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Flashcards in Managing Operations Deck (105):

3 Management Processes in Operations

1. supplier relationship
2. internal management
3. customer relationship


Goal of Operations Management

Make the operations as efficient as possible
Inputs (materials, capital) --> Operations --> Outputs (products, services)



Efficiency is measured in Productivity which = output/input
Output always measured in dollars
Find out what resource is scarce or expensive and focus on it (measure their productivity)


Productivity in Different Countries

- US is the leader
- Why does productivity in countries matter? You can only consume what you produce - standard of living is dependent on productivity.
- e.g. highway - can drive 70 US takes one hour, in a country where you can only drive 35 miles per hour, will take 2 hours
- highly concentrated countries are more productive (e.g. Japan)


US employment by Sector

Services, Manufacturing, Government, Agriculture
- productivity of manufacturing has gone up dramatically
- manufacturing jobs have gone down


Manufacturing vs. Service

M - physical, durable output, S - intangible, perishable output (you can't store service)
M - easily measured, S - not easily measured
M - low customer contact, S - high customer contact
M - long response time, S - short response time


Factors Affecting Productivity (11)

1. Investments in plant and equipment. Newer equipment = higher productivity
2. R&D Spending. higher spending = more innovations = higher productivity
3. Patent Laws - better patent laws, people will invest in R&D in those countries
4. Regulations - increase costs
5. Taxation - serious problem - US are taxed on global income (not just their income from the US)...not favorable for companies earning high proportions of incomes from foreign countries
6. Metric System - US follows Foot Pound Second (FPS)
7. Health Care Costs
- in the US, health care is paid by the employer (part of the cost of production)
- outside the US, paid by taxes
8. Price Earning Ration (earnings per share) - higher ratio = higher competitiveness. e.g. if you're P/E is 20, you can raise $20 from $1 in the market. Companies should try to have as high a P/E as possible
9. Education - matters because if you don't have high paying jobs to pay people with the highly educated people
- US values college education versus vocational education
10. Hourly Wages
11. Value-Added = price - cost of inputs


Challenges the US is facing (6)

1. High Trade Deficit (the good news is, most of the imports into the US is energy and energy use is going down)
2. Rising Current Account Deficit - almost 95% of the world's savings coming into the US
3. Falling dollar reducing the standard of living
4. Rising entitlement spending - social security payments, fewer and fewer people working in the US
5. Dramatic growth in China and India increasing costs of raw materials and energy
6. Loss of competitiveness - everybody else has started building up better infrastructure and becoming more competitive


Production Systems (4)

1. Job - e.g. printing press. high customization, high variety, volume low and unique, every job is unique - one extreme*
2. Project - building shopping centers. high customization, low volume
3. Batch - e.g. mcdonalds - low variety, standardized product, high volume - the other extreme*
4. Line - between batch and continuous process - refineries, little inventory held between processes


America's Race to the Bottom

- making less money today than in 1985, MBAs rarely get union jobs and those pay highly, unions have been going down
*less unions


Wages as a proportion to the GDP

60's-70's - 51/52%
Today - 42% (GDP is rising but wages are not)


Retirement Plans

- defined contribution is like 401K plan (depends on the stock market return) - this has been rising in the past 30 years
- defined benefit - take final salary, each year give you 2% of your final salary (if you work for 30 years, you get 60% of your ending salary) - this has been falling in the past 30 years
*less defined contribution


H1-B Visa Issuance Cap

- employer sponsored
- after 9/11, outsourcing went up - employees had worked in the US but were sent back, so companies outsourced the work and paid the local currency
*large number of jobs outsourced


Trends in Ops: Yield Management

- Simply by charging different prices to different segments based on their likelihood for payment, you don't have to spend any more money on resources (in Atlantic City example - bus, gas, etc) but you fill the bus and maximize your profit
- Ideal for perishable items - (airline seats have no value after the plane takes off, hotel rooms have no value for that night after the night is over, etc.)
Success in Yield Management
- The trick is to segment your customers and know how much they are willing to pay
- fixed costs high, variable costs low
- product can be sold in advance


Trends in Ops: Modular Design

- use standard components to produce a variety of products
- e.g. Lego Set
- customization and standardization can be achieved simultaneously
- trend - instead of nuts and bolts, use adhesives


Trends in Ops: Profit Pool

- profits rather than revenue
- considers both revenue and profit margin
- usual example is computers - hardware, processor, operating system, assembly, financing, trading, etc. By examining profit pools, company identifies deepest pool that will make max profits
- walmart will make larger items (destination product) less expensive but then charge more for cords, etc.


