Operations Management Exam 2 Flashcards

May use as refresher for future exams, but primarily for actually studying the new content for exam 2.

Behavioral Science

The study of why people act and make decisions as they do. Understanding decision-making dynamics allows firms to influence choices.

Rational decisions involve logical assessment of pros/cons;

irrational ones are influenced by bias and emotion.

People are predictably irrational—susceptible to the same influences repeatedly.

Example of Framing = Coca-cola encouraging existing cutomers to buy more (no more “new” customers available) by labeling 4 for $5 instead of $1.25 each

Framing Expectations

Expectations change how experiences are perceived. Higher prices lead to higher perceived quality due to framing. But every firm can’t just raise the price, so they keep the market price in mind and give a “discount”.

Ex. Tylenol vs. CVS brand pain reliever

Ex. Apple packaging experience

Ex. Blind wine taste test

Ex. Payless’s fake luxury store Palessi

Framing is possible because Confirmation bias makes people defend their own purchase choices.

Business use: start with high list price, then offer discounts to frame value (ex. College tuition).

Decoy Effect

Occurs when a third, less-attractive option influences decisions.

Example: Web $59 (16%), [Decoy] Print $125 (0%), Web+Print $125 (84%).

Removing the decoy drastically changes outcomes, showing perception influence.

Free Effect

‘Free’ creates an emotional response that overrides rational thinking. People feel more pain from losing money than pleasure from gaining the same amount.
Example: $10 free gift card chosen over $20 card costing $7.

Service Recovery Paradox

First and last impressions shape service perception; last impressions matter more.

Service Recovery Paradox: customers with resolved failures can be more satisfied than those without any issue (doesn’t mean satisfaction is always recovered)

Framework

• Pre-recovery : begins at first occurrence of failure, where firm must understand customer expectations of remediation

• Immediate Recovery : Firm decides how to resolve the failre. Response speed is critical. Resolution should be correlated to service failure and avoid generic response

• Follow-up : occurs after the situation has been resolved. Implement change so failure does not occur again.

What do you need me to do? —> I’ll do this just for you. —> This won’t happen again.

Data Analytics

The process of processing, cleaning, and modeling data to remove opinions and support decision-making. Also helps make better predictions and focus on key problems and customers.

ex. Google makes money through selling their analyzed predictions of future behavior of consumers to advertisers.

Types (DDPP):
Descriptive (what happened),

Diagnostic (why, relationship?),

Predictive (what might happen),
Prescriptive (what to do next / collecting data in real time and using it to make decisions). —> ex. self-driving cars

Used for:

Optimization models maximizing one variable while minimizing others 

Credit Acceptance clustering prospective customers into who will (not) default

Predictive Maintenace (condition based monitoring) using data from IOT and analytics to monitor equipment and predict potential failures before they occur

Service Operations

Develop processes and decisions ofa company for simultaneous production and consumption of an intangible product to ensure customer success and experience.

Good service increases retention, and a 5% increase in retention can raise
profit by at least 25%,meaning that increasing customer retention is the most effective way to increase profit

What makes it hard

• Hard to reduce costs (can’t apply assembly line and economies of scale cost reduction techniques)

• Not every customer is a good fit for your business (uniqueness)

• Variability is much more difficult to reduce than in manufacturing since there is no inventory. However, customers often measure quality of service by how their variability is accommodated.

Key to success : SETTING AND MEETING CUSTOMER EXPECTATIONS (Most conflict comes from a misunderstanding of expectations)

Evolution of Service Operations

Agricultural —> Manufacturing —> Service (transaction) —> Experience (personal and memorable)

Businesses can charge more for Experience-based services (ex. Disney, Starbucks, Casino)

Experiences build relationships which build loyalty

Service vs. Product

• Serivces are created and consumed simultaneously

• No inventory of unused service since services are perishable

• In service, customer participation plays a key role in their own satisfaction

• Almost impossible to patent a service

• Low barriers to entry for servicegfffd

Customer Satisfaction and Loyalty

Customer satisfaction aids retention but switching costs determine loyalty.

Example: banking industry has the lowest satisfaction, but the highest retention because people refuse to spend so much effort to switch  

Example: Chick-fil-a has high satisfaction, but low retention due to zero switching cost

Meeting expectations > exceeding them (avoids raising future expectations).

Satisfaction Measurement: Net Promoter Score (NPS) > Retention Rate > Surveys.

