PRESENTED BY:
Syed Mahbubul Haque Chowdhury
Supply Chain Manager, Business Development, Gemcon Group
Consultant, Organic Origin Firms Ltd.; Advanced Insight Ltd .
IBA, University of Dhaka
December 18, 2015
FOUR DIMENSIONS OF PERFORMANCE
Quality
Cost
Efficiency
Variety
Customer heterogeneity
Product quality (how good?)
Process quality (as good as
promised?)
Time
Responsiveness to demand
Important for
- Performance measurement
- Defining a business strategy
2
FOUR DIMENSIONS OF PERFORMANCE: TRADE-OFFS
Cost
Efficiency
Measured by:
- cost per unit
- utilization
Quality
Product quality (how good?)
=> Price
Process quality (as good as
promised?)
=> Defect rate
Variety
Time
Customer heterogeneity
Measured by:
- number of options
- flexibility / set-ups
- make-to-order
Responsiveness to demand
Measured by:
- customer lead time
- flow time
WHAT CAN OPS MANAGEMENT DO TO HELP?
STEP 1: HELP MAKING OPERATIONAL TRADE-OFFS
Responsiveness
High
Very short waiting times,
Comes at the expense of
Frequent operator idle time
Tradeoff
Low
Long waiting times,
yet operators are almost
fully utilized
Low labor
productivity
High labor
productivity
Example: Call center of a large retail bank
- objective: 80% of incoming calls wait less than 20 seconds
- starting point: 30% of incoming calls wait less than 20 seconds
- Problem: staffing levels of call centers / impact on efficiency
OM helps: Provides tools to support strategic trade-offs
Labor Productivity
(e.g. $/call)
WHAT CAN OPS MANAGEMENT DO TO HELP?
STEP 2: OVERCOME INEFFICIENCIES
Responsiveness
High
Current frontier
In the industry
Competitor A
Eliminate
inefficiencies
Competitor C
Low
Competitor B
Low labor
productivity
High labor
productivity
Labor Productivity
(e.g. $/call)
Example:
Benchmarking shows the pattern above
Dont just manage the current system Change it!
Provides tools to identify and eliminate inefficiencies => Define Efficient Frontier
Types of inefficiencies:
-Poor process design
- Inconsistencies in activity network
WHAT CAN OPS MANAGEMENT DO TO HELP?
STEP 3: EVALUATE PROPOSED REDESIGNS/NEW TECHNOLOGIES
Responsiveness
High
Redesign
process
New frontier
Current frontier
In the industry
Low
Low labor
productivity
High labor
productivity
Example:
What will happen if we develop / purchase technology X?
Better technologies are always (?) nice to have, but will they pay?
OM helps: Evaluates system designs before they occur
Labor Productivity
(e.g. $/call)
THE EFFICIENT FRONTIER
Responsiveness
High
Current frontier
In the industry
Competitor A
Eliminate
inefficiencies
Competitor C
Competitor D
Low
Competitor B
Low labor
productivity
High labor
productivity
Labor Productivity
(e.g. $/call)
There exists a tension between productivity and responsiveness
Efficient frontier
UNDERSTANDING OPERATIONS MANAGEMENT
Operations Management is defined as the process of
designing, operating and controlling a productive system
capable of transforming physical resources and human
talent into needed goods and services.
It
encompasses
forecasting,
capacity
planning,
scheduling, managing inventories, assuring quality,
motivating employees, deciding where to locate facilities,
buying materials and equipments and maintaining them,
and more.
OM AT THE CORE OF BUSINESSES
Organization
Finance
Operations
Marketing
Three basic functions
Operations/Production
Goods oriented (manufacturing and assembly)
Service oriented (health care, transportation and retailing)
Value-added (the essence of the operations functions)
Finance-Accounting
Budgets (plan financial requirements)
Provision of funds (the necessary funding of the operations)
Marketing
Selling, Promoting
Assessing customer wants and needs
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OBJECTIVE AREAS OF OPERATIONS MANAGEMENT
Quality
Speed
Dependability
Flexibility
Cost
Innovation
10
THE TRANSFORMATION PROCESS
Value-Added
Inputs
Land
Labor
Capital
Information
Transformation/
Conversion
Process
Outputs
Goods
Services
Measurement
and Feedback
Measurement
and Feedback
Control
Measurement
and Feedback
Feedback = measurements taken at various points in the transformation process
Control = The comparison of feedback against previously established standards to
determine if corrective action is needed.