Trends in Ops: Winner Takes All

- many industries have high competition so their income depends on your rank
- if you're not #1, there is no use (90% market share versus 10%)


Trends in Ops: Microprocessors

- in cars, etc
- build logical designs


Steps in Long Term Planning

1. Forecasting
2. Capacity Planning
3. Location
4. Facility Layout
5. Process Design/Time Measurement



- The first (and fundamental) step in long term planning - vital function and impacts every management decision
- Used by all departments (accounting, marketing, production, etc.)
- Forecasting: What will happen
- Planning: What you want to happen
- Schedule: when to do the plan (starting and completion dates)
- Forecast effort should be proportional to the magnitude of the decisions made
- There will always be some error in forecasting


Four Types of Forecasting (4)

1. time-series analysis (based on the idea that data relating to past demand can be used to predict future demand)
2. casual relationships
3. qualitative
4. Simulation


Product Life Cycle

1. R&D (innovators)
2. Introduction (early adapters)
3. Growth (early majority)
4. Maturity (late majority)
5. Decline (laggards)


Time Series Decomposition

- chronologically ordered
- may contain one or many of the following elements:
trend, seasonal, cyclical, autocorrelation and random
- identifying these elements and separating the time series data into these components is known as decomposition


Components of Demand (6)

1. Average demand for a period of time
2. Trend
3. Seasonal Element
4. Cyclical elements
5. Random variation
6. autocorrelation



Identification of trend lines is a common starting point when developing a forecast
- common trend lines: linear, S-curve, exponential, asymptotic


Time Series Analysis

Using the past to predict the future (you're assuming what happened in the past will happen in the future)
- short-term (less than 3 months) - mainly tactical decisions
- medium term (3 months to 2 years) - used to develop a strategy will be implemented over the next 6-18 months e.g. in response to demand
- long-term (greater than 2 years) - detecting general trends and major turning points


Model Selection for Forecasting

Choosing an appropriate model depends on:
1. time horizon to be forecast
2. data availability
3. accuracy required
4. size of forecasting budget
5. availability of qualified personnel


Simple Moving Average

- Forecast for the short term (weeks are often used for data) when the data is pretty fixed
- takes the average of a fixed number of past periods
- removes some of the random fluctuations from the data
- longer periods provide more smoothing, shorter periods react to trends more quickly
= Ft = A(t-1) + A(t-2) + A(t-3)...A(t-n)/n
A(t-2) = actual 2 periods ago


Weighted Moving Average

- allows for unequal weights depending on the time (usually more recent gets more weight)
- the sum of the weights must be equal to one
- when selecting weights, experience or trial-and-error are the best approaches


Exponential Smoothing

- a weighted average method which includes all past data in the forecasting calculation
- more recent weights are weighted more heavily
- most used of all the techniques
- surprisingly accurate, easy (with computers), user can understand it, little computation required, tests for accuracy easy to compute
Ft = Ft-1 + alpha(At-1 - Ft-1)
alpha = the smoothing constant
At-1 is actual one period ago


Choosing Alpha & Beta

- usually a range between .1 - .3
- alpha depends on how much random variable is present
- beta depends upon how steady the trend is


Linear Regression

- regression is used to identify the functional relationship between two or more correlated variables, usually from observed data
- one variable (dependent) is predicted given values of the other variable (independent)
- assumes relationships can be explained with a straight line
Y = a +bt


