Chapter 7 Managing Operations

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Managing Operations


Learning Objectives
1. Explain how operational excellence can lead to competitive advantage. 2. Describe different operating strategies managers can pursue. 3. Explain the role of operations in an enterprise. 4. Outline how the design of production systems and strategies for asset utilization, improving product quality, managing inventory, managing supply chains, and developing products can all improve the efficiency of an organization. 5. Describe the methodologies for improving operating processes, and explain how improvements in processes over time can lead to competitive advantage.


? Operations: The different activities involved in creating an organization’s products and services. ? Operations managers: People who manage operations.


Typical responsibilities of operations managers include the management of
? Production system

? Product quality
? Inventory system ? Suppy chains ? Product and process development


The aims of operations management
? Lower costs of their organization

? Increase the differentiation of its products
? Reach the efficiency frontier in industry


Productivity and Efficiency
? The key determinant of efficiency in most organizations is the productivity of labor and capital.
? The productivity rates of labor and capital are major dertiminants of efficiency and thus the cost structure of an enterprise.


? Productivity: The output produced by a given input.
? Productivity = Output/Input ? Productivity of labor: Unit output divided by some measure of labor input. ? Productivity of capital (capital turnover): Sales divided by the total capital (money) invested in a business.

U.S. Productivity of Labor
2007 2008


Number of increased labor productivity in the 86 detailed manufacturing industries

51 (59%)

35 (41%)

The highest productivity growth led by the computer and peripheral equipment and magnetic media manufacturing and reproduction industries. Number of increased labor 32 productivity in the 47 (68%) detailed service-providing industries 26 (55%)

The productivity growth led by wireless telecommunications carriers and employment placement agencies
Source: United States Departement of Labor


Productivity of labor in automible manufacturing industry
Toyota GM Daimler-Chrysler

Productivity of labor (per vechicle, 2004)
20.6H 23.6H 26H

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Productivity of Capital
Wal-Mart Target

Capital turnover (2005)






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Production System
? Production system: How the flow of work is configured.
? Job shop: Production systems used when items are ordered

? Small batch: Production systems used when customers order
in small batches but when each order is different.

? Assembly-line production: Systems used to mass-produce
large volumes of a standardized product.

? Continuous flow production: Production systems that
continuously produce a standardized output that flows out of the system.

Production Systems – Costs and Flexibility
Flexible/ standardized
Nature of technology/product New production technologies Small batch Assembly line Continuous flow Job shop

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Inflexible/ standardized

Low cost

High cost

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Comparision of Four Production Systems
Job shop Flexibility Cost Variety of products Economies of scale Highest Highest Too many Non Small patches High High Many Non Non Assembly-line low low Few Yes Yes Continuous flow lowest lowest Few Yes Yes

Learning effects Non

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How to achieve mass production of a customized final product economical?

New Production Technologies: Mass Customization ? Flexible production technology: A set of
methodologies that allows enterprises to produce a wider range of end products from a given production system without incurring a cost penalty.

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? Mass customization: The ability to customize
the final output of a product to individual customer requirements without suffering a cost penalty.

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Ford: adopted computer-controlled flexible manufacturing technologies
? 75% of production build on flexible assembly lines by 2010 ? Produces 8 models from 2 different chassis in an assembly plant in Chicargo ? Cost savings: - reduced downtime associated with changing a line to produce a different model - lower intenvory holding costs when products can be produced in small patches

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Mass customization
? Better differentiate its product offering ? Garner significant cost savings from reductions of inventory holding costs ? Example: apparel industry

Tailored clothes

Assembly-line clothes

Customized clothes

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Mass customization is possible when an organization is small. As it grows in size, the organization must move to mass production. Do you agree? Explain.

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Mass Customization
? Unto This Last – Selling directly to customers, this
European company manufactures the furniture to the customer’s measurement, in one week, at a mass customized price. The company utilizes the latest 3D modeling software to design and produce innovative and inexpensive furniture

? Design Your Own – Steve Madden, an American Shoe
designer, has opened a customized shoe website, where customers can select the type of shoe, color, heel, etc to their preference and in total offers some 4,221 possible combinations

Optimizing Work Flow: Process Reengineering and Process Innovation

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Most reengineering projects involve several basic principles:
1.Physically place adjacent processes near one another, which can accelerate work flow. 2.Standardize procedures at each step in the work flow, which makes it easier for replacement workers to fill in for an absent individual. 3.Eliminate loop backs in which work returns to a previous stage for further processing. 4.Balance work loads across different stages to make sure there are no bottlenecks and no stage has insufficient work. 5.Separate nonroutine complex and pass them to specialists so the flow of routine work is not slowed down by the need to deal with a complex transaction.

