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Operational Management


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NZ Diploma in Business L6:

NZ Diploma in Business L6 Operational Management 632 Feb 2013 Lecturer: Ben Golchin

Operations Management:

Operations Management Systematic direction, control, and evaluation of the entire range of processes that transform inputs into finished goods or services. Environmental factors-culture, political, and market influences Inputs-HR, capital, materials, land, energy, information, customer Transformations-convert inputs into outputs

O.M. (cont):

O.M. (cont) Outputs-goods or services, and waste Customer Contact-customers actively participate in transformation processes, self-service Performance Feedback-repair records, customer comments

Operations Management:

Operations Management Refers to the management of the production system that transforms inputs into finished goods and services. Production system: the way a firm acquires inputs then converts and disposes outputs. Operations managers: responsible for the transformation process from inputs to outputs. Operations management seeks to increase the quality, efficiency, and responsiveness of the firm. Seeks to provide a competitive advantage.

Operations Management Concepts:

Operations Management Concepts Quality : goods and services that are reliable and perform correctly. Quality allows customers to receive the performance that they expect. Efficiency : the amount of input to produce a given output. Less input required lowers cost and waste. Responsiveness to customers : actions taken to respond to customer needs. Firm can react quickly and correctly to customer needs as they arise.

Differences Between Services and Goods:

Differences Between Services and Goods Intangible Inventory Customer Contact Response Time Labor Intensity

Typical Characteristics of Services and Goods Producers:

Typical Characteristics of Services and Goods Producers Primarily Service Producers Primarily Goods Producers Continuum of Characteristics Intangible, nondurable Output can’t be inventoried High customer contact Short response time Labor intensive Tangible , durable Output can be inventoried Low customer contact Long response time Capital intensive Mixed

Positioning Strategies-approach selected for transformational processes:

Positioning Strategies-approach selected for transformational processes Process Focus-layout of plant and equipment around each production unit custom made Low Volume Norwegian Ship Building

Positioning Strategies-approach selected for transformational processes:

Positioning Strategies-approach selected for transformational processes Product Focus-arranging plant and equipment around one or a few output types many of one product high-volume, highly automated low flexibility Factory Lines


Flexibility Product Flexibility-speed with which products are created, ability to customize, ability to modify products for special needs Volume Flexibility-ability to respond to sudden changes in demand, change from small to full scale Process Flexibility-ability to manufacture a variety of goods in a short time, adjust to product mix over time, ability to accommodate changes in raw materials

Core Positioning Strategies:

Core Positioning Strategies Sources: Adapted from Brown, H.K., Clark, K.B., Holloway, C.A., and Wheelwright, S.C. The Perpetual Enterprise Machine: Seven Keys to Corporate Renewal Through Successful Product and Process Development. New York: Oxford University Press, 1994; Upton, D.M. “The management of manufacturing flexibility.” California Management Review, Winter 1994, 72–89. Process focus Space shuttle Legal practice Product focus Auto assembly plant Mail processing Intermediate Garment industry Branch banks Product volume Custom products, low volume Standard products, high volume Mixture of custom and standard products, moderate volume Continuous process (stable) Resource flows Mass production Large batch Sporadic (unstable)

Improving Responsiveness to Customers:

Improving Responsiveness to Customers Without customers, organizations cease to exist. Non-profit and for-profit firms all have customers. Managers need to identify who the customer is and their needs. What do customers want? Usually customers prefer: A lower price to a higher price. High quality over low quality. Fast service over slow service. Also good after sale support. Many features over few features. Products tailored to their specific needs.

Quality-how well a product does what the customer expects:

Quality-how well a product does what the customer expects Internal View-within the organisation External View-value customers expect Value-the relationship between quality and price

Competitiveness Value Map:

Competitiveness Value Map Relative Quality Superior Inferior Higher Lower Poor value Relative Price Economy value Outstanding value Premium value Average value Source: Adapted from Gale, B.T., and Buzzell, R.D. “Market perceived quality: Key strategic concept.” Planning Review, March-April, 1989, 10.

Price v. Attributes:

Price v. Attributes Firms offering high quality, fast service and other customer desires, often must raise price. Customers must tradeoff price for attributes . Operations management tries to push the price/attribute curve to the right with better production. Provides more attributes at the same cost. By enhancing the price/attribute relationship, the firm can increase its competitive position.

Customer Responsive Production Systems:

Customer Responsive Production Systems An output’s attributes is determined by the production system. Firms must strike a balance between cost and attributes Improving Quality : can apply to firms producing goods and services. A firm that provides higher quality than others at the same price is more responsive to customers. Higher quality can also lead to better efficiency. Lowers waste levels and operating costs.

Total Quality Management:

Total Quality Management The continuous process of ensuring every aspect of production builds in product quality Traditional Quality-product inspection during or at the end of the transformation process

Total Versus Traditional Quality:

Total Versus Traditional Quality Quality is a strategic issue Plan for quality Quality is everybody’s responsibility Strive for zero defects Quality means conformance to requirements that meet or exceed customers’ expectations Scrap and reworking are only a small part of the costs of nonconformance Traditional Quality Control Total Quality Management Quality is a tactical issue Screen for quality Quality is the responsibility of the quality control department Some mistakes are inevitable Quality means inspection Scrap and reworking are the major costs of poor quality

Improving Efficiency:

Improving Efficiency Labor productivity allows labor comparisons between organizations. Improved efficiency leads to lower costs and better performance. TQM and Efficiency : TQM can lead to much higher labor productivity. When quality rises, less time is wasted on scrap. Flexible manufacturing and efficiency : reduces the set-up costs for production systems. Facilities layout : seeks to design the machine-worker interface to increase production efficiency.

Efficient Manufacturing:

Efficient Manufacturing Most firms face major expense when setting up to produce a product. These costs must be paid before production begins. The more often products to be built change, the higher setup costs become. Flexible Manufacturing reduces setup costs. Just-in-Time (JIT) inventory , while developed for TQM, also adds to efficient production. Many costs are reduced including warehousing, holding costs and inventory tracking. Firm does not have a supply of parts, but can be vulnerable to strikes or supply problems.

Efficient Manufacturing:

Efficient Manufacturing Self-managed teams boost efficiency by allowing for a flatter organization structure. The team takes the role of the supervisor. Teams working together often become very skilled at enhancing productivity. Kaizen : Japanese term for a management philosophy the stresses the need for continuous improvement. Better operations can come from many, small, continuous improvements. Focus on what adds value to the product and try to eliminate steps that do not add value (such as inspection for defects).


Reengineering Process Reengineering : the fundamental rethinking and radical redesign of the business process. Can boost efficiency by directing efforts to activities that add value to the good or service produced. While Kaizen focuses on continuous enhancements, process reengineering considers wholesale change. Top managers must support operations enhancement tools for them to be accepted by workers. Usually, a successful operations change means a complete change in the organizational culture. Without a supporting culture, change will not succeed.

Nine Categories of Operations Management Decisions:

Nine Categories of Operations Management Decisions Product plans Competitive Priorities Positioning Strategies Location Technological Choices Quality management and control Inventory management and control Materials Management Master production scheduling

Inventory Costs:

Inventory Costs What contributes to inventory costs? TOTAL COST = ORDERING + CARRYING Carrying Costs Warehouse Insurance Obsolescence taxes breakage Ordering Costs Placing the order Transportation Shortage

Inventory Terms:

Inventory Terms Lead Time Elapsed time between placing and receiving an order EOQ-economic order cost optimum order quantity yielding the lowest total inventory cost Just-in-time finished goods to sell sub assemblies to be assembled purchases of raw materials to be transformed

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