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Operations Management GPO 300
October 2013
Levels of operations analysis 1. The Supply network
Supply Chain : Sequential system of suppliers and customers that begins with basic sources of inputs and ends with final customers of the system. Operations and supply chain are interdependent.
Any operation is part of a greater network of external operations.
Network of operations => Supply Nework
Each interface in the supply chain implies movement of goods as well as information flows
Levels of operations analysis Vertical and Horizontal integration
Supply network
Competition
Vertical integration : expansion into another production stage in the S.C Larger control of the operations of making a product or a service by gaining control over the suppliers or the distributors.
(*)the level of integration can be partial or full
Horizontal integration involves
controlling all aspects of a certain market. Company acquires, mergers or takes over another company in the same industry .
Levels of operations analysis Examples
Acquiring company Acquired company
Porsche Volkswagen
Daimler Benz Chrysler
Danone Centrale laitière
Kraft food Bimo
Glaxo Wellcome SmithKline Beecham
HP Compaq
United Airlines Continental
JPMorgan Chase Bank One
Microsoft Yahoo!
Horizontal integration Vertical integration
• Samsung
• Arcelor-Mittal
• OCP group
• Decathlon
Levels of operations analysis
Inside the operation, processes (arrangement of resources that produces a
mixture of goods and services) form an ‘internal network’ in the same way as whole operations form a supply network.
Each process is, at the same time, an internal supplier (within the operation) and an internal customer for other processes.
Levels of operations analysis 2. The operation
By treating internal customers with the same degree of care that is exercised on their external customers, the effectiveness of the whole operation can be improved.
Levels of operations analysis Levels of operations analysis 3. Processes
At the micro level we can consider that within individual processes, materials, information or customers will flow between individual staff and resources. This idea is called the hierarchy of operations. Hierarchy of operations is the idea that all operations processes are made up themselves of smaller operations process. Operations can also be considered as an activity
All functions manage processes and operations management is relevant for all functions within the organizations.
Operations characteristics (the 4 Vs)
Volume The level or rate of output from a process.
Variety The range of different products and services produced by a process.
Variation The degree to which the rate or level of output varies from a process over time
Visibility The amount of value-added activity that takes place in the presence (in reality or virtually) of the customer, also called customer contact.
Repeatability The extent to which an activity does not vary. Systemization The extent to which standard procedures are made explicit (explicit instructions on how each part of the job should be carried out)
How operations are different from each others ?
4 Vs - Implications
a local cafeteria vs. McDonald
Taxi agency vs. bus services
Retailer Vs e-biz
Summer resort hotel vs. a hotel in business center
4 Vs - Implications
All four dimensions have implications for the cost of creating the products or services : High volume, low variety, low variation and low visibility all help to
keep processing costs down. Low volume, high variety, high variation and high visibility generally
carry some of cost penalty for the operation. The position of an operation in the four dimensions is determined by the demand of the market it is serving.
Strategic role of operations function
Operations performance objectives
Productivity
Operations objectives improvement and trade offs
Operations strategy as a strategic reconciliation of market requirements with operations resources
Strategic role and objectives of operations
Key topics
Introduction
This can be better illustrated by the various perspectives and aspects of
performance, then by understanding how the operations performance can impact
the success of the whole organization.
In this section we will also examine how performance objectives trade off against
each other.
To understand the strategic
contribution of the operations function,
it is important to understand how we can
measure its performance.
Strategic Impact of effective operations
Operations can have a significant impact on strategic success and give
four types of advantage to the business :
Operations management can reduce costs
Operations management can increase revenue by increasing customer satisfaction through good quality and service;
Operations management can reduce the need for investment (Capital) by increasing the effective capacity of the operation and by being innovative in how it uses its physical resources
Operations management can enhance innovation : it can provide a basis for the future by building a solid base of operations skills and knowledge within the business.
• Mission
– The reason for existence for an organization
• Mission Statement – Answers the question “What business are we in?”
• Goals – Provide detail and scope of mission
• Strategies
– Methods and plans for achieving organizational goals
• Tactics – The methods and actions taken to accomplish strategies
Strategy - Reminder
Mission
Goals
Organizational Strategies
Functional Goals
Finance
Strategies
Marketing
Strategies
Operations
Strategies
Tactics Tactics Tactics
Operating
procedures
Operating
procedures
Operating
procedures
Strategy In an organization (top-down view)
The four perspectives of operations strategy
4 perspectives :
Top-down perspective
Bottom-up perspective
Market requirements
perspective
Operations resources
perspective
Slack & all
The 4 stage model of OM contribution to strategy
Operations can provides support for a differentiated strategy Operations serves as a firm’s distinctive competence in executing similar
strategies better than competitors
Slac
k &
all
Operations performance objectives
Quality * Being right
Speed Being Fast (throughput time)
Dependability** Being on Time
Flexibility*** Being able to change
Cost Being Productive Co
mp
etit
ive
ne
ss
Competitiveness : How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services .
