Managing Processes and Capacity in Operations Management

Process

A system of structured activities that use resources to turn inputs into valuable outputs.

Process Thinking

A philosophy that views activities in an organization as a collection of processes.

Juran's Law

15% of operational problems are the result of human errors, 85% are due to systemic process errors.

Implication of Juran's Law for Operations Management

To improve operations, we should focus our attention on processes rather than blaming people.

Examples of Business Processes

Strategic planning, innovation, customer service, resource management, human resource management, supply management, and performance measurement.

Input/Output for Strategic Planning

Inputs: competitor data, market assessment, internal capabilities, economic forecasts. Outputs: strategic vision, long-term objectives and plans.

Input/Output for Innovation

Inputs: technological developments, customer needs, production capabilities. Outputs: new products, new production technologies.

Input/Output for Customer Service

Inputs: customer orders, complaints, demand forecasts. Outputs: entered orders, delivery commitments, resolved problems.

Input/Output for Resource Management

Inputs: strategic objectives, resource costs, availability. Outputs: capacity plans, facility plans.

Input/Output for Human Resource Management

Inputs: strategic objectives, skill requirements, demand requirements. Outputs: hiring plans, training programs, staffing plans.

Input/Output for Supply Management

Inputs: supplier capabilities, raw materials, customer requirements. Outputs: fulfilled orders, production schedules, goods and services.

Input/Output for Performance Measurement

Inputs: raw information, benchmarks, standards. Outputs: performance variance reports, trend analysis.

Five Basic Components of a Process

Activities (operations, transportation, inspection, delay, storage), Inputs/Outputs, Flows, Process Structure, Management Policies.

Five Types of Process Activities

Operations, Transportation, Inspection, Delay, Storage.

Types of Flows in a Process

Material flows and information flows.

Role of Management Policies in Processes

They support, govern, or influence processes (e.g. compensation, safety policies, working hours).

Timeframes and Actions for Capacity Planning

Short-term (0-6 months): OT, temp labor, rentals. Medium-term (6-24 months): hiring, contract labor, equipment installation. Long-term (2+ years): new buildings, outsourcing.

Economies of Scale

As production volumes increase, the unit cost to produce decreases due to spread of fixed costs, bulk purchasing, and learning effects.

Diseconomies of Scale

When capacity is exceeded, leading to inefficiencies and increased per-unit costs.

Ways Capacity is Reflected

Resource availability (e.g., labor hours), and output per unit time (e.g., units/day).

Resource availability

Reflection of capacity. Ex: Labor hours available

Output per unit time

Measured in units/day reflecting capacity.

Utilization

A measurement of throughput vs maximum capacity. Actual output / Maximum output × 100%.

Effective capacity

Output level under normal circumstances, factoring in inefficiencies.

Key principles of process performance

Every process has a constraint, variance consumes capacity, processes must be managed as systems, process measures matter, and all processes should improve continuously.

Values that characterizes TQM

• Holistic view of product quality and its impacts

• Emphasis on customer requirements

• Extended process view of operations

• Emphasis on prevention rather than inspection

• Disdain for variability

• Data-based decision making (vs opinion based)

• Employee empowerment

• Top management support

• Supplier involvement

• Continuous improvement

Project process structure

A process used for one-of-a-kind, complex products or services such as a custom home or designing a video game.

Job shop process

A process with low volume and high variety, such as an auto repair shop or custom tool building.

Batch process

Produces moderate volume, like book printing or auto parts manufacturing.

Repetitive process

Used for high volume, low variety products like car or appliance manufacturing.

Continuous process

A non-stop flow used for high volume standardized products like gasoline or detergent.

Order fulfillment models

Engineer to Order (ETO), Make to Order (MTO), Assemble to Order (ATO), Make to Stock (MTS).

Engineer to Order (ETO)

Products are uniquely designed and production starts after the order is placed.

Make to Order (MTO)

Products have a standard base design but are customized during production.

Assemble to Order (ATO)

Products are assembled from pre-made components upon receiving an order.

Make to Stock (MTS)

Products are made in advance and stored in inventory before customer orders.

Service process types

Mass Services, Professional Services, Service Factory, Service Shop.

Mass Services

High labor intensity and low customization (e.g., retail banks, gas stations).

Professional Services

High labor intensity and high customization (e.g., lawyers, doctors).

Service Factory

Low customer interaction and low labor (e.g., airlines, trucking companies).

Service Shop

Low labor intensity but high customer interaction (e.g., hospitals, auto repair).

Facility layouts

Fixed Position, Functional, Product, Cellular.

Fixed Position layout

The product remains in one place while resources come to it.

Functional layout

Resources are grouped by function or type.

Product layout

Resources are arranged in the order of operations required.

Cellular layout

Mini production lines for product families with similar processing needs.

Quality management

The process of overseeing all activities and tasks needed to maintain a desired level of excellence.

Quality Management

An organizational approach focused on embedding quality in culture and operations using managerial and statistical tools.

Design Quality

The match between a product's design and customer requirements.

Conformance Quality

How well a product meets its design specifications.

Product Quality

Overall fitness of a product for consumption based on customer needs.

Kaizen

A Japanese methodology meaning 'change for the good' focusing on continuous improvement.

Kaizen improvement cycle

Identify → Analyze → Implement → Evaluate → Standardize.

Total Quality Management (TQM)

A company-wide effort to improve quality across all functions and employees.

Cost categories in quality management

Prevention, Appraisal, Internal Failure, External Failure.

Prevention Costs

Training, process improvement projects, data analysis.

Appraisal Costs

Inspection, testing, audit tools.

Internal Failure Costs

Costs from defects found before delivery (e.g., rework, scrap).

External Failure Costs

Costs from defects found after delivery (e.g., warranty claims, returns).

Six Sigma

A method aimed at reducing process variation and defects using the DMAIC process.

DMAIC

Define, Measure, Analyze, Improve, Control.

ISO 9000

A global certification standard for quality management systems.

Quality awards

Deming Prize, EFQM Global Award, Malcolm Baldridge National Quality Award.

Logistics Management

The planning, implementation, and control of goods, services, and information flow to meet customer and organizational needs.

Perfect order

Right product, right time, correct processing, complete shipment, right shipping method, tracking ability, accurate billing.

Key logistics activities

Order processing, inventory management, transportation, distribution, reverse logistics.

Most expensive logistics activity

Transportation (about 70% of costs).

Modes of transportation

Truck, Rail, Water, Pipeline, Air.

Truck transport characteristics

Most flexible, includes FTL, LTL, and parcel, 70% of US transport.

Last mile

The final step of delivery to the end customer, often the most challenging and expensive.

Freight consolidation methods

Market area, Pooled delivery, Scheduled delivery.

Reverse logistics

Handling returns and recycling, critical in e-commerce.

Value-added services in logistics

Postponed manufacturing, special packaging, and custom labeling.

Logistics total cost formula

Total Cost = Carrier Cost + In-transit Inventory Holding Cost.

In-transit inventory cost

(Transit days × shipment value × annual carrying cost %) / 365.

Types of distribution and fulfillment center (DC/FC) operations

Stockpiling, production support, break-bulk, fulfillment centers.

Logistics network design goal

how a company should implement its distribution strategy to optimize logistics costs and customer experience.