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Operations Management Notes for Exam 1, 2, and 3

by: Jessie Warshaw

Operations Management Notes for Exam 1, 2, and 3 BUSQOM 1070

Marketplace > University of Pittsburgh > Business > BUSQOM 1070 > Operations Management Notes for Exam 1 2 and 3
Jessie Warshaw

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This covers chapters 1-5, 6, 6s, 7, 7s, 8, 11, 11s, and 12-15
Operations Management
Jim Kimpel
operations, OperationsManagement
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This 94 page Bundle was uploaded by Jessie Warshaw on Sunday May 8, 2016. The Bundle belongs to BUSQOM 1070 at University of Pittsburgh taught by Jim Kimpel in Spring 2016. Since its upload, it has received 51 views. For similar materials see Operations Management in Business at University of Pittsburgh.


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Date Created: 05/08/16
CHAPTER 1: Operations and Productivity Operations Management -Operations Management (OM)- The set of activities that create value in the form of goods and services by transforming inputs into outputs -Production- The creation of goods and services -Supplier  Input (raw)  Process (transform; people, machines)  Output  Customer -Farmer  Syrup Producer  Bottler  Distributor  Retailer -Integrated Supply Chain* The Supply Chain -Supply Chain- A global network of organizations and activities that supply a firm with goods and services -Members of the supply chain collaborate to achieve high levels of customer satisfaction, efficiency, and competitive advantage -Goods (tangible) vs. Services (intangible)****  Service Sector makes up 85.9% of all jobs 48  79%!!!! What do Operations Managers Do? -Basic Management Functions/ The management process: five elements  Planning  Organizing  Staffing  Leading  Controlling -Management Cycle  Plan  Execute  Control -Inventory and Labor Organizing for Operations Management -Three Functions: Primary functions for all organizations 1. Marketing- Communication needs; generates demand, facilitates orders (sales) 2. Production/Operation- Creates the product or service 3. Finance/Accounting- Tracks performance, pays bills, collects money Ten Strategic Decisions* 35, 36, 37 -The relative importance of each of the ten operations decisions depends on the ratio of goods and services in an organization Why Study Operations Management? -OM is one of three major functions of any organization and is integrally related to marketing and finance/accounting -We want to study how people organize themselves for productive enterprise -We want (and need) to know how goods and services are produced -We want to understand what operations managers do -OM is such a costly part of an organization -The value proposition of OM: Options for increasing contribution U.S. Agriculture, Manufacturing, and Service Employment (Graph) -Services have dramatically increased -Agriculture has dramatically decreased -Manufacturing has risen and then slightly dropped; more or less held steady, but each manufacturing employee is manufacturing about 20 times as much Productivity -Productivity- A measure of output only; a measure of efficiency; a measure of process improvement -Only through productivity increases can out standard of living improve -The ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital); P=O/I; P=(more out)/(less in) -Two forms:  Single Factor Productivity = Output/One Input  Multi-Factor Productivity = Output/Labor+Mateiral+Energy+Capital+Miscellaneous (more than one) o AKA total factor productivity o Outputs and inputs are often expressed in dollars (money); not always -The Economic System- Input  Process (inventory, people, machines)  Output -The objective is to increase productivity… how? -Productivity Change = (New Productivity – Old Productivity)/Old Productivity Improving Productivity: Starbucks Example* Productivity 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 Cautions -Measurement Problems  Precise units of measure may be lacking; are often unavailable  External elements (e.g. electricity reliability) may cause an increase or decrease in productivity  Quality may change (e.g. 1950 Console TV versus 2012 Flat Panel) while the quantity of inputs and outputs remains constant -Balance C/F/D**** Q -Waste Service Productivity -Characteristics  Typically labor intensive  Frequently focused on unique individual attributes or desires  Often an intellectual task performed by professionals  Often difficult to mechanize (automate)  Often difficult to evaluate for quality New Challenges (Trends) in OM -Global focus -Supply-chain partnering -Sustainability -Rapid product development -Mass customization -Just-in-time performance -Empowered employees Ethics and Social Responsibility -Challenges facing operations managers  Developing and producing safe, quality products  Maintaining a clean environment  Providing a safe workplace  Honoring stakeholder commitments -Ethical and social dilemmas arise because stakeholders of a business have conflicting perspectives -Some of the operations-related activities of Hard Rock Café include designing meals and analyzing for ingredient cost and labor requirements -The production process at Hard Rock Café includes meal preparation and serving customers and more! -An example of a “hidden” production function is money transfers at banks -An operations manager is NOT likely to be involved in the identification of customers’ wants and needs... -Almost all services and almost all goods are a mixture of a service and a tangible product -Typical differences between goods and services do NOT include cost per unit -Management is the input that has the greatest potential to increase productivity; they are the largest contributor to productivity increases (estimated to be responsible for over half of the annual increase) -Service operations are NOT typically capital intensive... -Three commonly used productivity variables are labor, capital, and management -The service sector has lower productivity improvements than the manufacturing sector because services usually are labor-intensive 17Chapter 2: Operations Strategy in a Global Environment Reasons to Globalize -From tangible reasons to intangible reasons 1. Improve the supply chain a. Locating facilities closer to unique resources i. Auto design to California ii. Athletic shoe production to China iii. Perfume manufacturing in France 2. Reduce costs (labor, taxes, tariffs, etc.) a. Foreign locations with lower wage rates can lower direct and indirect costs b. Trade agreements can lower tariffs i. Maquiladoras- Free trade zones ii. World Trade Organization (WTO)- Has helped to significantly reduce tariffs around the world; also provides governments and industries with protection from firms that engage in unethical conduct; has made progress iii. North American Free Trade Agreement (NAFTA)- Seeks to phase out all trade and tariff barriers among Canada, Mexico, and the United States iv. APEC, SEATO, MERCOSUR, CAFTA v. European Union (EU) 3. Improve operations a. Understand differences with how business is handled in other countries i. Japanese- inventory management ii. Scandinavians- ergonomics b. International operations can improve response time and customer service i. Elliot Example* 4. Understand markets a. Interacting with foreign customers, suppliers, and competition can lead to new opportunities i. Cell phone design from Europe to Japan ii. Extend the product life cycle 5. Attract and retain global talent a. Offer better employment opportunities i. Better growth opportunities and insulation against unemployment ii. Relocate unneeded personnel to more prosperous locations Cultural and Ethical Issues -Cultures and attitudes can be quite different  Punctuality, lunch breaks, environment, intellectual property, thievery, bribery, and child labor Companies Want to Consider* -Political stability -Product liability laws -Work ethic -Number of miles of highway -Phone system, etc. Mission and Strategy -Mission- Tells an organization where it is going; its destination  Organization’s purpose for being  Answers, “What do we provide society?”  