Seasonal Variation

can be either additive or multiplicative


Forecast Errors

- difference between the forecast value and what actually occurred
- sources of error: bias (consistent mistake), random (unexplained)


Measures of Forecast Error (3)

1. Mean absolute deviation (MAD) - ideally will be zero
2. Mean absolute percentage error (MAPE) - scales the forecast error to the magnitude of demand
3. Tracking signal - indicates whether forecasting errors are accumulating over time


Casual Relationship Forecasting

- uses independent variables other than time to predict future demand (the variable must be a leading indicator)
- care must be taken in selecting variables - some are just correlated events


Multiple Regression Techniques

- often, more than one independent variable may be a valid predictor of demand


Qualitative Forecasting Methods

- generally used to take advantage of expert knowledge
- useful when judgment is required
e.g. market research



- the maximum rate of output of a process or system
- all departments need capacity information to make decisions
- done in the long-term and short-term


Capacity Utilization

average output rate/max capacity
- should not go beyond .65 (or long wait times)


Factors Affecting Capacity (5)

1. Economies of Scale
2. Diseconomies of Scale
3. Economies of Scope
4. U-Shaped time-capacity cost curve
5. Focus Factory


Economies of Scale

the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods
- spreading fixed costs
- reducing construction costs
- cutting costs of purchased materials
- finding process advantages


Diseconomies of Scale

An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.
- transportation costs increase
- monitoring worker productivity becomes too costly
- focus of the firm is reduced
- maintaining efficient flows of info becomes too expensive


Economies of Scope

- the average total cost of production decreases as a result of increasing the number of different goods produced
- two dissimilar products - the costs go down if you offer them together (e.g. can use base for both products)


U-Shaped Time-Capacity Cost Curve

If cost of unit capacity is plotted over time, it may rise, fall, remain the same, etc. - figure out in which direction it's going
- when the prices are rising, renovate
- when prices are falling, build bigger


Focused Factory

a firm with too many objectives excels at nothing as it has to make trade-offs among objectives


Theory of Constraints

"A Chain is no stronger than its weakest link" - capacity of a plant is based on the bottleneck process so if capacity needs to be increased, it has to be the capacity of the bottleneck or there will be no effect.
- TOC - a systematic approach that focuses on activity managing constraints that are impeding progress


How Operational Measures Relate to Financial Measures

1. Inventory
TOC - money invested in things to sell
Financial - decrease in inventory = increase profits
2. Throughput (T)
TOC - rate at which the system generates $ through sales
Financial - increase in T = increase in profis
3. Operating Expense (OE)
TOC - $ used to turn inventory into throughput
Financial - decrease in OE = increase in profits
4. Utilization (U)
TOC - degree to which equip, labor, etc. is being used - expressed as average output to max capacity (%)
Financial - increase in U at the bottleneck = increase in profit


Seven Key Principles of TOC

1. focus is balancing flow (not balancing capacity)
2. maximizing output of all resources will not max throughput of the entire system
3. an hour lost/saved at the bottleneck is an hour lost/saved for the entire system
4. inventories are only needed in front of bottlenecks or assembly and shipping - building elsewhere should be avoided
5. work should be released into the system only as frequently as the bottleneck needs it (which should be equal to market demand)
6. activation of non-bottleneck resources cannot increase throughput
7. every capital investment must be viewed from the perspective of its global impact on T, I and OE


Capacity Timing and Sizing

excess capacity = capacity cushion
capacity utilization should be about 65% so cushion should be about 35%
1. Expansionist Strategy - increase capacity in anticipation of forecast
2. Wait-and-see strategy - increase as needed


Cycle Time

- when you get the order to when you receive the $
- want this to be as small as possible


Machine Hours Required

(A/Q)s + At
A = annual demand
Q = batch size
s = setup time per batch
t = production time per unit
always round up


Things to Consider when Choosing a Location

1. Strategic
2. Technological
3. Macroeconomic
4. Political
5. Infrastructure
6. Competitive
7. Costs
- Decide what are the dominant factors in your decision


Locating a Single Facility

- expand onsite
- build another facility
- relocate to another site


Selecting a New Facility (5 steps)

