Operations Management Notes

Operations Management: Basic Terms and Concepts

Operations Management:
- Definition: The design, control, and coordination of resources and processes to provide customer and stakeholder value.
Input-Transformation-Output Model:
- Transformed Resources: Input resources that undergo change in the process.
  - Examples: Materials, information, and customers.
- Transforming Resources: Resources used to transform input resources.
  - Examples: Facilities and staff.

Coffee Shop Example: Input-Transformation-Output Model

Inputs/Transformed Resources:
- Coffee beans
- Milk
- Sugar
- Customers
Transforming Resources:
- Coffee machines
- Personnel
Outputs:
- Prepared coffee
- Satisfied customers
- Money

Operation Characteristics (Four V's)

Volume of Output: How much output is created through the process.
Variety of Output: How varied are the outputs of a process.
- Example: Using container ships to reduce output variety.
- Note: Reducing variety without demand will not be successful (e.g., squared watermelons).
Variation in Demand for Output: How elastic or conditions-related is demand?
- Example: Ice cream factory during summer and winter.
Visibility of Creation of Output to Customers:
- Example: If the kitchen is visible, how long is the customer willing to wait for food?
Operations must align with the culture and environment of its regional location (success of Dabbawallas in Mumbai).

Four V Profile

Note: Volume is reversed in contrast to the rest of the V's.

Five Performance Objectives of Operations

Quality of Output:
- Reduces costs
- Increases dependability
- Improves customer satisfaction
- Leads to a price premium
Speed of Production and Delivery:
- Reduces inventories
- Mitigates risks from demand variability
- Can be a competitive advantage
Dependability of Timing:
- Saves time and money
- Provides stability
Flexibility of Operations:
- Speeds up response to customer needs and demand
- Saves time
- Maintains dependability
Cost of Production:
- Measurement of operations
- Profit
- Affected by other objectives

Types of Quality

Conformance to basic requirements
Specification – Added custom value

Types of Flexibility

Product/service
Mix of products and services
Volume
Delivery

Polar Diagram of Performance Objectives

Within circle = Internal traits
Outside circle = External traits
Cost benefits are only achievable through investment in the other objectives

Case Study – Concept Design Services

Advantages:
- Previous experience in making aerospace products
- Capital for changing operations
- An untapped market for a b2b design product manufacturer offering full service from manufacture to distribution and marketing
- Standardization of machines, same resources could be used to create different products, leading to customization
Challenges:
- Subcontracting of focus products difficult, problems with scheduling and quality standards
- Lacking communication between the design department and the rest of the company
  - Promises to customers that are hard to keep
  - Causing logistical issues with designs
  - Due to the added stress of the design department being responsible for the company’s growth
- Sales forecast is extremely difficult and causes last-minute changes that disrupt the manufacture and distribution
  - Wildly changing consumer demand is the nature of the business
- Changing into a b2b company brings its own challenges and requires a skillset that the organization does not necessarily possess
- Unclear future plans
Advice for CDS:
- Have a meeting with the board of directors and determine a mutually agreed strategy and direction for the company
- Hire a consultancy firm to help with subcontracting
- Hire a communications expert to reform communications networks in the company and train personnel in honing proper communication channels between departments
- Subcontract UK delivery
- Gain market intelligence from customers (deeper market analysis)
- FROM PROFESSOR: Separate Focus and Concept into different units (“plant within plant”), and provide different operations systems as above
  - Better sales forecasting system
  - Revised scheduling system
  - Involve the manufacturing department in product development and design (manufacturability to be considered)
  - Tighter control of inventory
  - Investment in smaller machines

Process Design

About process design
Process types:
1. Project:
  - E.g.: Water dam/other big structures
  - Clear start and finish
  - Resources organized for each specific project
2. Jobbing:
  - E.g.: Cake shop
  - Low volumes with often smaller items
  - Specially made, high variation
  - Each product shares resources of the production system
  - Wide competence required
3. Batch:
  - E.g.: Agriculture, harvested foods
  - Large volumes, lower variety
  - Products in batches, repetitive
4. Mass:
  - E.g.: Candy bars
  - High volume, narrow variety, repetitive
  - Low and focused competence in those adding value
  - Synonymous with line
5. Continuous:
  - E.g.: Oil and gas production
  - Highest volumes, lowest variety, often only one product
  - Capital-intensive, fully automated
  - Expensive, difficult to start and stop the process

