OM 300 Exam 1

This contains information from chapters 1, 3, 4, and 7

Production

the creation of goods and services

Operations Management

The set of activities that creates value in the form of goods and services by transforming inputs into outputs

Essential functions of OM

1. Marketing – generates demand

2. Production/operations – creates the product

3. Finance/accounting – tracks how well the organization is doing, pays bills, and collects the money

Global Network (role of the supply chain)

organizations and activities that supply a firm with goods and services and distribute it to final customers

Role of the supply chain

Members of the supply chain collaborate to achieve high levels of customer satisfaction,efficiency, and competitive advantage

Designs of goods and services

• Defines what is required of operations

• Product design determines cost, quality, sustainability, and human resources

Managing quality and Statistical process control

• Determine the customer’s quality expectations
• Establish policies and procedures to identify and achieve that quality

process and capacity struggles

• How is a good or service produced
  
  

• Commits management to specific technology, quality, human resources, and investments

location strategies

• Nearness to customers, suppliers, and talent
• Considering costs, infrastructure, logistics, and government

layout strategies

• Integrate capacity needs, personnel levels, technology, and inventory
• Determine the efficient flow of materials, people, and information

Human resources, job design, and work management

• Recruit, motivate, and retain personnel with the required talent and skills
• Integral and expensive part of the total system design

Supply chain management

• Integrate the supply chain into the firm’s strategy
• Determine what is to be purchased, from whom, and under what conditions

Inventory management

• Inventory ordering and holding decisions
• Optimize considering customer satisfaction, supplier capability, and production schedules

scheduling

• Determine and implement intermediate- and short-term schedules
• Utilize personnel and facilities while meeting customer demands

Maintenence

• Consider facility capacity, production demands, and personnel
• Maintain a reliable and stable process

services

Economic activities that typically produce an intangible product (such as education, entertainment, lodging, government, financial, and health services)

Operations for goods and services

• Manufacturers produce tangible product; services often intangible
• Operations activities are performed in both manufacturing and services
• Distinction is not always clear
• Few pure services

Productivty

The ratio of outputs (goods and services) divided by the inputs (resources, such as labor and capital) (is a measure of output only and not a measure of efficiency)

productivity equation

Units produced/Input used

• Measure of process improvement
• Represents output relative to input
• Only through increases can our standard of living improve

Labor productivity equation

Units produced/Labor hours used

• One resource input → single-factor productivity

Multifactor productivity equation

Output/Multifactor + Lab + Material + Energy + Capital + Miscellaneous
• Also known as total factor productivity
• Output and inputs are often expressed in dollars

Measurement problems

• Quality may change while the quantity of inputs and outputs remains constant
• External elements may cause an increase or decrease in productivity
• Precise units of measure may be lacking

Productivty variables

• Labor - contributes about 10% of the annual increase

• Capital - contributes about 38% of the annual increase

• Management - contributes about 52% of the annual increase

Productivity improvement in services is difficult because

Typically labor-intensive, frequently focused on unique individual attributes or desires, often an intellectual task performed by professionals, often difficult to mechanize and automate, often difficult to evaluate for quality

Mission

statements tell an organization where it is going

strategies

Tell the organization how to get there

Strategies require managers to

• Develop an action plan to achieve the mission
• Ensure functional areas have supporting strategies that: Exploit opportunities and strengths, neutralize threats, and avoid weaknesses

Strategies for competitive advantage

1. Differentiation – better, or at least different
2. Cost leadership – cheaper
3. Response – faster or more responsive

Experience Differentiation

Engaging a customer with a product through imaginative use of the five senses, so the customer “experiences” the product

competing on cost

Low-cost leadership means achieving maximum value, as perceived by thecustomer. Does not imply low quality.

Competing on response

• Flexibility is matching market changes in design innovation and volumes
• Reliability is meeting schedules
• Quickness in design, production, and delivery

strategy development and implementation

• Identify key success factors that support core competencies
• Integrate OM with other activities
• Build and staff the organization

Outsourcing

Transferring activities that have traditionally been internal to external suppliers

Accelerating due to
1. Increased technological expertise
2. More reliable and cheaper transportation
3. Rapid development and deployment of advancements in telecommunications and computers

extends the long-standing practices of subcontracting production activities
Contract manufacturing is subcontracting done on a continuing basis

Theory of competitive advantage

• If an external provider can perform activities more productively than the purchasing firm, then the external provider should do the work
• The purchasing firm focuses on core competencies
• Drives outsourcing
• On a more macro (country view) basis – countries benefit from specializing in (and exporting) goods and services in which they have relative advantage, and they benefit from importing goods and services in which they have a relative disadvantage.

Advantages of Outsourcing

• Cost savings

• Gaining outside expertise that comes with specialization

• Improving operations and service

• Maintaining a focus on core competencies

• Accessing outside technology

disadvantages of Outsourcing

• Increased logistics and inventory costs

• Loss of control (quality, delivery, etc.)