1. identify important location factors and identify them as dominant or secondary
2. consider alternative regions; then narrow to alternative communities and finally specific sites
3. collect data on the alternatives
4. analyze data collected beginning with the quantitative factors
5. bring the qualitative factors pertaining to each site into the evaluation


Dominant Factors (Location) in Manufacturing

- favorable labor climate
- proximity to markets
- quality of life
- proximity to suppliers and resources
- utilities, taxes and real estate costs
- other factors


Dominant Factors (Location) in Services

- impact of location on sales and customer satisfaction
- proximity to customers
- transportation and proximity to markets
- location of competitors
- site-specific factors



- in terms of location, industries tend to cluster (e.g. pharmaceutical companies in NJ)
- clusters makes industries more competitive, more innovative and increases productivity
- easy to hire employees


Prisoners Dilemma

- in terms of location, choose a location where the competition can't beat you
- if you go for the optimal location and your competition does as well, both of you will lose


Environmental Justice

- in terms of location, means the fair treatment and meaningful involvement of all people regardless of race, age, etc. and that the government and industry in the location area support that


Right to Work States

- right to work law secures the right of employees to decide for themselves whether or not to join or financially support a union
- no dues unless you join the Union - get all the benefits without the dues (no incentive for unions to unionize)
- in a non-right to work state - union dues taken whether you want to join or not - unions have a lot of incentive to unionize (e.g. New York)


Three most important things to consider when choosing a location

1. Right to Work States
2. Prisoners Dilemma
3. Competitiveness


Multi-plant Location Strategies (4)

- deciding which product will be produced in which plant?
1. Product Plant - one plant produces a product that serves several markets (can take advantage of economies of scale)
2. Market Plant - one plant produces several products for one market
3. Process Plant - when product requires a unique process
4. General Purpose - all products can be produced in any plant


Layout Planning

- planning that involves decisions about the physical arrangement of economic activity centers needed by a facility's various processes
- economic activity center = anything that consumes space...a person or group of people, a customer reception area, a teller window, a machine, workstation, storage room, etc


Layout Planning Questions

- before a manager can make decisions regarding a physical arrangement, four questions must be addressed:
1. What centers should the layout include?
2. How much space and capacity does each center need?
3. How should each center's space be configured?
4. Where should each center be located?


Location Dimensions (2)

1. Relative Location - placement of a center relative to the others
2. Absolute Location - the particular space that the center fills within the location
- When a layout is revised, the relative location of each center changes but the absolute location stays the same


Factors you can Achieve via Layout

- layout choices can help communicate an organization's product plans and competitive priorities
- altering a layout can affect an org. and how well it meets its competitive priorities by:
-- increasing customer satisfaction and sales at store
-- facilitating the flow of materials
-- reducing hazards to workers
-- increasing efficient utilization of labor/equip
-- improving employee moral
-- improving communication


Types of Layouts

Job Shop = process layout:
- flexible-flow - organizes resources (employees and equipment by function vs. service/product), different jobs require different sequences so organized by process (similar together)

Batch = product layout:
- line-flow - workstations/departments are arranged in a linear path, products go through
- can be I-shapes, U-shaped, L-shaped, etc..

Hybrid Layout - some portions are flexible-flow and some are line-flow

Fixed Position Layout - service/manufacturing is fixed in place; employees along with their equipment come to the site to do their work


Designing Flexible Flow Layout

1. Gather information (available space, which centers need to be close to each other, etc.)
*closeness matrix = a table that gives a measure of the relative importance of each pair of centers being located near each other
2. Develop a block plan - allocates space and indicates placement of each dept.
3. Design a Detailed layout


Creating Hybrid Layouts

- layout flexibility: property of a facility to remain desirable after significant changes occur to be easily and inexpensively adopted in response
- one worker, multiple machines (OWMM) cell: one person cell that operates several different machines simultaneously to achieve line flow
- cell = two or more dissimilar workstations located close number of parts are processed