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Increasing Asset Utilization
? Asset utilization: refers to teh extent to which assets
are 'working', generating income for the organization. ? If managers can find ways to utilize their physical assets more intensively, they can increase the productivity of the firm's capital, thus lowering the cost strcuture of the organization and boosting its profitability.

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Realtime pricing

Optimize capacity

Efficient scheduling

Asset utilization

Quick turnaround

Asset Utilization in European Airlines

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? Since the terrorism scare of August 10, 2006, British low cost carrier EasyJet has cancelled 500 flights and Ireland’s Ryanair ahs cancelled more than one-third of its daily departures. ? These cancellations are not due to lack of business but due to new airport security rules at the British airports. ? An airline can loose as much as $190,000 a day in lost revenue if an aircraft were to sit on the ground ? The low cost airline business model calls for the planes to be in the air within 25-30 minutes of its landing ? Result – Significant underutilization of the assets.
Source: Business Week Online, August 16, 2006

Superior Product Reliability and Costs
Increased productivity
Lower rework and scrap costs Lower warranty costs Improved reputation

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Improved product reliability

Lower costs and higher profitability

Greater sales volume

Scale economies

Deming’s Quality Improvement Steps
1. A company should have a clear business model to specify

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where it is going and how it is going to get there. 2. Management should embrace the philosophy that mistakes, defects, and poor materials are not accepted and should be eliminated. 3. Quality of supervision should be improved by allowing more time for supervisors to work with employees and giving them appropriate skills for the job. 4. Management should create an environment in which employees will not fear reporting problems and recommending improvements.

Deming’s Quality Improvement Steps
5. Work standards should be defined not only as numbers or quotas but should also include some notion of quality to promote the production of defect-free output. 6. Management is responsible for training employees in new skills to keep pace with change in the workplace. 7. Achieving better quality requires the commitment of everyone in the company.

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Managing Inventory
? Inventory holding costs: The capital cost of
money tied up in inventory and the cost of the warehouse space required to store inventory.

? Just in time: Inventory that enters a production
process just in time to be used.

? Inventory turnover: The speed with which
inventory is replaced.

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? Cost of restocking excess inventory: 20-25% of the value of the goods ? Retail industry looses $2.5 billion annually in obsolete inventory ? Henceforth, the need for just-in-time system ? Other options used by retailers – drop shipment, centralized distribution centers, utilizing effective supply chain communication electronically (like Wal-Mart), and utilizing bricks and click model ? Example: While Barnes & Noble carries 100,000 titles in its store, its online offerings are over 2 million which requires a centralized distribution center
Source: Forbes, Leaner Shelves, Leaner Profits? November 15, 2006

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Economic Order Quantity
? EOQ = (2 X D X FC)/(VC X K)

? D = Annual demand ? FC = Fixed costs of producing/procuring inventory ? VC = Variable costs of inventory ? K = Inventory holding costs

Build to Order and Inventory
? Build-to-stock: Stocking a distribution channel in the anticipation that a customer will purchase those products. ? Build-to-order: Taking an order first, then building the product.

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When Toyota put s more emphasis on manufacturing a larger proportion of their cars once the order is received or the car is actually sold, they are moving toward the model of a. licensing. b. build-to-order. c. global standardization. d. build-to-stock.

Supply Chain Management and Information Systems
? Supply chain: The chain that provides raw materials, partly finished products, or finished products to an organization. ? Electronic data interchange (EDI): Coordinates the flow of materials into manufacturing, and out to customers.

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Discussion questions
1. Why is it more difficult to experience learning effects in a job shop environment than in an assembly-line production system? 2. What kind of production system does an automotive repair shop have? 3. What is the operations difference between a high-end restaurant and McDonald’s? 4. Are there some products that would not benefit from a mass customization model? 5. ‘Inventory is the enemy of efficiency.’ Discuss the statement.