Performance objectives
Providing error-free goods and services which are ‘fit for their purpose’ Quality
advantage.
Doing things fast, minimizing the time between a customer asking for goods or
services and the customer receiving them in full Speed advantage.
Doing things on time, so as to keep the delivery promises the company has made
dependability advantage.
To be able to vary or adapt the operation’s activities to cope with unexpected
circumstances or a change in business environment Flexibility advantage.
Doing things cheaply; that is, produce goods and services at a cost which enables
them to be priced appropriately for the market Cost advantage.
Performance objectives in practice
•Sony’s constant innovation of new products •HP computer’s ability to follow the PC market •Rayan Air No-frills service •Pizza hut’s five minute guarantee at lunchtime •FedEx’s “absolutely, positively on time” •Toyota •IBM’s after sales service on mainframe computers •Fidelity security’s broad line of mutual fund
Design/Flexibility
Volume
Cost
Dependability/Speed
Dependability
Quality conformance
After-sale service
Broad product line (V)
Cheaper
Faster Better
Examples Competitive priorities
Competitive advantage
Implications in terms of Strategic decisions
Products Supply
chain
Process
and
Technology
Capacity
Human
Resources Quality
Facilities
location
Sourcing Inventory
Improving the operations performance objectives
All performance objectives affect One important way to improve cost performance is to improve the
performance of the other operations objectives.
• High-quality operations do not waste time or effort.
• Fast operations reduce the level of in-process inventory between and within processes, as well as reducing administrative overheads.
• Dependable operations eliminate wasteful disruption and allows the other micro-operations to operate efficiently.
• Flexible operations adapt to changing circumstances quickly and without disrupting the rest of the operation.
Cost
Polar diagrams
Polar diagrams are used to indicate the
relative importance of each
performance objective to an operation
or process
They can also be used to indicate the
difference between different products
and services produced by an operation
or process
Productivity
Definition :
The measure that is most frequently used to indicate how successful an operation is productivity. Productivity is the ratio of what is produced by an operation to what is required to produce OR the ratio of output to input
Single-factor Productivity
Productivity = Units produced
Labor-hours used
= = 4 units / labor-hour 1,000
250
Example : Labor Productivity
One resource input single-factor (Partial) productivity
Multi-Factor Productivity
Output
Labor + Material + Energy + Capital + Miscellaneous
Productivity =
Also known as total factor productivity if it includes all the inputs involved in production
Output and inputs are often expressed in monetary units
Multiple resource inputs multi-factor productivity
Labor productivity - numerical application
Staff of 4 works 8 hrs/day 8 products/day
Payroll cost = $640/day Overhead = $400/day
Old System :
14 products/day Overhead = $800/day
New System :
8 products/day
32 labor-hrs =
Old labor productivity = .25 products/labor-hr
14 products/day
32 labor-hrs =
New labor productivity = .4375 products/labor-hr
M.F Productivity - numerical application
Staff of 4 works 8 hrs/day 8 products/day
Payroll cost = $640/day Overhead = $400/day
Old System:
14 titles/day Overhead = $800/day
New System:
8 products/day
$640 + 400
14 products/day
$640 + 800
= Old multifactor
productivity
= New multifactor
productivity
= .0077 products/dollar
= .0097 products/dollar
Change in Productivity
Change in Productivity:
(New Productivity – Old Productivity ) * 100 Old
In this case productivity was improved by 26%
Worked examples
The following information regarding the output produced and inputs consumed for a
particular time period for a particular company is given below:
Output = 10 000 Dh
Human input = 3 000 Dh
Material input = 2 000 Dh
Capital input = 3 000 Dh
Energy input = 1 000 Dh
Other misc. input = 500 Dh
The values are in terms of base year dirham value. Compute various productivity
Indices ( various single factors and total productivity).