Group Technology

- an option for achieving line-flow layouts with low-volume processes
- groups products with similar characteristics into families and sets aside groups of machines for their production


Strategies for Improving Layout (6)

1. Remove unnecessary equipment
2. Install equipment on bottleneck process
3. Divide layout of part/assembly
4. Keep some stocks of finished part near assembly area
5. Place machine/equip according to the sequence of process
6. Reduce space btw machines


Market Basket Analysis

How do you organize a retail store?
- MBA assists in understanding what items are likely to be purchased together
- can use the info to place products together and increase sales (cross-sell and up-sell campaigns)
- focus on destination items (e.g. milk stays the same price or is on sale but the items you buy with milk like cereal are more expensive)


Process Design

- Only 5% of the cost - but decides 95% of the cost
- decides the business model


When Process Design Decisions need to be Made

- new or modified product to be introduced
- improve quality
- demand changes
- current performance inadequate
- competitors gaining
- new material, equipment or technology available
- change in priorities


Four Basic Process Decisions

1. Customer Involvement
2. Resource Flexibility
3. Capital Intensity
4. Process Structure including Layout


Customer Involvement Advantages & Disadvantages

- increased value to customer
- can mean better quality, faster delivery, lower cost
- may help coordinate across the supply chain
- can be disruptive
- managing timeline and volume challenging
- requires interpersonal skills
- multiple locations may be necessary


Resource Flexibility

- flexible workforce can often require higher skills, more training and education
- worker flexibility can help achieve reliable customer service and alleviate bottlenecks
- helps absorb changes in workflows
- volume of business may affect type of equipment used
- break-even analysis used to determine at what volumes changes in equipment should be made


Capital Intensity

- automation one way to address the mix of capital and labor
- applies to manufacturing and services
- usually high volumes and costs are high
- automation might not align with competitive priorities
- relatively inflexible
- classic example: industrial robots
- may impact customer contact
- may be used in both BOH and FOH


Vertical Integration

- don't outsource if supplier decides your product specification
- make sure your supplier doesn't become your future competitor
- try to protect your product using strong intellectual property rights
- never outsource your whole module


Strategic Fit

- process design chosen should reflect the desired competitive priorities
- process structure has a major impact on customer involvement, resource flexibility and capital intensity


Product-Mix Matrix

- choices include job, batch, line, continuous flow process
- production and inventory strategies include make-to-order, assemble-to-order, make-to-stock
- for manufacturing organization, brings together:
1. volume
2. product customization
3. process characteristics


Process Charts

- an organized way to document all the activities performed by a person or group
- annual cost of entire process can be estimated
- usually five categories:
1. Operation
2. Transportation
3. Inspection
4. Delay
5. Storage


Sipoc Diagram

- high level process map that can be used to identify and map all the relevant elements of a process before a process involvement or re-engineering exercise
- use when the team is not clear about the inputs, specifications, and actual requirements of the process


Managing Processes - Common Mistakes

- not connecting with strategic issues
- not considering impact on people
- not giving the design teams and process analysts a clear charter and then holding them accountable
*failure to manage the process is failure to manage the business


DSL (Design for Logistics)

- take supply chains into account when designing product and manufacturing processes
- strategies:
1. Modularity and Component Commonality
2. Postponement - delay the specifications of your product as late as possible (reduced inventory costs) - e.g. only white paint, add dye when someone wants to buy


Work Measurement Techniques

- used to estimate average time each step in process would take
- learning curve analysis appropriate for new products or processes (complex jobs also need more learning)


Short Term Planning Steps

1. Sales Plan from marketing department
2. Shipping Plan
3. Annual Plan
4. Weekly Plan (Master Production Schedule)
5. Check whether capacity is available (if not, change MPS)
6. Materials Requirement Planning
7. Input/Output Analysis


Short Term Planning Strategies

1. Subcontracting - outsourcing to overcome short-term capacity shortages
2. Backlogs (accumulation of customer orders), Backorders (customer order can't be filled immediately), Stockouts (order that is lost, customer goes somewhere else
3. Aggressive Alternatives - actions that attempt to modify demand and consequently, resource requirements
4. Complimentary Products - similar resources requirements but different demand cycles
5. Creative Pricing - promotional campaign


Inputs Required for Short Term Planning

1. Operations - machine capacity, staff levels, etc.
2. Materials - supplier capabilities, materials availability
3. Engineering - process charts, machine standards
4. HR - labor market conditions, etc.
5. Accounting and Finance - financial condition, cost data
6. Distribution and Marketing - demand forecasts, competition behavior, etc.