Provides boundaries and focus  Well defined missions make strategy development much easier  Once the mission has been developed, the functional areas develop their supporting missions -Strategy- Tells an organization how to get there  The path to the destination  Action plan to achieve mission  Consider strengths, weaknesses (internal), opportunities, and threats (external) (SWOT Analysis)  Incorporate functional (departmental) strategies  Functional strategies are shaped by corporate strategy Factors Affecting Mission -Philosophy and Values -Profitability and Growth -Public Image -Benefit to Society -Customers -Environment Strategic Process -Strategic Process- Organization’s Mission  Functional Area Missions  Marketing, Operations, and Finance/Accounting -All to support the mission to make it happen Sample Missions* Strategies for Competitive Advantage* (and allow firms to achieve their mission) C/D/Q -Differentiation- Better, or at least different; quality  Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer’s perception of value -Cost Leadership- Cheaper  Provide the maximum value as perceived by customer; does not imply low quality -Response- Rapid response; faster  Flexibility is matching market changes in design innovation and volumes  Reliability is meeting schedules  Timeliness is quickness in design, production, and delivery Issues in Operations Strategy**** -Resources view (people, capital… factories, machines, retail locations) -Value-chain analysis -Porter’s Five Forces model -Operating in a system with many external factors (global environment) -Constant change Product Life Cycle A. Introduction- Best period to increase market share a. Product design and research and development (R&D) engineering is critical b. Frequent product and process design changes c. Short production runs d. High production costs e. Limited models f. Attention to quality B. Growth- Practical to change price or quality image a. Strengthen niche b. Forecasting critical c. Product and process reliability d. Competitive product improvements and options e. Increase capacity f. Shift toward product focus g. Enhance distribution C. Maturity- Poor time to change image, price, or quality a. Competitive costs become critical; defend market position b. Standardization c. Fewer product changes, more minor changes; poor time to change quality d. Optimum capacity e. Increasing stability of process f. Long production runs g. Product improvement and cost cutting D. Decline- Cost control critical a. Little product differentiation b. Cost minimization c. Overcapacity in the industry d. Prune line to eliminate items not returning good margin e. Reduce capacity -Make money mostly in introduction and growth -New idea… Product life cycle starts all over again Strategy Development Process A. Analyze the Environment- Identify the strengths, weakness, opportunities, and threats; understand the environment, customers, industry, and competitors B. Determine the Corporate Mission- State the reason for the firm’s existence and identify the value it wishes to create C. Form a Strategy- Build a competitive advantage, such as low price, design, or volume flexibility, quality, quick delivery, dependability, after-sale service, or broad product lines Strategy Development and Implementation -Identify key success factors- a small number of things that have to be done well -Build and staff the organization -Integrate OM with other activities -Operations Manager- Job is to implement an OM strategy, provide competitive advantage, and increase productivity Key Success Factors* Activity Mapping at Southwest Airlines- Competitive Advantage: Low Cost* Implementing Strategic Decisions- Two Drug Companies* Theory of Comparative Advantage Theory of Comparative Advantage-If an external provider can perform activities more productively than the purchasing firm, then the external provider should do the work  Purchasing firm focuses on core competencies  Drives outsourcing Core Competencies and Outsourcing -Core Competencies- What an organization does as well, or better, than competitors; Same as Critical Success Factors (Often necessary, but not sufficient for competitive advantage)! -Non-Core Competencies- Candidates for outsourcing -Outsourcing- Transferring a firm’s activities that have traditionally been internal to external suppliers  Legal services, travel services, payroll, production (aka contract manufacturing), surgery Pros and Cons of Outsourcing -Pros  Cost savings  Gaining outside expertise  Improving operations and service; more productive  Maintaining a focus on core competencies  Accessing outside technology -Cons  Increased logistics and inventory costs  Loss of control (quality, delivery, etc.)  Potential creations of future competition (intellectual property)  Negative impact on employees  Risks may not manifest themselves for years Rating Outsourcing Providers -Insufficient analysis most common reason for outsourcing failure* -Factor rating method -Points and weights assigned for each factor to each Global Operations Strategy Options (Venn diagram) -Global Strategy (Save more money and low local responsiveness)  Standardized product  Economies of scale  Cross-cultural learning -Transnational Strategy (Save more money and all over world)  Move material, people, and ideas across national boundaries  Economies of scale  Cross-cultural learning -International Strategy (Save less money and low local responsiveness)  Import/export or license existing product; centralized -Multidomestic Strategy (Save less money and all over world)  Use existing domestic model globality  Franchise, joint ventures, subsidiaries Ranking Corruption* -Boeing’s development of the 787 Dreamliner is an example of a company obtaining a competitive advantage via product differentiation/innovation; has increased efficiency from new engine technology -Between 1980 and 2005, the amount of money (bank deposits, government and corporate debt securities, and equity securities) invested in global capital markets more than tripled -Experience Differentiation- is an extension of product differentiation in the service sector, accomplished by using people’s five senses to create an experience rather than simply providing a service -Decisions that involve what is to be made and what is to be purchased fall under the heading of supply chain management -Errors made within the locations decision area may overwhelm efficiencies in other areas -Southwest Airlines’ core competence is operations -SWOT analysis does NOT identify those activities that