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Principles of Operations Management

A review of current literature on the subject of production/operations management indicates that:

Operations management uses capital and human knowledge to transform materials and services into products, either tangible (goods) or intangible (services).

Operations management designs the system and controls it; this includes arranging facilities, scheduling tasks, developing procedures for inventory acquisition and turnover, as well as providing corrective actions to ensure that changes are made when necessary.

Operations systems can be classified in a variety of ways: degree of standardization; type, such as physical, storage, transportation, exchange; entertainment or communication; and manufacturing vs. service. In general, manufacturing produces material goods that require a distribution system to get them into the hands of consumers, while service industries tend to deal directly with consumers.

The evolution of manufacturing began with craft production, where skilled workers using general-purpose tools produced custom-made goods. This was supplanted by mass production in the early 1900s.

In contrast to craft production, production workers were generally low-skill, machines were specialized, and jobs became narrow. Specialization and division of labor were key concepts. Costs decreased while quality and productivity increased.

An important new approach to production of manufactured goods is lean production. It gets its name from the fact that it requires less inventory, time, and other resources than mass production Mass production is starting to give way in some industries to lean production. Lean production has the advantage of greater flexibility than mass production, and can usually achieve higher quality than mass production.

There are quite a few current issues that have an impact on operations management, including: globalization, quality and process improvement, technology, environmental issues, downsizing, supply chain management, and a new emphasis on operations strategy. Two recent issues are having a major impact: supply chain management and the Internet.

Operations managers engage in strategic planning to select products, choose locations and technology, and oversee new construction.

A key responsibility of the production manager is to achieve productive use of an organization's resources. Productivity is important because it relates to an organization's ability to compete and to the overall wealth and standard of living of a nation. Productivity is affected by work methods, capital, quality, technology, and management.

The post-war experience of Japanese industry has provided lessons in management effectiveness, quality low-cost production, and employee motivation; it has also enabled Japan to become a leading industrial power, even though the country has limited natural resources.

Business organizations compete with each other in a variety of ways, such as price, quality, product or service features, flexibility, and delivery time. Businesses can gain a competitive advantage by distinguishing themselves from competitors on the basis of differentiation, response or cost.

Operations managers must consider ten factors to be successful: product, quality, process, location, layout, human resources, supply chains, inventory, scheduling and maintenance.

Successful operations planning requires good forecasts. Forecasting is imprecise, but the errors in prior forecasts are measurable.

There are qualitative and quantitative forecast systems.

Qualitative systems include expert or executive opinions, sales force composites, opinion surveys and the Delphi technique. The Delphi method includes a sequence of questionnaires administered to a select group of qualified experts; the design of each questionnaire is based upon the results of the previous questionnaire.

Quantitative forecasting methods include naïve forecasts, exponential smoothing, moving averages, and associative (regression-based) systems. A forecast system may be a combination of several of these.

The accuracy of a forecast system depends upon:

accuracy of the historical time series data

similarity of patterns between the past and the future

grouping or aggregation of the data series

 time lapse between the historical periods and the period for which the prediction is being made choice of a model.

Exponential smoothing is an adaptive forecasting technique with some advantages over other types of moving averages and other statistically based measures. These advantages include:

Calculations are simple.

The weighting pattern can be changed simply by changing the smoothing constant.

Relevant considerations in planning a product or service system include: research, design, production, life cycle, safety in use, reliability, maintainability, regulatory and legal problems.

There are five stages to the product-demand life cycle: incubation, growth, maturity, saturation and decline. The production/operations system becomes an active participant early in the cycle because of the need to plan production facilities.

Standardization of parts, components, and modularization, or standardizing larger components that might be used in several different products, has advantages for many reasons, including: reducing inventories; enhancing employee, customer and vendor familiarity; making it easier to purchase raw materials and component parts; and routinizing production and quality assurance activities.

Some companies are offsetting the lack of variety through mass customization, which involves adding a small degree of customization to standardized goods and services. One approach is delayed differentiation, which involves producing but not quite completing a product or service until customer preferences are known. Another approach is modular design, which involves standard modules (groups of parts or services) that can be assembled in several different ways (or used or not used) to achieve variety.

An important aspect of the design process is to design for manufacturability. This means avoiding designs that would require costly or time-consuming steps or steps that would make it difficult to achieve desired quality levels. Instead, designers need to be aware of manufacturing capabilities and create products that are easy to produce and lend themselves to achieving desired quality levels.

The design of services differs in many respects from the design of products because of certain basic differences that exist between products and services. For example, services tend to have higher customer contact than manufacturing, and services tend to be intangible. Also, services cannot be inventoried.

Strategically, capacity and financial decisions are made first, followed by decisions on location of the facility, design of the product, layout and work systems.

The capacity decision involves the type of equipment or facilities to be employed in producing the product or service, how much capacity or equipment is needed, and when it is needed. These decisions are often costly and difficult to modify.

Efficiency is the ratio of actual output to effective capacity. Utilization is the ratio of actual output to design capacity. Planning considerations involve long-run trends, seasonal shifts in demand, and joint and competing products and services. Cost-volume analysis helps in determining the optimum design capacity, for a variety of output rates.

Job design specifies the content of a job and the methods used, it also has a significant effect upon efficiency and productivity.

Job enlargement entails diversifying tasks assigned to a worker, whereas job enrichment entails increasing the skill level within the present job. Both job enlargement and job enrichment help sustain morale and improve efficiency and productivity if workers understand the reasons behind the changes.

Flow process charts, work-machine charts and multiactivity charts are useful for methods analysis and balancing the workflow. Properly scheduled work breaks help improve efficiency and morale.