11
OM: AN ORGANIZATIONAL PERSPECTIVE
Strategic (long-range)
Needs of customers
(capacity planning)
Tactical (medium-range)
Efficient scheduling of
resources
Operational planning
and control (short-range)
Immediate tasks and
activities
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OM: AN OPERATIONAL PERSPECTIVE
Some examples of the different types of transformations are:
Physical, as in manufacturing
Locational, as in transportation
Exchange, as in retailing
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INPUT-TRANSFORMATION-OUTPUT
RELATIONSHIPS FOR TYPICAL SYSTEMS
14
MARKETING OM FINANCE
SHOULD WORK TOGETHER
Operations
Marketing
Finance
15
OPERATIONS ARE EVERYWHERE !
Operations
Goods producing
Examples
Farming, mining, construction
Storage/transportation Warehousing, trucking, mail, taxis, buses, hotels
Exchange
Trade, retailing, wholesaling, renting, leasing, loans
Entertainment
Radio, movies, TV, concerts, recording
Communication
Newspapers, journals, radio, TV, telephones, satellite
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THE VALUE CHAIN AND ITS SUPPORT FUNCTIONS
(LINKING OM TO CUSTOMERS AND SUPPLIERS)
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MANUFACTURING VS. SERVICE OPERATIONS
Production of goods
Tangible products
Automobiles, Refrigerators, Aircrafts, Coats, Books, Sodas
Services
Repairs, Improvements, Transportation, Regulation
Regulatory bodies: Government, Judicial system
Entertainment services: Theaters, Sport activities
Exchange services: Wholesale/retail
Appraisal services: Valuation, House appraisal
Security services: Police force, Army
Financial services: Banks
Education: Universities, Colleges, Schools.
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CHARACTERISTICS OF SERVICE
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OM: MANUFACTURING VS. SERVICES
Characteristics Differences between Goods & Services
Characteristics
Goods
Services
Output
Tangible
Intangible
Customer Contact
Low
High
Uniformity of Input
High
Low
Labor Content
Low
High
Measurement of Productivity
Easy
Difficult
Opportunity to correct quality
Problems
High
Low
Input variability
Lower
Greater
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MOST PRODUCTS ARE A BUNDLE
OF GOODS AND SERVICES
21
OM: EXAMPLE OF SERVICE
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OM: EXAMPLE OF GOODS
23
IMPORTANT QUALITY DIMENSIONS IN
MANUFACTURING
Performance
Features
Reliability
Conformance
Durability
Serviceability
Aesthetics
Perceived Quality
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IMPORTANT QUALITY DIMENSIONS IN
SERVICES
Time
Timeliness
Completeness
Courtesy
Consistency
Accessibility & Convenience
Accuracy
Responsiveness
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10 DECISION AREAS OF OM
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Product Design: What good or service should we offer?
Quality: How to define quality?
Process: What process will these products require?
Location: Where should we put the facility?
Layout: How should we arrange the facility?
Human Resources :How to provide a reasonable work
environment?
Supply Chain Management: should we make or buy this
component?
Inventory: How much inventory of each item should we have?
Planning (aggregate and short-term): which job do we perform
next?
Maintenance: who is responsible for maintenance?
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OPERATIONS MANAGEMENT ACTIVITIES
Operations Management Activities
Periodic
Selecting
Designing
Continual
Updating
Operating - Controlling
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NEW CHALLENGES OF OM
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RESPONSIBILITIES OF OPERATIONS MANAGEMENT
Planning
Capacity, utilization
Location
Choosing products or
services
Make or buy
Layout
Projects
Scheduling
Market share
Plan for risk reduction,
plan B?
Forecasting
Controlling
Inventory
Quality
Costs
Organization
Degree of standardization
Subcontracting
Process selection
Staffing
Hiring/lay off
Use of overtime
Incentive plans
In a nutshell, the challenge is
Matching the Supply with Demand
SUPPLY SIDE
DEMAND SIDE
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Supply Does Not Naturally Match Demand
Inventory results from a mismatch between supply and demand
Mismatch can take one of the following two forms
Supply waits for Demand
Inventory = Finished goods and resources
Demand waits for Supply
Inventory is negative or said to be backordered in manufacturing
Inventory = Waiting customers in services
Mismatch happens because
the demand varies
the capacity is rigid and finite.
If the capacity is infinite, products (or services) can be provided at an infinite rate
and instantaneously as the demand happens. Then there is no mismatch.