make a difference between having and not having a competitive advantage; they help the company achieve its mission -The impact of strategies on the general direction and basic character of a company is long-range -Costs, quality, and human resource decisions interact strongly with the goods and service design decision -Layout design is influence by inventory requirements, capacity needs, personnel levels, and technology decisions; pertains to sensible location of processes and materials in relation to each other -Price is NOT an operations strategic decision -Preconditions to establishing and implementing a strategy include understanding competitors’ strengths and weaknesses, understanding current and prospective technological issues, and understanding product life cycle -The three steps of the operations manager’s job, in order, are: Develop the strategy, establish the organizational structure, and find the right staff -MNC- Multinational Corporation -Caterpillar and Texas Instruments have benefited from the use of the global strategy option -Examples of transnational firms include Coca-Cola, Nestle, Asea Brown Boveri, Reuters, and Citicorp Chapter 3: Project Management Projects vs. Operational Work -Organizations perform work to achieve a set of objectives; generally work can be categorized as either projects or operations, although the two sometimes overlap -Similarities  Performed by people  Constrained by limited resources  Planned, executed, and controlled (Management Cycle) -Differences  Operations are ongoing and repetitive  Projects are temporary and unique -Project- A temporary endeavor undertaken to create a unique product, service, or result  Temporary- Definite beginning and definite end  Unique product, services, or result- Creates deliverables  Progressive elaboration- developing in steps, continuing by increments -Project Examples: Construction of a bridge, development of a new pharmaceutical drug, and the implementation of a computer system -Operational Work Examples: Manufacturing of flat panel televisions, receipt of raw material, cycle counting inventory, and monthly financial closing The Importance of Project Management: Bechtel Project Management (the world’s premier manager of massive construction and engineering projects) and Hard Rock Café Rockfest Project Examples* The Project Management Framework -Project Management- The application of knowledge, skills, tools, and techniques to project activities to meet project requirements -The Project Management Framework Includes: 1. Planning- Goal setting, defining the project, team organization 2. Scheduling- Relates people, money, and supplies to specific activities and activities to each other (These first two part of planning) 3. Controlling- Monitors resources, costs, quality, and budgets; revises plans and shifts resources to meet time and cost demands (This one part of control in management cycle) -Balance of art and science, and psychology and technology Project Organization -Project Organization- An organization formed to ensure that programs (projects) receive the proper management and attention; effective for companies with multiple large projects; for complicated tasks -Weak matrix includes dotted line to project manager, indicating secondary control of project resources -Strong matrix includes sold line to project manager, indicating primary control of project resources Ethical Issues -Project managers face many ethical decisions on a daily basis -The Project Management Institute has established an ethical code (for project managers) to deal with problems such as:  Offers of gifts from contractors  Pressure to alter status reports to mask delays  False reports for charges of time and expenses  Pressure to compromise quality to meet schedules -Problems that can arise include bid rigging (giving bidders on a project an unfair advantage), bribery, and “low balling” The Five Project Variables -There are five key project variables (the “Metrics of Project Management”) that must be managed and measured in order to achieve project success 1. Scope- product, service produced**** 2. Schedule- timeiline 3. Resources- like people 4. Cost 5. Quality- grade/sophistication of solution**** -Our challenge as project managers is to balance these competing variables; in order to improve/ensure our chances of successfully managing projects, it is essential to understand the customer’s expectations of these project variables Work Breakdown Structure -Activity Definition- Involves identifying and documenting the specific activities (tasks) that must be performed to produce the project deliverables -Work Breakdown Structure (WBS)- The most popular, and certainly the most powerful tool/technique for activity definition  The WBS is a hieratical, logical decomposition of the elements of work needed to produce the project deliverables  It represents the complete data dictionary (structured list) of all work necessary to accomplish the project  It is the primary communications tool for planning, monitoring, and controlling the project  The WBS facilitates roll-up and summary reporting of all project work, including project time/schedule, resources, and cost -Note: WBS does not address timing of individual work elements What is Project Scheduling? 1. Define the project and prepare the work breakdown structure 2. Develop relationships among the activities - decide which activities must precede and which must follow others 3. Draw the network connecting all of the activities 4. Assign time and/or cost estimates to each activity 5. Use CPM to identify the Critical path - the longest time path through the network 6. Use PERT to account for variability in activity times Questions CPM and PERT Can Answer • When will the entire project be completed? • What are the critical activities or tasks in the project? • Which are the noncritical activities? • What is the probability (PERT) the project will be completed by a specific date? • Is the project on schedule, behind schedule, or ahead of schedule? • Is the money spent equal to, less than, or greater than the budget? • Are there enough resources available to finish the project on time? • If the project must be finished in a shorter time, what is the way to accomplish this at least cost (CRSH)? Project Network Diagrams* -Activity comes AFTER Immediate Predecessors -Include time (duration) Use Critical Path Method (CPM) to Determine the Critical Path (Drawn diagram*) -Critical Path- The longest path through the network -The critical path is the shortest time in which the project can be completed -Any delay in critical path activities delays the project (there is no slack time!) -Earliest Start (ES)- Earliest time at which an activity can start, assuming all predecessors have been completed -Earliest Finish (EF)- Earliest time at which an activity can be finished -Latest Start (LS)- Latest time at which an activity can start so as to not delay the completion time of the entire project -Latest Finish (LF)- Latest time by which an activity has to be finished so as to not delay the completion time of the entire project (DIAGRAM*) Forward Pass (Example*) -Begin at starting event and work forward; flow  -Earliest Start Time Rule:  If an activity has only a single immediate predecessor, its ES equals the EF of the predecessor  If an activity has multiple immediate