Introduction to operations
management
April 2005
What Are SMEs?
It is very difficult to say when a company is small, medium or large. The first problem is to
decide on the variables. The second problem is to decide the range of values.
According to my experience, the table below shows widely agreed values:
Turnover (ML of €) N° of employees
Small <=20 <=100
Medium >20 and <=50 >100 <=300
Large >50 and <=250 >300 and <=1000
Very Large >250 >1000
2
Exercise 01-01:
Draw a functional organization chart identifying for each position the main goals and activities.
3
Functional Organization Chart
The Organization Chart of a SME might be either similar or different from this.
In many cases, there is no official organization chart. Practice rather than rules tell people what
to do. Roles and objectives are often not clear.
Entrepr./CEO
R&D Sales Logistics Production Purchasing Finance
New product Distribution channel Goods receiving and Shop-floor control Selection Invoicing
design management accepting Machine and Quotation Accounting
New product Negotiation Warehouse stocking equipment Negotiation Tax calculation
engineering Meetings with and picking maintenance Meetings with Statistics
Changes to customers, sales men, Inventory checking Quality control suppliers Payroll
existing products distributors Planning Order entry Payments to: sales
Technical data Price lists Order promising Expediting men, suppliers,
creation and Catalogues Work order Paper checking personnel, PA
modification Order entry Delivery Customer Payments
Order promising and credit control
Invoicing and other Cash flow
documents Balance sheet and
Delivery profit and loss account
IT
4
Objectives
Objectives are sometimes conflicting.
The sales department objective is to maintain and increase revenues. That is why it must provide the best
customer service possible.
To maintain high inventories, so that goods are available at any time
To interrupt the production run, so that a non-stored item can be manufatured quickly
To create an extensive and costly distribution system, so that goods can be shipped rapidly
Finance must keep investment and costs low
To reduce inventories, investment being the least possible
To manufacture upon customer order only
To produce large quantities by using large production runs
Production must keep its operating costs as low as possible
To make long production runs of relatively few products
To keep the raw material inventory and work-in-process levels as high as possible, so as not to
cause production interruptions / stoppages
5
Standard Product Order Processing
ACTIVITIES OFFICES
Order Acquisition Sales office
Order entry Sales office (Customer service)
Credit control Sales office / Finance
Order confirmation (delivery time) Production planning/logistics
Manufacturing Production
Delivery Sales office / Logistics
Invoicing Finance / Sales office
Accounts Receivable control Finance
Collection Finance
In this example an order for a standard product goes through 6 departments.
Whenever a problem occurs or a customer asks for information about the status of an order, the
order may be hard to track and the information provided might be incorrect.
The lack of cooperation and coordination may cause problems, delays and can lower customer
satisfaction.
6
Job Processing
ACTIVITIES OFFICES
Customer requirements (offer request) Agent
(Technical) feasibility analysis Sales office
Offer (with quotation) Agent/Sales office
Negotiation Agent /sales office • In this example of Job
Offer acceptance Customer Processing, there are 11
Order entry Customer service departments involved.
Credit control Customer service / Finance • If there is no project
Order confirmation (delivery time) Production planning leader, conflicts and
Product Design R & D or technical design delays are possibly at
Bill of materials Technical design each of the process
Routing Industrial engineering phases.
Manufacturing instructions Industrial engineering • The information flow can
Purchasing Purchase department move slowly.
Manufacturing Production
• The delivery lead time
Delivery Logistics
may be very long.
Invoicing Finance / sales office
Accounts Receivable control Finance
Collection Finance
Job costing Cost accounting
7
Traditional Organization vs. Process Organization
Customers do not care about the company’s organization or if there are different departments
with different objectives.
Customers want quality, service, and fair prices.
Therefore, we need to re-consider the traditional organization and design an organization based
on processes.
“By the term “process” we mean:
a group of resources and activities which add value for the customer
by turning specific inputs into outputs”
8
Processes
Inputs to the process
Transformed resources
Transforming resources
Within the process
Materials processing
Information processing
Outputs from the process
Product
Service
The process hierarchy
Within operations there are other operations (think about operations management!)
Internal customer and internal supplier
Business process reengineering
9
Logistics, Supply Chain, Materials and
Operations Management
To manage related processes and balance conflicting objectives, some kind of integrated material management or
logistics is required to manage supply, production and distribution.
Rather than having the planning and control of these functions spread among sales, production and distribution
departments, they should be put under a single area of responsibility.
Material management is a coordinated function, responsible for the material flow planning and control. Its
objectives can be summarized as:
1. Maximization of the use of corporate resources (labor, equipment, machines, materials, etc.)
2. Optimization of customer service.
(Tony Arnold – Introduction to Materials Management)
Other terms for material management are: logistics, supply chain or operations management.
Operations management comprises all the activities necessary for the day-to-day fulfillment of customer
requests. This includes both the sourcing (of products & services) from suppliers and the transportation (of
products & services) to customers.
(Nigel Slack – Operations Management)
10
The Supply Chain, Operations Management
Concept (1)
Raw Raw Finished good
Manufacturing Market
material supply material storage storage
warehouse
storage
Plant
warehouse
storage
Plant
warehouse
storage
Inbound Logsitics Internal Logsitics Outbound Logistics
11
The Supply Chain, Operations Management
Concept (2)
WH WH Distribution
Supplier Factory Customers
RM FP System
Physical Supply Manufacturing Planning and Physical Distribution
Control
DOMINANT FLOW OF PRODUCTS AND SERVICES
DOMINANT FLOW OF DEMAND AND DESIGN INFORMATION
RECOVERY, RECYCLING AND REUSE OF MATERIAL
12
The Supply Chain, Operations Management
Concept (3)
Plan
Plan
Suppliers Source Make Deliver Customers
Enablers
13
The 4 Fundamental Processes of Operations
Management
Processes Definitions
These processes balance demand and supply by implementing
Plan actions which are consistent with the company’s rules and
targets.