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OM: PROCESS TECHNOLOGY
Job shop technology: suitable for a variety of custom
designed products in small volume; e.g., Consulting firms
Batch technology: suitable for a variety of products in
varying volume; e.g., Bakery
Assembly line: suitable for a narrow range of standardized
products in high volume; e.g., RMG Manufacturing
Continuous flow technology: suitable for producing a
continuous flow of products; e.g., Beverage
Project technology: is unique and not repetitious activity
with well defined objective that cuts across many
organizational and functional lines involving cost & time;
e.g., Padma Bridge Project
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PRODUCT LIFE CYCLE
32
PRODUCT DESIGN & DEVELOPMENT SEQUENCE
Key Activities
Steps
Search for consumer needs
Searching for Alternatives
Key Outputs
Idea Generation
Selection & ranking of best Ideas
Economic Analysis
General Feasibility
Product Selection
Choice of specific product features
Evaluation of alternative designs with regard to
reliability, maintainability, and service life
Preliminary Design
Selection of best design
Development and testing of process, compatibility
& simulation studies
Final Design
Final specification in the form of
assembly drawings, processing
formulas, procedure statements etc.
Market Analysis
Facilities Exist
New facilities required
Major & minor tech choice
Evaluation alternative technologies & methods
Process selection
Choice of specific equipment & process flow.
Downstream production decision
Capacity Planning
Production planning
Scheduling
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- WHAT ARE THE TOOLS OF OM?
- THEY ARE THE MODELS
Model: A structure which has been built purposefully to exhibit
features and characteristics of another object.
A map is a model of
A toy car is a model of
A movie is a model of
An OM course is a model of
For
Improved understanding and communication
Easy to use, less expensive
Experimentation
Analysis of tradeoffs
Enable what if questions
Standardization and organization for analysis
Increase understanding of the problem
Consistent tool
Standardized format
Specific objectives
Abstraction vs. computability
34
TYPES OF MODELS
Physical models (prototypes)
Schematic models (Graphs, charts, pictures)
Mathematical models, by application area
Statistical models
Linear regression
Linear programming
Queuing techniques
Inventory models
EOQ model
EPQ model
Project management models
Networks
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Inventory Management
36
Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple components of the production
To protect against stockouts
To take advantage of order cycles
To hedge against price increases, or to take advantage
of quantity discounts
To permit operations (work in process)
37
Objectives of Inventory Control
Maximize level of customer service
Minimize costs (carrying costs and ordering costs)
38
Requirements for Effective Inventory Management
A system to keep track of the inventory
periodic, perpetual, two-bin, and universal product code (UPC)
A reliable forecast of demand
Knowledge of lead times and lead time variability
-lead time time between submitting a purchase order and receiving it
-lead time variability reliability of the supplier
Estimates of inventory holding costs, ordering costs, and shortage costs
Holding cost
Ordering cost
Stockout cost
A classification system for inventory items
ABC approach classifies inventory
according to some measure of importance ($ value) where A very
important, C least important
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Finding the optimal quantity to order EOQ
Lets say we decide to order in batches of Q
Inventory position
Number of
periods will be
Period over which demand for Q has occurred
Time
The average
inventory for
each period is
Q
2
Total Time
Finding the optimal quantity to order
Purchasing cost = D x C
Ordering cost =
x S
Inventory cost =
Q
2
x H
So what is the total cost?
TC = D C
D
Q
In order now to find the optimal quantity we need to
optimize the total cost with respect to the decision
variable (the variable we control)
Which one is
the decision
variable?
What is the main insight from EOQ?
There is a tradeoff between holding costs and ordering costs
Total cost
Cost
Holding costs
Ordering costs
Order Quantity (Q*)
Economic Order Quantity - EOQ
Q*
2SD
H
Example:
Assume a car dealer that faces demand for 5,000 cars per year, and
that it costs $15,000 to have the cars shipped to the dealership.
Holding cost is estimated at $500 per car per year. How many
times should the dealer order, and what should be the order size?
2(15,000)(5,000)
Q
548
500
*
If delivery is not instantaneous, but there is a
lead time L:
When to order? How much to order?
Inventory
Order
Quantity
Q
Lead Time
Place
order
Receive
order
Time
If demand is known exactly, place an order when
inventory equals demand during lead time.
Order
Quantity
Q
Inventory
Q: When shall we order?
A: When inventory = ROP
Q: How much shall we order?
A: Q = EOQ
Reorder
Point
(ROP)
ROP = LxD
Lead Time
D: demand per period
L: Lead time in periods
Place
order
Receive
order
Time
Example (continued)
What if the lead time to receive cars is 10 days?
(when should you place your order?)
Since D is given in years, first convert: 10 days = 10/365yrs
R =
10
D =
365
10
5000 = 137
365
So, when the number of cars on the lot reaches 137,
order 548 more cars.
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