predecessors, its ES is the maximum of all the EF values of its predecessors o ES = Max EF of all immediate predecessors -Earliest Finish Time Rule:  The earliest finish time (EF) of an activity is its earliest start time (ES) plus its duration o ES + duration = EF Backward Pass (Example*) -Begin with the last event and work backwards;  flow -Latest Finish Time Rule:  If an activity is an immediate predecessor for just a single activity, its LF equals the LS of the activity that immediately follows it  If an activity is an immediate predecessor to more than one activity, its LF is the minimum of all LS values of all activities that immediately follow it o LF = Min LS of all immediate following activities -Latest Start Time Rule:  The latest start time (LS) of an activity is its latest finish time (LF) minus its duration o LF – duration = LS Computing Slack Time -After computing the ES, EF, LS, and LF times for all activities, compute the slack or free time for each activity -Slack- The length of time an activity can be delayed without delaying the entire project  Slack = LS- ES or Slack = LF – EF (On circles, subtract up and down!) o ES/Activity/EF (+) o LS/Duration/LF (-) ... In diagram! -Slack times of 0 ARE ON CRITICAL PATH!!!! -Total Slack* slack of two activities shared because they are on same network path (with same slack times- example) Use Program Evaluation and Review Technique (PERT) to Account for Variability in Activity Times -PERT uses a probability distribution for activity times to allow for variability -Three estimates are required  Optimistic time (a)- if everything goes according to plan  Most likely time (m)- most realistic estimate  Pessimistic time (b)- assuming very unfavorable conditions -Expected time (t) is a weighted average  t = (a + 4m + b)/6 -Variance of time (v)  v = [(b-a)/6]^2 PERT and the Beta Distribution (Graph*) -PERT often assumes activity times follow the Beta distribution- Used to calculate expected activity times PERT and Probability of Project Completion -Project variance (standard deviation^2) is computed by summing variances of the critical activities  Standard deviation^2 = Sum of variance of activities on critical path -Project standard deviation (standard deviation) is the square root of project variance  Standard deviation = Square root of standard deviation^2 -PERT makes two more assumptions:  Total project completion times follow a normal probability distribution (curve)  Activity times are statistically independent -What is the probability (Z) this project can be completed on or before the 16-week deadline?  Z = (Due Date – Expected Completion Date)/Standard deviation  Z is the number of standard deviations the due date lies from the expected date  Then look up Z to find probability!  Note: If Z is negative, lookup positive value of z and subtract % from 1 Note: Expected completion date is the last number in the network PERT and Determining Project Completion Time for a Given Confidence Level -Use this for to determine the due date for a different probability (percentage) level  Due Date = Expected Completion Date + (Z)(standard deviation)  Example: If you wanted to find a due date for probability of 99%, you would look up the value in the appendix and find the Z value that corresponds with that (2.33)  If the new due date is not allowed, this is when you can use CRASH PERT and Variability of Completion Time for Noncritical Paths -Variability of times for activities on noncritical paths must be considered when finding the probability of finishing in a specified time -If an activity hits a pessimistic time, then the critical path can/will change Cost-Time Trade-Off and Project Crashing -It is not uncommon to face the following situations:  The project is behind schedule  The completion time has been moved forward -Project Crashing (Crash)- Shortening the duration of the project; Spending money to shorten the schedule (adds cost and resources at the expense of quality and scope); assigns more resources to one or more of the critical tasks Factors to Consider When Crashing a Project -The amount by which an activity is crashed is, in fact, permissible/feasible -Taken together, the shortened activity durations will enable us to finish the project by the due date -The total cost of crashing is as small as possible Steps in Project Crashing 1. Compute the crash cost per week (or other time period) for each activity in the network; if crash costs are linear over time, the following formula can be used: a. Crash cost per period = (Crash cost – Normal cost)/ (Normal time – Crash time); = Extra cost/Time Saved b. Note: Crash time is the shortest duration we can make an activity 2. Using current activity times, find the critical path(s) in the network; identify the critical activities; need to shorten critical path 3. Number of critical paths: a. If there is only one critical path, then select the activity on this critical path that i. Can still be crashed, and ii. Has the smallest crash cost per period b. If there is more than one critical path, then select one activity from each critical path such that i. Each selected activity can still be crashed, and ii. The total crash cost of all selected activities is the smallest c. Note: The same activity may be common to more than one critical path 4. Update all activity times; if the desired due date has been reached then stop; if not, then return to step 2 a. Note: Recalculate critical path after you shorten duration of an activity -Add up crash costs per week of activities crashed to get total crash cost -Crashing projects is important because many contracts for projects include bonuses or penalties for early or late finishes A Critique of CPM and PERT -Pros: • Especially useful when scheduling and controlling large projects • Straightforward concept and not mathematically complex • Graphical networks help highlight relationships among project activities • Critical path and slack time analyses help pinpoint activities that need to be closely watched • Project documentation and graphics point out who is responsible for various activities • Applicable to a wide variety of projects • Useful in monitoring not only schedules but costs as well -Cons: • Project activities have to be clearly defined, independent, and stable in their relationships • Precedence relationships must be specified and networked together • Time estimates tend to be subjective and are subject to fudging by managers • There is an inherent danger of too much emphasis being placed on the longest, or critical, path Overview of Project Controlling -Monitor resources, costs, and quality -Revise and change plans -Shift resources Project Control Reports • Detailed cost breakdowns for each task • Total program labor curves • Cost distribution tables • Functional cost and hour summaries • Raw materials and expenditure forecasts • Variance reports • Time analysis reports • Work status reports Using Microsoft Project* -A project organization does NOT work best for an organization when the project resides in only one of its functional areas -One responsibility of a project manager is to make sure that the project meets its quality goals -Gantt charts give a timeline for each of a project’s activities, but do not adequately show the interrelationships of activities -Every network has at least one critical