In work sampling, a worker is observed at random times during working hours. Work sampling provides a measure of employee efficiency by showing what proportion of the time is spent working. It can be used to study nonrepetitive jobs. The sample size is a function of the proportion of idle time and how much confidence we want to have in the results.

A plant location decision is either a choice to expand existing productive facilities, add new locations, or substitute a new facility for an existing one. Subcontracting may also be used as a substitute for substantial plant expansion.

A plant location decision can be made either before the capacity decision is made, concurrently with the capacity decision, or after it.

There is a location problem at more than one level of decision making. Not only must a decision be made as to where to put the production facility, but also where to put the warehouses and distribution centers, and how to build support networks that take care of the relevant logistical problems.

Localities frequently offer special incentives for industrial development by buying land for industrial districts, constructing special buildings, and offering favorable leases, tax incentives or loans. Location preferences may reflect organizational policy on decentralization versus centralization.

Regional factors include location near the sources of raw materials, both for service and to minimize transportation costs. Site location factors include costs, transportation access, zoning restrictions and land.

Total Quality Management (TQM) is a philosophy that promotes quality as the responsibility of everyone in the organization. Important features include continuous improvement, benchmarking, employee empowerment, the use of teams for problem solving, and knowledge of tools for proactively identifying and resolving problems.

Continuous improvement provides a structured approach to quality improvement and is directed primarily at improving the process. The Japanese term for continuous improvement is kaizen. Among the key tools and techniques used for continuous improvement are flow charts, check sheets, Pareto analysis, brainstorming, control charts, interviewing, quality circles, benchmarking and cause-and-effect diagrams.

The requirements for effective inventory management are:

an accounting system to keep track of on-hand and on-order merchandise

reliable forecasting of demand

estimates of lead times between placing an order and receiving goods, and lead-time variability

estimates of inventory holding costs, ordering costs and shortage (backorder) costs

a classification system

Just-in-time is an approach to repetitive manufacturing that emphasizes continual effort to remove inefficiency and waste from the production process. It is the aspect of lean production that is concerned with the flow of material through the system.

JIT systems achieve important benefits through the use of small lot sizes, high quality, and a team approach. The main goal of a JIT system is smooth production (i.e., level use of production resources).

An important feature of JIT systems is the use of a pull system rather than a push system to move work through a system. Under a push system, work is moved along as it is completed; under a pull system, downstream operations signal preceding operations when they want/need work. The building blocks of JIT are product design, process design, organizational elements, and manufacturing planning and control.

Material Requirements Planning (MRP) releases either internal production orders or external purchase orders for components, assemblies, subassemblies, etc., time phased so as to permit arrival of goods at the next higher level of assembly when they are needed. The three principal computerized files in an MRP system are a master schedule, a bill of materials and an inventory record.

Capacity Requirements Planning is used in conjunction with MRP and helps to ensure that MRP production plans are realistic, and that they are consistent with management objectives of smooth flow of materials, continuity of the labor force and balanced workloads between departments.

MRP II systems actively integrate marketing and finance into approximate capacity planning, capacity requirements planning and setting up MRP master schedules.

Enterprise Resource Planning (ERP) is a computerized system that integrates standardized record keeping for the purpose of information sharing throughout an organization. Sales, billing, distribution and manufacturing are among the areas that are linked by an ERP system.

Operations scheduling involves the timing of specific operations for both workers and machines. The chief objective of scheduling is to utilize manpower and machines to produce goods and services when they are required and to balance the workload so as to reduce costs, idle time, and excess inventories.

The hierarchy of decisions in production/operations is: capacity planning for long-term decisions on plant size; aggregate or intermediate planning for general use of facilities, personnel, subcontracting and purchased material; and detailed scheduling of manpower and machines.

Material requirements planning (MRP) and capacity requirements planning (CRP) are useful for batch processing with dependent sequential demands. They do not necessarily tell which personnel or machines will work on specific jobs.

Flow systems such as processes and high-volume assembly lines are dedicated to single products or services, with possible variations in sizes, models or mixtures. Scheduling flow systems frequently involves line balancing; but disruptions to the system such as fluctuations in demand or machine breakdowns must be taken into consideration.

Job shops typically use Gantt charts. Two specific types are load charts and schedule charts. The load chart shows loading and idle times for a group of machines or departments. Schedule charts show the current status of every job, along with planned and actual starting and ending dates.

Examples of scheduling in service systems are appointments such as in doctors' offices, simple reservations as in restaurants, and computerized scheduling from multiple sources as in airline reservations.

A project is a set of activities or specialized functions all directed toward achieving a unique objective or goal. A network diagram is a graphic representation of a project that that shows major project activities and is composed of arrows and nodes that indicate sequential relationships among activities. This information is extremely important for project planning, time and cost estimation, and resource allocation.

A path is a sequence of activities beginning with the first node and ending with the last node. The path with the longest set of times is called the critical path, and the activities on that path are called critical activities. The term critical refers to timely project completion; if any activities on the critical path take more time than expected, and the increased time is not offset by a decrease somewhere else in that path, the project duration will increase.

Key decisions in project management include deciding which projects to implement, choosing a project manager, assembling a project team, designing the project, managing and controlling resources, and deciding if, and when, an ongoing project should be terminated.

Project managers are responsible for managing work, human resources, communications, quality, time, and costs. They are also responsible for risk management. Risks include unforeseen circumstances that can negatively impact the project. Risk is highest early in a project, but the cost to overcome the occurrence of a risk event is highest near the end of the project.

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