Aggregate Planning Strategies

1. Level Strategy - same quantity is produced month after month (no hiring/firing)
2. Chase Strategy - produce what is demanded each month (hire when demand is high, fire when demand is low)


Cost Considered in Aggregate Planning

- OT costs
- hiring and firing costs
- layoff costs
- inventory
- holding costs
- backorder and stock costs


Level Scheduling (Advantages and Requirements)

- Advantages:
1. system can be planned to minimize inventory and work-in-process
2. product modifications are up-to-date
3. smooth flow throughout production system
4. purchased items from vendors can be delivered when needed
- Requirements:
1. production should be repetitive (assembly-line format)
2. equipment costs must be low
3. workforce multi-skilled
4. smooth relationship between purchasing, marketing and production


Master Production Schedule

- do this for every product you have
- weekly plan is used to book sales
- monthly plan is a rolling sales plan
- yearly plan consistent with long term plan
- shipping plan = how long takes to get to customers


5 Types of Inventories

- inventory constitutes biggest portion of working captial
1. Raw and Packing materials
2. Work-in-process
3. Finished Goods
4. Supplies (e.g. paints, pins, stationary)
5. Capital Goods


Types of Inventory Costs

1. Ordering Costs - e.g. purchasing manager salary, mail, phone, etc
2. Holding Costs (about 10% of costs) - e.g. insurance, store rental
3. Component Devaluation Costs - when costs of components fall in price, companies reimburse these costs to retailers
4. Price Protection Costs - if price falls, reimburse retailers for reduced price
5. Production Return Costs
6. Obsolescence Costs


Economic Order Quantity (EDQ)

- the lot size that minimizes total annual inventory holding and ordering costs
- Assumptions:
-- demand rate is constant and known
-- there are no constraints on lot size
-- the only relevant costs are holding and ordering/set-up cost
-- decisions for items can be made independently of other items
-- lead time is constant and known with certainty


Replenishment Systems

- inventory control systems tell us how much to order and when to place the order
1. Continuous Review Systems - fixed ordering system. Different time period, re-order the same (depending on when you need more)
2. Periodic Review System - fixed interval re-order. Same time period, different order quantities (depending on how much you need at the set re-order time)
3. Safety Stock - inventory help in case demand exceeds expectations and is held to counter uncertainty


4 Types of Auctions

- auctions are often used to procure items
1. Sealed Bid first price - each supplier submits sealed-bid, whoever is highest wins
2. English Auctions - open auction with starting price. Item sold to highest bidder
3. Dutch Auctions - asking price is lowered until buyer accepts price
4. Vikrey (second price auction) - highest bidder wins but only pays second highest price


ABC Analysis

- 20% of the items account for 80% of the value - by concentrating on these items, you can control 80% of the dollar amount


Dependent Demand

the demand for an item that occurs because the quantity required varies with the production plans for other items held in the firm's inventory


Parent vs. Component

- Parent: any product that is manufactured from one or more component
- Component: and item that goes through one or more operations to be transformed into or become part of one or more parents


Materials Requirement Planning and MRP Explosion

MRP - a computerized information system developed specifically to help manufacturers manage dependent demand inventory and schedule replenishment orders
MRP Explosion - process that converts the requirements of various final products into a material requirements plan that specifies replenishment schedule


Bill of Materials (BOM)

record of all the components of an item, the parent-component relationship and the usage quantities derived from engineering and process designs (list inputs going into your final product)


Master Production Schedule

Takes the production plan of each product combined into one requirements list