path -The critical path is determined using BOTH forward and backward pass -In PERT analysis, the identification of the critical path can be incorrect if a noncritical activity takes substantially more time than its expected time -Crashing an activity must consider the impact on all paths in the network -All activities on the critical path have their LS equal their predecessor’s EF -In PERT, non-critical activities that have little slack need to be monitored closely because near-critical paths could become critical paths with small delays in these activities 12 Chapter 4: Forecasting Forecasting Defined -Forecasting- The art and science of predicting a future event Forecasting Time Horizons -Short-Range  Up to 1 year, generally less than 3 months  Used for purchasing, job scheduling, workforce levels, job assignments, and production levels  Employ different (qualitative and quantitative) methods than medium or long-range forecasts; tactical  Tend to be more accurate than medium or long-range forecasts; about execution -Medium-Range  3 months to 3 years  Used for sales and production planning, budgeting -Long-Range  3+ years  Used for new product planning, facility location, research and development -Medium and long-range forecasts deal with more comprehensive issues; strategic Product Life Cycle -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 Types of Forecasts A. Economic Forecasts a. Address business cycle- inflation rate, money supply, housing starts, etc. B. Technological Forecasts a. Predict rate of technological progress b. Impacts development of new products C. Demand (Sales) Forecasts a. Predict sales of existing products and services; serve as inputs to financial, marketing, and personnel planning Forecasting and Operations Management -Production is the creation of goods and services -Operations Management (OM) is the set of activities that create value in the form of goods and services by transforming inputs into outputs -Drives Operations Management decisions related to production, inventory, personnel, and facilities Forecasting and Business Integration (Diagram*) -Integrates with marketing/sales and finance/accounting Strategic Importance of Forecasting -Human Resources  Hiring, training, laying off workers -Capacity  Capacity shortages can result in undependable delivery, loss of customers, loss of market share -Supply Chain Management  Good supplier relations, advantages in product innovation, cost and speed to market Seven Steps in Forecasting 1. Determine the use of the forecast; economic, tech, demand (sales); the why? 2. Select the items to be forecasted; the what? 3. Determine the time horizon of the forecast; short, medium, long; the when? 4. Select the forecasting model(s); the how? 5. Gather the data needed to make the forecast; Plan 6. Make the forecast; Execute 7. Validate and implement results; Control The Realities! -Forecasts are seldom perfect; 80% accurate; unpredictable outside factors may impact the forecast -Most techniques assume an underlying stability in the system -Product family and aggregated forecasts are more accurate than individual product forecasts Forecasting Approaches: Qualitative vs. Quantitative Methods -Qualitative Methods  Used when situation is vague and little data exist o New products o New technology  Involves intuition, experience o e.g., forecasting sales on internet -Quantitative Methods  Used when situation is ‘stable’ and historical data exist o Existing products o Current technology  Involves mathematical techniques o e.g., forecasting sales of color televisions Overview of Qualitative Methods 1. Jury of executive opinion a. Pool opinions of high-level experts, sometimes augment by statistical models b. Involves small group of high-level experts and managers (small groups create, large groups evaluate) c. Group estimates demand by working together d. Combines managerial experience with statistical models e. Relatively quick f. ‘Group-think’ disadvantage 2. Delphi method a. Panel of experts, queried iteratively (cycles/iteration) b. Iterative (cyclical) group process, continues until consensus is reached c. 3 types of participants i. Staff (administering survey) ii. Respondents (experts- people who can make valuable judgments) iii. Decision makers (evaluate responses and make decisions) 3. Sales force composite (GRAPH* shooting up; based on months and time) a. Estimates from individual salespersons are reviewed for reasonableness, then aggregated b. Each salesperson projects his or her sales c. Combined at district and national levels d. Sales reps know customers’ wants e. Tends to be overly optimistic 4. Market Survey a. Ask customers about purchasing plans b. Useful for demand and product design and planning c. What customers say, and what they actually do are often different d. May be overly optimistic Overview of Quantitative Approaches -From simple, faster, and low quality to more complex, larger, and higher quality -Time Series Models- Use past demand (sales) to calculate future demand; analysis of past demand helps predict future demand 1. Naive Approach a. Assumes demand in next period is the same as demand in most recent period b. Sometimes cost effective and efficient c. Can be good starting point 2. Moving Averages a. MA is a series of arithmetic means i. Used if little or no trend ii. Used often for smoothing iii. Provides overall impression of data over time iv. Moving Average = Sum of demand in previous n periods/n b. Weighted Moving Avera i. Used when some trend might be present; older data usually less important ii. Weights based on experience and intuition iii. Weighted Moving Average = Sum of (weight for period n*demand in period n)/Sum of weights c. Potential Problems with Moving Average i. Increasing n smooths the forecast but makes it less sensitive to changes ii. Does not forecast trends well iii. Requires extensive historical data 3. Exponential smoothing a. Form of weighted moving average i. Weights decline exponentially ii. Most recent data weighted most b. Requires smoothing constant (Greek letter alpha) i. Ranges from 0 to 1... percentage ii. Subjectively chosen iii. The larger the smoothing constant, the more responsive the forecast c. Involves little record keeping of past data d. New Forecast = Last period’s forecast + alpha*(Last period’s actual demand – Last period’s forecast)... this last part same as forecast error e. Effect of Smoothing Constants i. The bigger the alpha, the more sloped the graph and differences in weight... f. Impact of different alphas i. Choose high values of alpha when underlying average is likely to change ii. Choose low value of alpha when underlying average is stable g. Choosing Alpha i. The objective is to obtain the most accurate forecast no matter the technique ii. We generally do this by selecting the model that gives us the lowest forecast error iii. Forecast Error = Actual demand – Forecast value = A – F Common Measures of Error  Mean Absolut Deviation (MAD) = Sum of absolute value of (actual – forecast)/n o Primary purpose to measure forecast accuracy  Mean Squared Error (MSE) = Sum of [(actual – forecast)^2]/n o Use when error is small  Mean Absolute Percent Error (MAPE) = [Sum of: 100*absolute value of (actual-forecast)/Actual]/n o Use when error is large Definition of Time Series Forecasting -Time Series