• Potential creation of future competition

• Negative impact on employees

• Risks may not manifest themselves for years

Rating Outsourcing Providers

• Insufficient analysis most common reason for failure
• Factor-rating method
• Points are assigned for each factor for each provider
• Weights are assigned to each factor

Reshoring

• Returning production to the home country.
• Two-thirds of U.S. and European manufacturers plan to repatriate Asian production; 20% may relocate most or all of it.

Nearshoring

• Moving production closer to home.
• U.S. companies leverage Mexico's proximity and trade benefits

Friend-shoring

Sourcing production from politically aligned and economically stable countries.

Reasons to globalize

1. Improve the supply chain
2. Reduce costs and exchange rate risks
3. Improve operations
4. Understand markets
5. Improve products
6. Attract and retain global talent

Improve the supply chain

Locating facilities closer to unique resources. These resources may be human resource expertise, low-cost labor, or raw materials.

Reduce Costs and Exchange Rate Risk

• Risks associated with currency exchange rates
• Reduce direct and indirect costs
• Trade agreements can lower tariffs

Understand and Access New Markets

Interacting with foreign customers, suppliers, and competition can lead to new opportunities

Forecasting

• The art and science of predicting future events

• The underlying basis of all business decisions: Production, Inventory, Personnel, Facilities

Short-range forecast

• Up to 1 year, generally less than 3 months

• Purchasing, job scheduling, workforce levels, job assignments, production levels

• usually employs different methodologies than longer-term forecasting

• tend to be more accurate than other forecasts

Medium-range forecast

• 3 months to 3 years

• Sales planning, production planning and budgeting, cash budgeting and analysis of various operating plans

• deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes

Long-rage forecast

• 3+ years

• New product planning, facility location or expansion, capital expenditures, research and development

• Deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes

Economic forecasts

Address the business cycle – inflation rate, money supply, housing starts, etc

Technological forecast

• Predict rate of technological progress
• Impacts development of new products

Demand forecasts

Predict sales of products and services

strategic importance of forecasting

• Supply Chain Management – Good supplier relations, advantages in product innovation, cost and speed to market
• Human Resources – Hiring, training, laying off workers
• Capacity – Capacity shortages can result in undependable delivery, loss of customers, loss of market share

Influence of the product lifecycle

Introduction and growth require longer forecasts than maturity and decline
• As product passes through life cycle, forecasts are useful in projecting: Staffing levels, Inventory levels, Factory capacity

Seven steps in forecasting

1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the forecast
4. Select the forecasting model(s)
5. Gather the data needed to make the forecast
6. Make the forecast
7. Validate and implement the results

The realities of forecasting

• Most forecasting techniques assume that there is some underlying stability in the system; many firms automate their predictions using computerized forecasting software
• Product family and aggregated forecasts are more accurate than individual product forecasts – helps balance the over- and underpredictions
• Outside factors that we cannot predict or control often impact the forecast

Qualitative forcasting methods

• Used when the situation is vague and little data exists: New products, New technology
• Involves intuition, emotions, personal experiences, and value systems

Quantative forecasting methods

• Used when the situation is ‘stable’ and historical data exist: Existing products, Current technology
• Involves mathematical techniques

Jury of executive opinion (qualitative)

Pool opinions of high-level experts or managers, sometimes augmented by statistical models

• Involves a small group of high-level experts and managers

• Group estimates demand by working together

• Combines managerial experience with statistical models

• Relatively quick

• ‘Group-think’ disadvantage

Delphi methods (qualitative)

• Expert panel consensus gathers forecasts from 5–10 experts
• Iterative process
• Uses multiple rounds of questionnaires.
• Experts review and adjust responses based on group feedback.
• Support staff prepare, distribute, collect, and summarize surveys.
• The state of Alaska used it for long-range economic forecasts. Incorporating diverse opinions across the state

sales force composite (qualitative)

• Each salesperson projects his or her sales
• Combined at district and national levels
• Sales reps know customers’ wants
• May be overly optimistic

Market survey (qualitative)

• Ask customers about purchasing plans
• Useful for demand forecasting, product design, and planning for new products
• What consumers say and what they actually do may be different
• May be overly optimistic

Time-series forecasting

Set of evenly spaced numerical data

• Obtained by observing the response variable at regular time periods (weekly, monthly, quarterly, and so on)

Forecast based only on past values; no other variables are important

• Assumes that factors influencing the past and present will continue to influence in the future

trend component (time series)

• Persistent, overall upward or downward pattern
• Changes due to population, technology, age, culture, etc.
• Typically several years duration

seasonal component (time series)

• Regular pattern of up and down fluctuations
• Due to weather, customs, etc.
• Occurs within a single year
• Six common patterns

six common patterns of seasonal component

Period length;season length - week;day, month; week, month; day, year; quarter, year; month, year; week

cyclical component (time series)

• Repeating up-and-down movements
• Affected by business cycle, political, and economic factors
• Multiple-year duration
• Often causal or associative relationships

random component (time series)

• “Blips” in data caused by chance and unusual situations
• Follow no discernible pattern
• Cannot be predicted