Volume and Variety in Process Types

Project: low volume, high variety
Jobbing: low volume, high variety
Batch: medium volume, medium variety
Mass: high volume, low variety
Continuous: highest volume, lowest variety
More process flexibility than necessary = high cost
Less process flexibility than necessary = high cost

Services

Professional Services:
- E.g.: Lawyers, doctors
Service Shop:
- E.g.: Banks
Mass Service:
- E.g.: Police

Layout Types

Fixed Position:
- Project and professional services processes (high variety, very low volume)
- Transformed resource not possible to move
- Transforming resources come to the inputs
- Usually always very expensive
Functional:
- Low volumes, some variety
- E.g.: Library
- Transformed resources go their related transforming resources
- Easy to supervise, high flexibility
- Low utilization (pileup of inventory and other disruptions)
Cell:
- E.g.: Department store
- A collection of functional layouts
- Costly to rearrange and to maintain
Product:
- Synonymous with line layout
- Greatest volume for low unit cost
- A single disruption in the line will cause the whole process to stop

Same process types can have different layouts
A single organization often has several different layouts

Examples of Process Types and Layouts

NASA probe: Project process with professional service, project and service in fixed position layout
Furniture maker: Jobbing process with functional layout
Bakery: Batch process with functional layout
Gym: Service shop with functional layout
Rolls Royce Jet Engine Production: Mass production with professional service, all in Cell layout
Tesco Mega Store: Mass Service with Cell layout
Petrochemical Refinery: Continuous production with line layout
Utility Services: Mass service with line layout

Line Balancing

Line Balancing = Assigning tasks to transforming resources to optimize work flow and reducing idle time
- Specialist recruitment
- Generalist recruitment
The layout and design of any operation is detrimental to its effectiveness

Case Study – North West Bank

Consolidation of three separate regional departments into one central department
1. Due to regional variance in demand, and because of bad average turnaround times
Problems:
1. New change has caused uncertainty
2. Last minute rush of discounted rate products came during the time or reorganization (missed profits)
3. Problems with the new layout:
  - Filing room is now further away from most staff, meaning more unnecessary moving about
  - Consequently, staff keep files on desks for use longer than usual, resulting in them being unavailable for use to others
  - The location of the scanning machines causes additional moving about for most teams
  - The flow of the process was muddled, and the high amount of partially processed applications keep getting lost
Options:
1. Keep the system as it is with a common data entry stage and region-specific offer and underwriting stages
  - Organizational coherence
  - Allow teams to develop their own cultures
  - Cell layout
2. Reform into a functional layout
  - Fits the higher volume
  - Eliminates the problem of departments wandering around through each other for scanning and files
  - Specialization and skill development
  - Hurts morale
  - Region-specific knowledge is still required, meaning that the offer team would need a cell layout
3. Same as 2; reform into a functional layout, except that the offer and underwriting stages would operate in parallel
  - Dramatically improves the turnaround times
  - A clear flow of the process should eliminate the problem of disappearing partially processed applications therefore taking away the perceived risk of this change
  - Proven to work in many other banks
  - Data of applicants and surveys is required by law to be saved to an extent, so applications being rejected or flagged isn’t nearly as big of a problem as it seems
  - Works best for a high volume
Notes on case work from lecture:
- Keeping option 1 in the short-term is the best option, because introducing massive reforms one after another in a short sequence is catastrophic for operations
- In the long-term options 2 and 3 are necessary
Notes from review
- Process and service design should always be coordinated with product design
- The design of any process should be governed by the volume and variety it is required to produce
- Process types are a spectrum, as portrayed in the product- process matrix
- Process mapping is the second stage of process design after deciding the overall process type and potentially layout
  1. Example:

Line of Visibility

Line of visibility describes the point in which a service turns from a back office process to one that the customer can see
1. Example:
Designing a service that deals with customers should consider the touchpoints of the process, as in the points where the customer can be engaged in the process
Throughput time = Time between an item entering the process and leaving it (the time it spends in the system)
Cycle time = Avg. time to complete one unit
Work-in-progress = Number of items within the process at any given time
Throughput time = WIP x Cycle time (Little’s Law)
Throughput efficiency =

Planning, Control & Management

Little’s Law: $Throughput \space time = WIP \space x \space Cycle \space time$
Work-in-progress (WIP) = Number of units waiting to be processed further
Cycle time = Avg. time between units of output emerging from a process
Throughput time = Total amount of time it takes for a product to enter a process and exit it
$Number \space of \space transforming \space resources = \frac{Work \space content}{Cycle \space Time}$
$Throughput \space Efficiency = \frac{Work \space content}{Throughput \space Time} \space (x \space 100)$

Inventory Management

Inventories = accumulations of transformed resources
- Stock = Physical items
- Queues = People
- Databases = Information
Managing databases is more about organization of the data, its storage, security, and retrieval
- Information can also often turn from a transformed resource into a transforming resource (e.g.: customer data being used to target ads for similar groups)
The task of operations management is to allow inventory to accumulate only when its benefits outweigh its disadvantages
Uses for physical inventory:
- Can be used as buffer inventory for unexpected fluctuations in demand, essentially protection against uncertainty
- Countering lack of flexibility with cycle inventory (There is a demand-sufficient inventory of item A while production of item B takes up all product processes)
- Taking advantage of opportunities, e.g.: a supplier offers a special deal to reduce their own inventories
- Anticipation inventory for large but mostly predictable demand fluctuations
- Some products can increase in value while in inventory, for example wine
- Pipeline inventory = Inventory awaiting distribution or locked down from other customers by an order
Use for queues:
- Queues of customers enable prioritization (e.g.: hospital queues with separate emergency lines)
- A queue gives customers time to choose (e.g.: restaurants)
- A queue can enable efficient use of resources (e.g.: elevator)
Use for databases:
- Efficient multi-level access to data
- No need to capture data at every transaction (aside from checks)
- Can speed up processes (e.g.: cookies on websites)
Inventory management affects return on assets:
- Inventory may become obsolete or lose value over time
- Storage costs
- Administrative and insurance costs
- Ties up money (working capital) leading to an opportunity cost
- Inventory contracts affect the timing of payment to suppliers
- How much should be ordered?
  - When order size increases:
    - Cost of placing the order (all transactions related to making the order from suppliers) decreases
    - Price discounts are often given for big orders
    - Stock-out costs (opportunity costs) decrease when there is buffer inventory
    - Working capital costs = Lag between paying suppliers and receiving payment from customers
    - Storage costs = Rent, heating, lighting
    - Obsolescence costs = With large orders, some items will inevitably sit in storage longer than others, potentially losing value
    - Operating inefficiency costs = High inventory levels disrupt understanding of organizational flaws

Economic Order Quantity (EOQ) Formula

How much of a specific item to order?
Q = Items ordered
D = Demand rate (units demanded per month)
Ch = Total cost of holding one unit in stock for a period of time
CO = Total cost of placing an order
$EOQ = \sqrt{\frac{2 \cdot D \cdot CO}{Ch}}$
Small errors in estimating holding or ordering costs are not going to affect total costs much

Economic Batch Quantity (EBQ)

Takes into account that even when produced in batches, items are added to and sold from the inventory continuously
(The Derivation of the formula is omitted here)
P = Rate at which items are made and put into inventory
D = Rate at which demand is depleting inventory
Both models are generally applicable and functional but do make certain unrealistic assumptions (e.g. stable demand). Regardless, this doesn’t diminish the value of the models, but does restrict them
The models are also meant to optimize the order quantity for a specific system, NOT THE SYSTEM
- Lean philosophies argue for different methods to reduce costs

When Should the Order Be Placed?