Forecasting- Set of evenly spaced numerical data; obtained by observing response variable at regular time periods -Forecast based only on past values, no other variables important -Assumes that factors influencing past and present will continue influence in the future Decomposition of a Time Series (4 Components) 1. Trend- Trend is the slope of the regression equation a. Persistent, overall upward or downward pattern b. Changes due to population, technology, age, culture, etc. c. Typically several years duration 2. Seasonal- Adjust raw data for patterns that repeat at regular time intervals a. Regular pattern of up and down fluctuations b. Due to weather, customs, etc. c. Occurs within a single year 3. Random a. Erratic, unsystematic, ‘residual’ fluctuations b. Due to random variation or unforeseen events c. Short duration and nonrepeating 4. Cyclical a. Repeating up and down movements b. Affected by business cycle, political, and economic factors c. Multiple years duration d. Often causal or associative relationships e. Note: The best way to forecast a business cycle is by finding a leading variable -The fundamental difference between cycles and seasonality is the duration of the repeating patterns Monitoring and Controlling Forecasts -Tracking Signal- Measures how well the forecast is predicting actual values  Ratio of cumulative forecast errors to mean absolute deviation (MAD) o Good tracking signal has low values; closer to 0 is better o If forecasts are continually high or low, the forecast has a bias error  Tracking Signal = Cumulative Error (RSFE)/MAD = Sum of (actual demand in period i – Forecast demand in period i)/ Sum of absolute value of (actual – forecast) Focus Forecasting- Tries a variety of computer models and selects the best one for a particular application -Developed at American Hardware Supply, based on two principles: 1. Sophisticated forecasting models are not always better than simple ones 2. There is no single technique that should be used for all products or services -This approach uses historical data to test multiple forecasting models for individual items -The forecasting model with the lowest error is then used to forecast the next demand Forecasting in the Service Sector -Presents unusual challenges  Special need for short-term records  Needs differ greatly as function of industry and product  Holidays and other calendar events  Unusual events -The forecasting time horizon and the forecasting techniques used tend to vary over the life cycle of a product -Forecast including trend is an exponential smoothing technique that utilizes two smoothing constants: one for the average level of the forecast and one for its trend -Linear-Regression Analysis- A straight-line mathematical model to describe the functional relationships between independent and dependent variables -Also, Slope of # means that there is a # unit rise in Y for every unit of time that passes -Demand cycles for individual products can be driven by product life cycles -Many service firms use point-of-sale computers to collect detailed records needed for accurate short-term forecasts -Two numbers included in the daily report to the CEO are yesterday’s forecast number and yesterday’s actual number -Associative model uses variables such as price and promotional expenditures, which are related to product demand, to predict demand -A six-month moving average forecast is better than a three-month moving average forecast IF demand is rather stable -Increasing the number of periods in a moving average will accomplish greater smoothing, but at the expense of responsiveness to changes -If there is a negative sign on the slope in a time series trend equation, it indicates that product demand is declining -A fundamental distinction between trend projection and linear regression is that in trend projection, the independent variable is time, while in linear regression, it does not have to be time, but can be any variable with explanatory power -The coefficient of determination measure the percent variance in the dependent variable that is explained by the regression equation -The correlation coefficient measures the degree of strength of a linear relationship -If two variables were perfect correlated, the correlation coefficient r would equal 1 or -1 Chapter 5: Design of Goods and Services Goods and Service Selection -Great products and services are the keys to success -Anything less than an excellent product strategy can be devastating to a firm -Product Design- The objective of product design is to develop and implement a product strategy that meets the demands of the marketplace with a competitive advantage  Response  Differentiation  Low Cost Importance of New Products* -Percentage of Sales from New Products increases with a higher position of firm in the industry Product Life Cycles* -May be any length from a few hours to decades -The operations function must be able to introduce new products successfully Life Cycle and Strategy 1. Introduction (Marketing and R&D) a. Fine tuning may warrant unusual expenses for i. Research ii. Product development iii. Process modification and enhancement iv. Supplier development 2. Growth a. Product design begins to stabilize b. Effective forecasting of capacity becomes necessary c. Adding or enhancing capacity may be necessary 3. Maturity a. Competitors now established b. High volume, innovative production may be needed c. Improved cost control, reduction in options, paring down of product line 4. Decline a. Unless product makes a special contribution to the organization, must plan to terminate offering b. Look for low cost ways to extend product life Note: Profit is at its greatest in the decline stage of the product life cycle Product-by-Value Analysis -Lists products in descending order of their contribution per unit to the firm -Used to determine which products represent the best use of the firm’s resources or, perhaps, which products are to be eliminated -Calculate the total annual dollar contribution of the product (Annual sales (units)*Contribution per Unit) -Helps management evaluate alternative strategies Time-Based Competition -Product life cycles are becoming shorter and the rate of technological change is increasing -Developing new products faster can result in a competitive advantage Product Development Continuum -Internal Development Strategies  Migrations of existing products  Enhancements to existing products  New internally developed products (has the highest risk!) -External Development Strategies  Alliances  Joint ventures  Purchase technology or expertise by acquiring the developer -So...  