Naive apporach

• Assumes demand in the next period is the same as demand in the most recent period
• e.g., If January smartphone sales were 68, then February sales will be 68
• Sometimes cost-effective and efficient
• Can be a good starting point for comparison with more sophisticated models

Moving averages

• A series of arithmetic means
• Useful because we can assume that market demands will stay fairly steady over time
• Used often for smoothing
• Provides an overall impression of data over time demand in previous n periods/n

Weighted moving average

• Used when some trend or pattern might be present
• Older data is usually less important
• Weights based on experience and intuition

potential problems with moving averages

1. Increasing the size of n smooths the forecast but makes it less sensitive to changes in the data
2. Cannot pick up trends well
3. Requires extensive records of past data

Exponential smoothing

• Form of weighted moving average: Weights decline exponentially, Most recent data weighted most

• Requires a smoothing constant (α): Ranges from 0 to 1, Subjectively chosen

• Involves little record-keeping of past data

Measuring Forecast Error

• The objective is to obtain the most accurate forecast no matter the technique

• We generally do this by selecting the model that gives us the lowest forecast error according to one of three preferred measures:
  • Mean Absolute Deviation (MAD)
  • Mean Squared Error (MSE)
  • Mean Absolute Percent Error (MAPE)

Mean Acctual Deviation (MAD)

|Actual - Forecast|/n

Mean Squared Error (MSE)

(forecast errors)²/n

Trend projections

• Fitting a trend line to historical data points to project into the medium to long-range
• Linear trends can be found using the least-squares technique ˆy=a+b

y^

computed value of the variable to be predicted (dependent variable)

a

y-axis intercept

b

slope of the regression line

x

the independent variable

Least sqaures requirment

1. We always plot the data to ensure a linear relationship
2. We do not predict time periods far beyond the database
3. Deviations around the least squares line are assumed to be random and normally distributed

Steps in the process for monthly seasons (seasonal variations in data)

1. Find average historical demand for each month.
2. Compute the average demand over all months.
3. Compute a seasonal index for each month.
4. Estimate next year’s total demand.
5. Divide this estimate of total demand by the number of months, then
multiply it by the seasonal index for that month

Cyclical variations

• Cycles – patterns in the data that occur every several years
• Forecasting is difficult
• Wide variety of factors

Associative forecasting

• Used when changes in one or more independent variables can be used to predict changes in the dependent variable
• The most common technique is linear regression analysis
• We apply this technique just as we did in the time-series example

Forecasting in the Service Sector

• Presents unusual challenges
• Special need for short-term records
• Needs differ greatly as a function of industry and product
• Holidays and other calendar events
• Unusual events

Process Strategy

An organization’s approach to transforming resources into goods and services

• Must produce a product or provide a service that:

  • Meets or exceeds customer requirements

  • Meets cost and managerial goals

• Noting that the strategy has long-term effects on:

  • Efficiency and production flexibility

  • Costs and quality

Process strategies

1. Process focus
2. Repetitive focus
3. Product focus
4. Mass customization

process focus

• Facilities are organized around specific activities or processes
• General-purpose equipment and skilled personnel
• High degree of product flexibility
• Typically high variable costs and low equipment utilization
• Product flows may vary considerably, making planning and scheduling a challenge

repetitive focus

• Facilities are often organized as assembly lines
• Characterized by modules with parts and assemblies made previously
• Modules may be combined for many output options
• Less flexible than process-focused facilities but more efficient

Product focus

• Facilities are organized by product
• High volume but low variety of products
• Long, continuous production runs enable efficient processes
• Typically high fixed cost but low variable cost
• Generally less skilled labor
• Example - Paper mills, Nucor Steel, Frito Lay

Mass customization

• The rapid, low-cost production of goods and services to satisfy increasingly unique customer desires
• Combines the flexibility of a process focus with the efficiency of a product focus

making mass customizatoin work

• Mass customization suggests a high-volume system in which products are built-to-order (BTO).

• High-volume BTO is difficult, but resourceful managers address challenges in a number of ways, including:

  • Imaginative product design

  • Flexible process design

  • Tightly controlled inventory management

  • Digitized communication tracks orders and material

  • Responsive partners in the supply chain

selection of equitment

• Decisions can be complex as alternative methods may be available
• Important factors may be

• Cost

• Cash flow

• Market stability

• Quality

• Capacity

• Flexibility

process analysis design

When analyzing and designing processes, we ask questions such as:
• Is the process designed to achieve a competitive advantage?
• Does the process eliminate steps that do not add value?
• Does the process maximize customer value?
• Will the process win orders?

tools for process analysis and design

Flowchart, Time-Function Mapping, Process Charts, Value-Stream Mapping, Service Blueprinting

flowchart

shows movement of people or material

Time-Function Mapping

Adds time on the horizontal axis to a flowchart

Process charts

Use symbols to analyze movement of people or material

Value-stream mapping

Expands time-function mapping to see where value is added in the entire supply chain

Service blueprinting

Focuses on the customer and the provider’s interaction with the customer. Identifies potential failure points