Lead time = The time between ordering a product and it arriving
Re-order point = Point at which stock will fall to zero minus the order lead time
Re-order level = The level of inventory when a replenishment order needs to be made
Because both order lead times and demand are not easily predictable, replenishment orders need to be done a bit before the re-order point
- Safety / Buffer stock = The stock that is still in inventory the moment the replenishment order arrives
- Due to lead time (t) and demand (d) being fluctuating variables, the level of buffer stock is always less or above the average Continuous review (orders placed at re-order level and the order quantity is constant) System for determining reorder timing
Lead-time usage = How many products are taken out of the inventory during order lead time (d1 and d2 in the picture)
Setting the re-order level at 600 would mean that there is only a 0,08% chance of a stockout occurring Periodic review (Orders placed at regular intervals and at quantities that help reach a certain point every time).

Time Interval Between Orders in Periodic Review

$Time \space between \space orders \space = \frac{EOQ}{D}$
Uncertain demand and lead time can be compensated by setting the maximum quantity Qm higher

Controlling Inventory

Inventory has to be prioritized and discriminated to be tracked and controlled
Usage value = Usage rate X Individual value
- Higher usage values are to be controlled more carefully
Pareto law (or 80/20 law) = A relatively small proportion of the total range of items in an inventory will account for a large proportion of the total usage value
ABC Inventory control = Controlling stock according to the Pareto law
- Class A items = The 20% of items that contribute 80% of usage value
- Class B items = The next 30% of items that contribute 10% of usage value
- Class C items = The last 50% of items that contribute 10% of usage value
Other criteria for classifications of items:
- Consequence of stock-out
- Uncertainty of supply
- High obsolescence or deterioration risk
The ABC system can mislead one into interpreting that class C and B items are not important and need little control or monitoring, however:
- Excess stock of class A items can be sold relatively quickly, whereas an excess stock of class C items move slowly and can incur big costs
- Class C items, or ‘slow-moving stock’, require significantly bigger investment in stock
- Most managers deem controlling class B and C items more difficult
The monetary value of inventory is often calculated like this = Number of specific items X their value (the cost of purchasing them)
- However, this tells nothing of the size of the investment relative to the throughput of the operation (is the stock sitting on its ass or being sold/used)

Ways to Compare Total Number of Stock Against Rate of Usage

Calculate how long the inventory would last without replenishment = Cover of the stock
Calculate how often the stock is used within a period (often a year)
The biggest problem in inventory management
- Most inventory management is done through computerized inventory management systems with sophisticated algorithms
- The systems follow a principle called the perpetual inventory principle
- Any error in recording transactions results in a perpetually greater discrepancy between recorded and actual inventory
  - Entering wrong products or codes, miscounting transferred items, not recording damaged stock, etc.

Planning, Control & Capacity

Planning is just a formalization of intended events in the future
Control is the process of coping with any changes that affect the plan
Dependent demand
- Dependent on other products or variables (e.g.: car tires in an automobile plant are dependent on cars)
Independent demand
- Dependent on random factors that are very difficult to predict
The type of demand is a spectrum

Key Planning & Control Activities

Scheduling
- When to do things
Sequencing
- In what order should things be done?
Loading
- How much to do?
Monitoring and control
- Is everything going according to the plan?
Capacity = Scale of an operation
- Not necessarily reflective of processing capability
- Always requires a time dimension for appropriate measurement
- Aggregate numbers ignore details:
  - E.g.: Rooms per night ignores number of guests in each room
  - E.g.: Aluminum tons per month ignores types of alloy, gauge and batch variations
The purpose of capacity management is to determine an appropriate amount of capacity for an operation
- Additionally: Special events (e.g.: Finland winning world cup suddenly increases Finnish demand for alcohol, hotels, etc.)

Good Demand Forecasting

Three strategies for capacity management:

Chase demand plan
- Adapting to demand and trying to stay above it
- High turnover
- Worktime flexible
- Subcontracting
Manage demand plan
- Affecting demand with marketing efforts
- Flexible operation, least wastage
- Reduced quality control
- Most difficult to plan & control
Level capacity demand
- Keep capacity at a constant level despite of demand (e.g.: luxury products or petrochemical [capacity hard to change])
- Can cause big queues and backlogs
To change demand one can also develop alternative products/services