Internal  Cost of product development  Shared  Lengthy  Speed of product development  Rapid and/or Existing  High  Risk of product development  Shared The New Product Development Process -Scope of product development team (including marketing and engineering) -Ideas  Ability  Customer Requirements  Functional Specifications  Product Specifications  Design Review (then pilot run (test run))  Test Market  Introduction  Evaluation Organizing for Product Development -From narrow and poor to broad and good  Historically- distinct departments o Duties and responsibilities are defined o Difficult to foster forward thinking  A Champion o Product manager drives the product through the product development system and related organizations  Team Approach o Cross functional- representatives from all disciplines or functions o Product development teams, design for manufacturability teams, value engineering teams  Japanese “whole organization” Approach o No organizational divisions New Product Opportunities (Brainstorming) -Understanding the customer (ideas) -Economic change -Sociological and demographic change -Technological change -Political/legal change -Market practice, professional standards, suppliers, distributors Quality Function Deployment (House of Quality) 1. Identify customer wants/needs 2. Identify how the good/service will satisfy customer wants 3. Relate customer wants to product “how’s” 4. Identify relationships between the firm’s “how’s” (how to how); its interrelationships 5. Develop customer importance ratings (weights and weighted score) 6. Evaluate competing products X 7. Compare performance to desirable technical attributes X -Determines what will satisfy the customer, and then translates the customers’ desires into a target design QFD House of Quality- Simplified Model* House of Quality Sequence* (Diagram) -Deploying resources through the organization in response to customer requirements Decision Trees (Example*) -Particularly useful when there are a series of decisions and outcomes which lead to other decisions and outcomes -Procedure 1. Include all possible alternatives (including “doing nothing”) 2. Enter payoffs at end of branch 3. Determine the Expected Monetary Value (EMV) of each branch 4. “Prune” the tree to find the alternative with the best expected value Note: Unit*Contribution – Cost... if there is one Ethics, Environmentally Friendly Designs, and Sustainability -It is possible to enhance productivity and deliver goods/services in an environmentally and ethically responsible manner -In OM, sustainability means ecological stability -Conservation and renewal of resources through the entire product life cycle -View product design from a systems perspective  Inputs, processes, outputs  Costs to the firm/costs to society -Consider the entire life cycle of the product -Goals (Want) 1. Developing safe and environmentally sound practices 2. Minimizing waste of resources 3. Reducing environmental liabilities 4. Increasing cost-effectiveness of complying with environmental regulations 5. Being recognized as a good corporate citizen -Environmentally Friendly Designs (How) 1. Make products recyclable 2. Use recycled materials 3. Use less harmful ingredients 4. Use lighter components 5. Use less energy 6. Use less material -Viewing a product in terms of its impact on the entire economy and considering the life cycle of a project combine to increase the likelihood of ethical decisions by managers -An operations manager’s MOST ethical activity is to enhance productivity while delivering desired goods and services Good Design Practices -Manufacturability and Value Engineering  Reduced complexity of products  Reduction of environmental impact  Additional standardization of products  Improved functional aspects of product  Improved job design and job safety  Improved maintainability (serviceability) of the product -Oriented toward improvement of design Make or Buy -The choice between producing a component or purchasing it from an outside source  Cost  Quality  Delivery (speed) Computer Aided Design (CAD) -Interactive use of a computer to develop and document a product 3-D Printing -3-D printing uses data from a CAD system to create a three- dimensional prototype by adding material (metal, plastic, paper) one layer at a time Computer Aided Manufacturing (CAM) -The use of information technology to control machinery -Examples: SolidWorks, Rapid Prototyper, CNC Milling Machine Documents -Engineering Drawing- shows the dimensions, tolerances, materials, and finishes of a component Product Life Cycle Management (PLM) -Integrated software that brings together most, if not all, elements of product design and manufacture  Product design  CAD/CAM, DFMA (Design for manufacture and assembly)  Product routing  Materials  Assembly  Environmental  Configuration  Management  Engineering Change Notices Enterprise Resource Planning Data (Overhead) -Bill of Material- Lists components, quantities and where used; Shows product structure -Route Sheet- Lists of operations necessary to product, the component with the material specified in the bill of material Manufacturing Drawings and Documents (Pictures*) Transition to Production and Pilot Run -Know when to move to production  Product development can be viewed as evolutionary and never complete  Product must move from design to production in a timely manner -Most products have a trial production period (pilot run) to insure producibility  Develop tooling, quality control, training  Ensures successful production -Responsibility must also transition as the product moves through its life cycle  Line management takes over from design -Three common approaches to managing transition (slide 13)  Project managers  Product development teams  Integrate product development and manufacturing organizations Service Design -Service typically includes direct interaction with the customer  Increased opportunity for customization  Reduced productivity -Cost and quality are still determined at the design stage (techniques used to reduce cost)  Limit options  Delay customization  Modularization  Reduce customer interaction  Automation  Moment of Truth (satisfied/unsatisfied) -Process-Chain-Network (PCN) Analysis- Focuses on the way in which processes can be designed to optimize interaction between firms and their customers  Analysis* (Diagram) Documents for Services -High levels of customer interaction necessitates different documentation -Often explicit job instructions (script) for moments-of-truth  First Bank Corporation drive-up teller service guidelines o Be especially discreet when talking to the customer through the microphone. o Provide written instructions for customers who must fill out forms you provide. o Mark lines to be completed or attach a note with instructions. o Always say “please” and “thank you” when speaking through the microphone. o Establish eye contact with the customer if the distance allows it. o If a transaction requires that the customer park the car and come into the lobby, apologize for the inconvenience. -Scripts and storyboards are other techniques ZEBRA -Relatively few new product ideas, perhaps only 1 in 250, become successfully marketed products -Virtual reality technology can improve designs less expensively than the use of physical models or prototypes -Robust Design- A method that ensures that small variations in production or assembly does not adversely affect the product -Group Technology- Enables the grouping of parts into families based on similar processing requirements -The customer may participate in the design of, and in the delivery of, services -The three major subdivisions of the product design are selection, definition, and design -Value analysis takes place during the production process, when it is clear the new product is a success -Assembly Chart- Shows in schematic form how a product is assembled -Assembly Drawing- Shows an exploded view of the product -A process sheet is a type of route sheet -Work Order- Document for production that gives the instruction to make a given quantity of a particular item, usually