Service Profit Chain

Links profitability to process design and employee satisfaction

• Internal Service Quality (How well is the job designed for the employees)

• Employee Satisfaction

• Employee Retention and Productivity (drives operating, hiring, and training costs down)

• Great Customer Service

• Customer Satisfaction 

• Customer Loyalty (loyal customers are cheaper to serve and willing to pay more)

• Higher Revenue

• Higher Profit

Servicescape

Physical environment influences behavior and spending.

Reflects the values of the organization without words

Must be flexible to accommodate changes in demand

Put the customers in the mood to spend money

Ex. Casino

Service Variability

Types: Arrival (may arrive at times without enough service providers), Request (different needs / that’s why doctors specialize), Capability (of customer), Effort (of customer), Subjective Preference (hardest for firm to control / different perception of quality of same service / Ex. Tiffany & Co beeper system).

Strategy: accommodate (high cost, customer-focused) or reduce (low cost, efficiency-focused). Either can satisfy customers if expectations are clear.

Example : DELL added high end server and was expecting customers to demand responsive service for any problems with the server. They accommodated the arrival, request, and capability variability, but kept costs under control by outsourcing serivice to 3rd party firms (no pay to idle workers, only pay for what you use)

Service Dilemma (Curse of Success)

How to deliver high customer satisfaction to multiple customer segments while not sacrificing one segment for another and protecting your brand image of what made you successful in the first place.

Ideal Solution:

Find service improvements to satisfy multiple segments (quicker service)

Create new brand to segregate customers

Avoid upsetting one segment to win another

LOYAL CUSTOMERS (ORIGINAL SEGMENT) ARE THE MOST IMPORTANT CUSTOMERS

• Ex. Starbucks

  • Originally targeted towards extreme coffee lovers ← first in America 

  • New market segments flood in ← wants to get coffee in-and-out

  • Solution : Mobile order system, Starbucks reserve

Managing Demand and Capacity

Services lack inventory safety nets, so demand forecasting to match demand and capacity is crucial and a major challenge since hiring new employees to provide services does not yield results overnight (training). 

Overcapacity = waste; undercapacity = dissatisfaction. Must balance with forecasting and flexibility.

Quality Management

Quality = meeting expectations.

Poor quality has higher penalties than benefits of high quality.

Service Quality : Meeting expectations —> customer satisfaction —> Higher revenue

Process Quality : Reducing process variability —> Less waste / defects —> Lower costs

Quality may be too good (no one will replace), so the right amount of quality means meeting expecations

Total Quality Management focuses on design and process quality.

Goal: deliver consistent quality by finding and reducing / eliminating variability

The most important component of any product

One that fails because customers only focus on that one failure

Types of Quality

Product quality : characteristics that meet customers acceptability

Process quality : consistent results within a specified range

Decision quality : based on the best possible analysis and information regardless of the actual outcome

Costs of Quality

Least to greatest

1. Appraisal costs (inspecting, auditing, testing)

2. Prevention costs (efforts to keep defects from occurring)

3. Internal failure costs (caught internally and either scrapped or corrected

4. External failure costs (defects seen by the customer)

5. Opportunity costs (loss of future business due to poor quality reputation)

Six Sigma

Methodology developed by Motorola to eliminate defects (<3.4 defects / million opportunities).

Focuses on reducing process variation that leads to defects

Defects are determined by customers.

DMAIC: Define, Measure, Analyze, Improve, Control.

(in reality, the job of improving processes is never done —> job security)

Tools:

Flowcharts : diagram of sequence of operations

Run chart : depict trends in data over time

Pareto chart : help to break down a problem into components

Checksheet : basic form to standardize data collection

Cause-and-Effect Diagram : show relationships between causes and problems

Opportunity Flow diagram : used to separate value-added from non-value-added

Process Control chart : used to assure that processes are in statistical control

Control chart : shows lower, upper control limit of production

Fishbone : visual tool used to identify and categorize the potential causes of a specific problem

Lean Management

Philosophy: Identify (hard part) and eliminate waste (anything that adds cost but not value) and simplify necessary parts to also cut down the cost of production

• Sources of waste: overproduction, waiting, transportation (unnecessary part movement / determined by layout of facility), inventory (lean management considers raw material, WIP, and FG all waste), processing (more work than needed), motion (inefficient labor / layout can determine), defects (rework and rescheduling).

• According to lean, quality control is waste since processes should be designed so that there are no defects in the first place. But the downside of getting defect product out beats the “waste” of quality control.