Worked examples
SOLUTION:
1. Labour productivity = Output/Human input = 10 000/3 000 = 3.33
2. Capital productivity = Output/ Capital input = 10 000/ 3 000 = 3.33
3. Material productivity = Output / Material input = 10 000 /2 000 = 5
4. Energy productivity = Output/ Energy input = 10 000/ 1 000 = 10
5. Other misc. expenses = Output / Other misc. input = 10 000/ 500 = 20
6. Total productivity = Total output/Total input =
Total output (Human + Material + Capital + Energy + Other misc. input) =
10,000 / (3 000 + 2 000 + 3 000 +1 000 +500 )
= 10,000 / 9,500 = 1.053
SOLUTION
• During the first year, production is 160 kg
Productivity = Output/Input = 160/200 = 0.8
• For the second year, production is increased by 100%
Productivity = Output:/ Input = 320 / 420 = 0.76 (↓ -5%)
• For the third period, production is increased by 150%
Productivity = Output/Input = 400/400 = 1.0 (↑ 25%) From the above illustration it is clear that, for second period, though production has doubled, productivity has decreased by 5% . for the third period, production is increased by 150% and correspondingly productivity increased by 25%
Worked examples A company produces 160 kg of plastic moulded parts of acceptable quality by consuming 200 kg
of raw materials for a particular period. For the next period, the output is doubled (320 kg) by
consuming 420 kg of raw material and for a third period, the output is increased to 400 kg by
consuming 400 kg of raw material.
Calculate the productivity for each period and its change (reference = year 1)
Worked examples
Compute the multifactor productivity measure for an eight-hour day in which the usable output was 300 units, produced by three workers who used 600 pounds of materials. Workers have an hourly wage of $20, and material cost is $1 per pound. Overhead is 1.5 times labor cost.
Usable output
Labor cost + Material Cost+ Overhead cost
300 units
(3 workers X 8 h X $20/h) + (600 pounds X $1/pound) + (3workers X 8 hours X $20/hour X 1.5)
300 units
$480+ $600+ $720
1,67 units of output per dollar of input
MFP =
=
=
MFP =
A health club has two employees who work on lead generation. Each employee works 40
hours a week, and is paid $20 an hour. Each employee identifies an average of 400 possible
leads a week from a list of 8 000 names. Approximately 10 percent of the leads become
members and pay a one-time fee of $100. Material costs are $130 per week, and overhead
costs are $1 000 per week. Calculate the multifactor productivity for this operation in fees
generated per dollar of input.
Worked examples
MFP = (Possible leads)(N of workers)(Fee)(conversion percentage)
Labor cost + Material Cost + Overhead cost
(400)(2)($100)(0.10)
2(40)($20) + $130 + $ 1 000
$ 8 000
$ 2 730 = = = 2. 93
Improving the Productivity
One obvious way of improving an operation’s productivity is to reduce the cost of its inputs while maintaining the level of its outputs. This means reducing the costs of some or all of its transformed and transforming resource inputs.
Productivity can also be improved by making better use of the inputs to the operation
All operations are increasingly concerned with cutting out waste, whether it is waste of materials waste of staff time, or waste through the under-utilization of facilities. They are also concerned with reducing the impact of operations activities on the environment (EMS)
Efficiency and effectiveness
Efficiency : How well you do something ? Effectiveness : How useful it is ?
“Efficiency is doing things right, effectiveness is doing the right things.”
Doing the Right Things is More Important than doing things
right
Productivity is not Efficiency nor Effectiveness
Trade-offs between performance objectives
Improving one performance objective might only be achieved by sacrificing the performance of another. Two views of trade-offs: Repositioning performance objectives by trading off improvements in some objectives for a reduction in performance in others.
Increasing the ‘effectiveness’ by overcoming trade-offs so that improvements in one or more aspects can be achieved without any reduction in the of others.
Most businesses will adopt both approaches through the concept of the ‘efficient frontier’
Trade-offs and the efficient frontier (I)
Operations A, B, C, D have all chosen a different balance between variety and cost efficiency. • None is dominated by any other operation • Operation X, however, has an inferior performance because operation A is able to offer higher variety at the same level of cost efficiency and operation C offers the same variety but with better cost efficiency. • The convex line on which operations A, B, C and D lie is known as the ‘efficient frontier’.
Trade-offs and the efficient frontier (II)
Operations on the efficient frontier will generally also want to improve their operations effectiveness by overcoming the trade-off that is implicit in the efficient frontier curve. • Operation B can improve both its variety and its cost efficiency simultaneously and move to position B1 through operations improvements • This distinction between positioning on the efficient frontier and increasing operations effectiveness by extending the frontier is an important issue
• Any business must make clear the extent to which it is expecting the operation to reposition itself in terms of its performance objectives and the extent to which it is expecting the operation to improve its effectiveness.
Operations strategy as a strategic reconciliation of market requirements with operations resources
Further reading*
• Michael E. Porter, «What Is Strategy?» Excerpt from ‘What is Strategy’ by Michael E. Porter, Nov/Dec 1996, Harvard Business School Publishing Corporation
• David Walters, «Marketing and operations management:
an integrated approach to new ways of delivering value » Department of Business, School of Economic and Financial Studies, Macquarie University, Australia (*) Document available on the PSI
