integrated operation

Traditional supply

management

Types of supply relationship


Attitudes

Actions

Trust

Elements of process partnership relationships

Joint problem solving

Joint co-ordination of

activities

Joint learning

Long-term expectations

Sharing success

Multiple points of contact

Few relationships

Information transparenc

yDedicated assets

Closeness of relationship


Improved profitability

Supply chain time compression

Schedule changes impact

market faster

so can respond to

market changes better

so revenues are maximized

so improved forecasts

so reduced stockholding

costs

Forecasts made closer to demand time

so less need for safety stocks

Defects are detected faster

so easier to improve quality

so reduced wastage costs

New products and service

faster to market

so fewer lost sales from

delayed launch

so reduced risk of

obsolescence

so revenues are maximized

so less discounted

sales

The effects of supply chain compression


Supply chain dynamics

Supply chains with different end objectives need to be managed in different ways


Matching the supply chain with market requirements

Lean supply chain

management

Mismatch

Mismatch Agile supply chain

management

Nature of demandFunctional products Innovative products

PredictableFew changes

Low varietyPrice stable

Long lead-timesLow margin

UnpredictableMany changesHigh varietyPrice markdownsShort lead-timesHigh margin

Su

pp

ly c

hai

n o

bje

ctiv

esR

espo

nsiv

eE

ffic

ient

Low

co

st

Hig

h ut

iliza

tion

Min

imum

inve

ntor

y

Low

-cos

t su

pplie

rs

Low

th

roug

hpu

t tim

es

Hig

h ut

iliza

tion

Dep

loye

d in

vent

ory

Fle

xibl

e su

pplie

rs


Lean operations and JIT

Source: Tibbet and Britten


‘The key principle of lean operations is relatively

straightforward to understand: it means moving

towards the elimination of all waste in order to

develop an operation that is faster and more

dependable, produces higher quality products

and services and, above all, operates at low cost.’


Synonyms

continuous flow manufacture

high value-added manufacture

stockless production

low-inventory production

fast-throughput manufacturing

lean manufacturing

Toyota production system

short cycle time manufacturingSource: Corbis/Denis Balihouse


Traditional approach

JIT approach

stage A

orders

deliveries

orders

deliveries

JIT material flow

buffer inventory

stage B

buffer inventory

stage C

stage A stage Cstage B


JIT approach

focus on producing only when needed

fewer stoppages

low inventory so problems are exposed and

solved

no surplus production goes

into inventory

lower capacity utilization, but

Traditional approach

focus on high capacity utilization

more stoppages because of problems

high inventory means less chance of problems being

exposed and solved

extra productiongoes into inventory

because of continuing stoppages at stages

more production at each stage

JIT and capacity utilization


JIT aims to meet demand instantly, with perfect quality and no waste

JIT definitions

More fully:

Improved overall productivity and elimination of waste

Cost-effective production and delivery of only the necessary quantity of parts at the right quality, at the right time and place, while using a minimum amount of facilities, equipment, materials and human resources

JIT is dependent on the balance between the supplier’s flexibility and the user’s flexibility

JIT is accomplished through the application of elements that require total employee involvement and teamwork

A key philosophy of JIT is simplification

Source: Empics


The lean philosophy of operations is the basis for JIT techniques that include JIT methods of planning and control

The lean philosophy of operations

Eliminate waste Involve everyone Continuous improvement

JIT as a set of techniques for managing operations

Basic working practices

Design for manufacture

Operations focus

Small, simple machines

Flow layout

TPM

Set-up reduction

Total people involvement

Visibility

JIT supply

JIT as a method of planning and control

Pull scheduling

‘Kanban’ control

Levelled scheduling

Mixed modelling

Synchronization


The 5 S’s

Sort (Seiri) Eliminate what is not needed and keep what is needed.

Straighten (Seiton) Position things in such a way that they can be easily reached whenever they are needed.

Shine (Seiso) Keep things clean and tidy; no refuse or dirt in the work area.

Standardize (Seiketsu) Maintain cleanliness and order – perpetual neatness.

Sustain (Shitsuke) Develop a commitment and pride in keeping to standards.