• May involve complicated processes, or simply more organization

• Focus on just-in-time step performance and continuous improvement (easier said than done)

Push vs. Pull Manufacturing

Push: make-to-stock, maximizes individual efficiency (keep employees busy)

• Pros : Higher inventory of safety net to better handle variability

• Cons : Cost of idle employes / inventory (higher internal costs)

Pull: maketo-order, Efficiency of entire process, keep materials buy not stations, seeks to eliminate WIP and bottlenecks

• Pros : Lower internal costs

• Cons : No buffer (safety net)

Trade-off: customer wait time vs. internal cost.

Toyota Production System (TPS)

Emphasizes continuous waste reduction throughout the value chain, quality at the source (do it right the first time and stop the process immediately if something goes wrong), and worker empowerment.
Example: red button halts production when defect found; managers apologize for errors.

Willow Run Bomber Plant

Ford mass produced bombers for the army with assembly lines, but army kept demanding improvements (preventing standardization which is a product characteristic for mass production) while requiring ford to meet the contracted quantity.

To maintain mass production while implmenting constant changes, Ford established modification centers to incorporate the latest changes while Willow Run continued to manufacture standard bomber.

Operations Planning

Translates strategy into an actionable plan.

Starts with demand forecasting and requires coordination across all departments.

Ends with an operational plan on what resources are needed to meet the demand (materials, manpower, production capacity, distribution)

Revenue and Pricing

Optimize price based on customer groups and timing in order to maximize profit

Timing:

• Decreasing value as time passes : perishable goods / technology

• Increasing value as time passes : event specific goods (holiday, game, etc.) like vintage cars, homes, airline tickets (dynamic pricing —> as supply decreases, price increases)

Price Segmentation : charging different prices to customer groups

Single Price Optimization

Multi Price Optimization

Variation and Strategies

Handle low demand and idle employees via discounts, layoffs, and switching to different product

Handle high demand via outsourcing, overtime of employee, and hiring more

Chase strategy (used for perishable goods) = match capacity to demand (involves low level skill workers)

Level strategy (easier to manage) = steady production for average demand with inventory buffer (use inventory to match demand)

Capacity Management

Capacity = design output of process

Utilization (measurement of capacity) = actual/design (should not plan for more than 100% since there is variation ← capacity cushion)

Capacity cushion : the amount of additional capacity needed absorbs variability and still meet demand (directly related to how much variability you have)

• More cushion = less risk, higher cost

• Less cushion = more risk, lower cost.

Work Standardization

Goal: consistent, large, efficient output.

Standardized work instructions reduce variability and improve quality.

Statistical Process Control (SPC)

Monitors process quality with tolerance limits in real-time and detects variation before defects occur.

Small Standard Deviation —> Less variation —> more under control —> Less defects

Consumers determine acceptable tolerance range.

Use Control charts that have Upper & Lower Specification Limit (range of variation that is considred acceptable by the designer and customer)

• Before designing the process, purchasing machinery, training personnel, etc., determine what the spec limits shouldbe to make sure you spend money on the right machine, people, and training

Use samples from output to estimate average (deceptive) and standard deviation (amount of variation)

Process Capability

Assesses the ability of the process stays within tolerance.

Process Control Limits (UPCL, LPCL) : range of variation that a process is able to maintain (physical boundaries / NEVER cross)

PCL > SL process is incapable of being defect free

PCL< SL process is capable of being defect free

Process Capability Indes (Cpk) : Gives us an indication of how many outputs we can expect outside the specification limits (defect)

Cpk > 1 = capable

Formula:
Cpk = min{(X-LSL)/kσ, (USL-X)/kσ}.

kσ = sigma level (possibility of defect) 1-6

What to do if process is producing defects

• Reduce variability

• Accept them

• Find the root cause of the variability and fix it

• Increase the tolerance / specification limits after we define customer expectations (widening the goal post / changing the definition of a defect / acceptable if current limits are too tight and don’t add value to customer)

Defect Probability

• Calculate the probability of can with less than 55 psi

  • Z = LSL - X / σ

  • Z = -3 → NORMSDIST(-3) = 0.00135

• Can with less than 65 psi

  • Z = USL - X / σ

  • Z = 2 → NORMSDIST(2) = 0.97725

• Can with more than 65 psi

  • 1-Z = 1-0.97725 = 0.2275

• Can with less than 55psi or more than 65psi

  • 0.00135 + 0.02275 = 0.0241 → 2.4% will be defective

Process Consistency and Accuracy

Consistency = small standard deviation (more important).

Accuracy = average close to target.

Achieve consistency first, then fine-tune for accuracy