These processes provide goods and services that are necessary
Source to meet demand – either real or planned.
These processes transform raw materials into finished products
Make to satisfy demand – either real or planned.
Deliver These processes supply finished products and services to satisfy
demand – either real or planned.
14
Plan (1)
Processes that balance supply and demand by implementing the
actions which are most consistent with the company’s rules and
targets.
Demand planning
– Market needs, forecasting, …..
Plan Supply chain resource planning
– supply-chain physical configuration,
– Make-or-buy decisions,
– Manufacturing planning.
– Inventory management
– Distribution requirement planning.
15
Plan (2)
PLAN
Demand Planning Supply Chain Resource Planning
New Inven
Supply
Product Event tory
Forecasti Chain Manufacturi
Demand Plannin Etc. man Etc.
ng configurati ng Planning
Planning g age
on
ment
16
Source (1)
Processes that provide goods and services that are necessary to
meet the demand – either real or planned.
Procurement of resources
– Purchasing, receiving, inspecting, storing, etc.
Source Management of suppliers
– Supplier selection and assessment,
management of the quality of supplies,
negotiation with suppliers.
17
Source (2)
SOURCE
Management of Suppliers Procurement of resources
Material Physical
Supplier Negotiation
Etc. Order Cycle Materials
Selection with suppliers
Management Management
18
Make (1)
Processes that transform raw materials into finished products to satisfy
the demand – either real or planned.
Production activity control (PAC)
Make – Scheduling, manufacturing and testing,
releasing finished products
Manufacturing system design
19
Make (2)
MAKE
Design of the manufacturing system PAC
Scheduling,
Manufacturing
Fabrication,
system and Etc. Etc. Etc. assembly,
structure
packaging
20
Deliver (1)
Processes that supply finished products and services to satisfy
demand – either real or planned.
Customer service management
– Order entry, customer DB creation and updating , price
list DB updating, credit management, invoicing.
Distribution management
Deliver – Warehouse and distribution center management
– Transportation management
21
Deliver (2)
DELIVER
Distribution Management Customer Service Management
Customer Order
Warehouse Cycle Etc.
Transport
Management Management
22
Supporting Processes
ENABLERS
Manageme Product
Environmen Organizati
Strategy nt developme IT Quality
t on
control nt
23
Operations Management at a Glance
Manufacturing Planning and Control (Plan and Make)
Demand planning
Production planning
Inventory management
PAC
Purchasing and Physical Supply (Source)
Purchasing Order management
Management of suppliers
Physical Distribution (Deliver)
Manufacturing System Design
Customer Order management
(Plan and Make)
Warehouse and distribution center
management Supply chain configuration
Transportation Manufacturing System
24
Manufacturing Planning and Control
Order processing Demand planning Inventories
Goal
RP & RCCP PP
FRONT END
MPS
Bill of materials & Actual
work routings
MRP
CRP ENGINE
BACK END
PAC PO
25
A Process-Oriented Organization Chart
A good example of process-oriented organization chart in SMEs:
Entrepr./CEO
HR QU.E.S.
R&D Sales Operations Finance
R&D Customer assistance Planning Acconting
Customer service
Design Sales office Finance
Purchasing
Industrial Engineering Marketing P.A.C.
Management Control
Warehouse Management
Delivery
Maintenance
26
Exercise 01-02:
On which part of a company income statement does Operations Management have an
impact?
27
Operations Management and Income Statement
Revenues
Cost of goods sold
Direct material
Direct labor
Materials
Factory overheads
Management
Gross profit
Distribution costs
75% of total cost?
Commercial costs
General and Administrative
expenses
R & D expenses
EBIT
Direct material and labor increase or decrease depending on the quantity sold.
“Overhead” does not directly vary with sales (equipment and machinery depreciation, indirect
labor, indirect material, energy and fuels, etc.).
Distribution costs: transportation, personnel, depreciation, etc.
28
Exercise 01-03:
Sales 1,000,000
Cost of Goods Sold 840,000
Material 450,000
Labor 190,000
Overhead 200,000
Gross profit 160,000
What will be the improvement of profit if, through a well-organized operations Functions,
direct material is reduced by 5%?
How much would have sales increase to get the same increase in profit?
29
Operations Management and ERP Systems
Budget and Reporting DEFINITION
Budget
Budgetand
and Reporting
Reporting
Extended ERP
Apics dictionary defines ERP as: an
accounting oriented information system
for identyfing and planning the
enterprise.
Usually ERP are divided into modules
Manufacturing
Sales
Manufacturing Sales
MRP II
MRP I ERP
NAMES
SAP
JD Edwards
Finance
Finance Oracle Applications
Finance
ERP Baan
ERP National Champions?
30
Operations Management and Innovation
Management
R
&
D
De
sig
n
I
En ndu
gi st
ne ri
er al Plan
in Plan
g
Suppliers Source Make Deliver Customers
Enablers
31
References
Introduction to Operations Management – Slides.
Introduction to Materials Management, Tony Arnold – Chapters 1 and 2.
Operations Management, Nigel Slack – Chapters 1 and 2.
32