Inventory level

Delivering smaller quantities more often can reduce inventory levels

Inventory level


operation

movement

inspection

storage

Activities:

Waste (muda)

influencing the throughput efficiency

Types of waste:

delay

over-production

waiting time

transport

process

inventory

motion

defective goods


WIPDefective materials

ReworkScrap

Downtime

productivity problems

WIPDefective materials

ReworkScrap

Downtime

productivity problems

Reduce the levelof inventory (water) to reveal the operations’ problems

The problem with inventory


Small machines

The conventional Western approach is to purchase large machines to get ‘economies of scale’.

These often have long, complex set-ups, and make big batches, quickly creating ‘waste’.


JIT small machines approach:

emphasis: flexibilityeconomies of scope

Using several small machines rather than one large one allows simultaneous processing, is more robust

and is more flexible

easy to move (layout)

quick set-up

flexible scheduling options

cheaper tooling

fewer set-ups needed

planned maintenance easier


continuous improvement insmall steps, to expose wasteand eliminate it

gradual reduction of inventory

identify exposed problems

emphasis:

In JIT systems:

eliminate these problems

repeat the cycle

Visible, enforced improvement

‘Traditional’ production systems often accept waste and use the insurance of all types of inventory


The operations challenge

Source: Provided by the Sea W: FS Project, Nasa/Goddard Space Flight Center and ORBIMAGE


Five of the challenges for operations managers

Operations strategy

Design Improvement


Globalization

Corporate social responsibility

Technology Knowledge management

Environmental responsibility


Operations decisions have a corporate social responsibility dimension

Product/service design – customer safety, recyclability of materials, energy consumption

Network design – employment implications and environmental impact of location

Layout of facilities – staff safety, disabled customer access

Process technology – staff safety, waste and product disposal, noise pollution, fumes and emissions

Job design – workplace stress, unsocial working hours

Capacity planning and control – employment policies

Inventory planning and control – price manipulation

For example …


Decision area Some globalization issues

Product/service design Transferability of product/service design

Adaptation of design to fit culture and legislation

Network design Location of global network of facilities

Ownership and capacity change legislation

Layout of facilities Cultural reaction to work organization

Process technology Serviceability and maintenance of technology

Skills availability

Job design Cost of labour

Skills availability

Cultural reaction to work requirements

Planning and control (including MRP, JIT and project planning and control)

Cultural reaction to necessity for planning

Cultural reaction to need for flexibility

Globalization


Decision area Some globalization issues

Capacity planning and control

Differences in seasonality and demand patterns

Legislation on part-time or temporary work contracts

Legislation and cultural view of flexible working

Inventory planning and control

Storage conditions and climatic sensitivity

Cost of capital and other storage cost differences

Supply chain planning and control

Real cost of transportation

Differences in contractual arrangements

Supplier conformance to employment standards

Quality planning and control and TQM

Cultural views of acceptable quality

Cultural views of participation in improvement groups

Safety

Failure prevention and recovery

Maintenance support

Cultural attitude to risk

Flexibility of response to failure

Globalization


Product/service design – recyclability of materials, energy consumption, waste material generation

Some environmental considerations of operations management decisions

Network design – environmental impact of location, development of suppliers in environmental practice, reducing transport-related energy

Layout of facilities – energy efficiency

Process technology – waste and product disposal, noise pollution, fume and emission pollution, energy efficiency

Job design – transportation of staff to and from work, development in environmental education

Planning and control (including MRP, JIT and project planning and control) – material utilization and wastage, environmental impact of project management, transport pollution of frequent JIT supply


Some environmental considerations of operations management decisions (continued)

Capacity planning and control – over-production waste of poor planning, local impact of extended operating hours

Inventory planning and control – energy management of replenishment transportation, obsolescence and wastage

Supply chain planning and control – minimizing energy consumption in distribution, recyclability of transportation consumables

Quality planning and control and TQM – scrap and wastage of materials, waste in energy consumption

Failure prevention and recovery – environmental impact of process failures, recovery to minimize impact of failures


Is packaging necessary?

Can packaging

be reduced?

Yes

Reduce packaging

Yes

Reuse

YesRecycle

Yes

Eliminate unwanted packaging

No

Can packaging be reused?

No

Can packaging

be recycled?

NoMinimize

packagingNo

Identifying waste minimization in packagingS

ourc

e: A

we

Insp

iring

Im

ages

/Pho

togr

aphe

rs D

irect

som soumitra's slides

Documents

robert johnston

stuart chambers

operations practice

nature of operations

edition nigel slack

operation operations

outputs slack

services customers slack