to a given schedule Chapter 6: Managing Quality Quality American Society of Quality (ASQ)- The totality of features and characteristics of a product or service that bears on its ability to satisfy stated or implied needs (Voice of Customer (VOC)); customer-oriented definition -View or perspectives on quality; three broad categories of definitions of quality:  User-Based- better performance, more features  Product-Based- specific and measurable attributes of the product  Manufacturing-Based- conformance to standards, right the first time -Key Dimensions of Quality: Performance, features, reliability, conformance, durability, serviceability, aesthetics, perceived quality, value Quality and Operations Management Operations Management (OM)- The set of activities that create value in the form of goods and services by transforming inputs into outputs Production- The creation of goods and services -A problem is a problem for somebody  customer (external/internal) -Transfer function Change? International Standards Organization (ISO) Quality Standards -Overview/Value  International recognition  Encourages quality management procedures, detailed documentation, work instructions, and recordkeeping  2009 revision emphasized sustained success  Over one million certifications in 178 countries  Critical for global business -Management Principles  Top management leadership  Customer satisfaction  Continual improvement  Involvement of people  Process analysis  Use of data-driven decision making  A systems approach to management  Mutually beneficial supplier relationships (win/win) -Required international sales (CE-Certified in Europe-mark) Quality Supports Strategy* -Managing quality supports strategy (Differentiation, Low cost, Response) -Quality helps increase sales and reduce costs Cost of Quality (Costs increasing with each one) Prevention Costs- Reducing the potential for defects Appraisal Costs- Evaluating products, parts, and services (inspect) Internal Failure- Producing defective parts or services before delivery  Associated with scrap, rework, and downtime External Costs- Defects discovered after delivery Implications of Quality -Company reputation  Perception of new products  Employment practices  Supplier relations -Product liability  Reduce risk -Global implications (ISO Certification)  Improved ability to compete Malcolm Baldrige National Quality Award -Established in 1988 by the U.S. government -Designed to promote TQM practices -Winners include FedEx, The Ritz-Carlton, at&t, etc. Ethics and Sustainability -Ethics  Operations managers must deliver healthy, safe, quality products and services  Poor quality risks injuries, lawsuits, recalls, and regulation  Organizations are judged by how they respond to problems  All stakeholders must be considered -ISO 14000 Environmental Standards  Positive public image and reduced exposure to liability  Systematic approach to pollution prevention  Compliance with regulatory requirements and opportunities for competitive advantage  Reduction in multiple audits Implications of Quality Summary -An operations manager’s objective is to build a total quality management (TQM) system that identifies and satisfies customer needs -Building a quality organization is a demanding task Total Quality Management (TQM) -Encompasses entire organization, from supplier to customer -Stresses a commitment by management to have a continuing, companywide drive toward excellence in all aspects of products and services that are important to the customer Leaders in Quality* Seven Concepts of TQM 1. Continuous Improvement (“Kaizen”) a. Represents continual improvement of all processes b. Involves all operations and work centers including suppliers and customers (people, equipment, materials, procedures) c. Shewhart’s PDCA Cycle i. Plan- Identify the pattern and make a plan ii. Do- Test the plan iii. Check- Is the plan working? iv. Act- Implement the plan document d. Management Cycle i. Plan  Execute (do)  Control (check) 2. Six Sigma* (two meanings) a. Statistical definition of a process that is 99.9997% capable, 3.4 defects per million opportunities (DPMO) b. A program designed to reduce defects, lower costs, and improve customer satisfaction; comprehensive quality system 3. Employee Empowerment a. Getting employees involved in product and process improvements i. 85% of quality problems are due to process and material (not employees) b. Techniques i. Build communication networks that include employees ii. Develop open, supportive supervisors iii. Move responsibility to employees iv. Build a high-morale organization v. Create formal team structures 1. Quality Circles a. Group of employees who meet regularly to solve problems b. Trained in planning, problem solving, and statistical methods c. Often led by a facilitator d. Very effective when done properly 4. Benchmarking a. Selecting best practices to use as a standard for performance i. Determine what to benchmark ii. Form a benchmark team iii. Identify benchmarking partners iv. Collect and analyze benchmarking information v. Take action to match or exceed the benchmark b. Note: Use internal benchmarking if you’re big enough c. Best Practice and Justification i. Make it easy for clients to complain- free market research ii. Respond quickly to complaints- adds customers and loyalty iii. Resolve complaints on first contact- reduces cost iv. Use computers to manage complaints- discover trends, share them, and align your services v. Recruit the best for customer service jobs- should be part of formal training and career advancement 5. Just-in-Time (JIT) a. ‘Pull’ system of production scheduling including supply management; production only when signaled b. Allows reduced inventory levels, which exposes problems; inventory costs money and hides process and material problems c. Encourages improved process and product quality d. Relationship to quality: i. JIT forces improvement to process required for high quality ii. JIT process improvements cut the cost of quality iii. Better quality means less inventory and better, easier-to-employ JIT system 6. Taguchi Concepts a. Quality Robustness- Ability to produce products uniformly in adverse manufacturing and environmental conditions i. Small variations in materials and processes do not destroy product quality ii. Remove the effects of adverse conditions... typically costs less than removing the cause of adverse conditions b. Quality Loss Function* (?) i. Target-oriented quality yields more product in the “best” category ii. Target-oriented quality brings product toward the target value iii. Conformance-oriented quality keeps products within 3 standard deviations iv. L = D^2*C v. Costs related to poor quality are high (?) (21) c. Most quality problems are the result of poor product and process design (not people) d. Costs of dissatisfaction, repair costs, warranty costs, inspection costs, service costs, scrap and repair, and society are all elements of cost in the Taguchi Loss Function 7. Knowledge of TQM Tools a. To empower employees to improve quality through TQM, a broad cross-section of the organization must be trained in TQM tools Tools of TQM* • Generate Ideas 1. Check Sheet- An organized method of recording data 2. Scatter Diagram- A graph of the value of one variable vs. another variable


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