Operations Management

Chapter 7

Dr. Rajesh Ramchunder

 Study Objectives
• Define the term “transformation process”
• Describe the nature of the transformation process
• Define manufacturing and service operation
• Discuss and differentiate between the manufacturing and service
industries
• Discuss and explain the operation design process
• Discuss the different means of defining and measuring capacity
• Explain the importance of capacity planning
• Explain what a flexible manufacturing system (FMS) is
• Explain and discuss the term just-in-time (JIT)
• Discuss the goals of the JIT system
• Discuss all the JIT building blocks
• Discuss the benefit of the JIT system
• Define and discuss inventory
• Define the term productivity
• Discuss the different ways of improving productivity.
•
Introduction
Organisations in the same area of business often compete for the
same customers. Competition will determine whether an
organisation will flourish, just make ends meet or declare
bankruptcy. The following are the external & internal competitive
factors:
• Internal competitive factors
– Determine the desires and requirement of the customers
– Price of the product
– Marketing and promotions
• External competitive factors
– New designs of product or service
– Cost of manufacturing should not outstrip the price for product
– Location
– Quality
– Speedy reaction
– Elasticity – speed organisation react to change
– Inventory management
– Supply chain management
– After sale service
– Management and staff members
 What Is Operations
Management?
Production is the creation of goods
and services
Operations management (OM) is
the set of activities that create value
in the form of goods and services by
transforming inputs into outputs
Transformation Process
Examples of Transformation processes
Operation Input Transformation Output
Process
Hospital Doctors Beds Test results
Nurses Medicine Healthy patient
Patient Operation Research
Canned goods Fresh foodstuff Prepare the food Canned goods
Machine Can and cook the
Other equipment food
Labor
Police Offices Prevent crime Lawful society
Crime information Solve crime Public feel safe
Public Arrest criminals
Computer
Food store Foodstuffs for sale Display goods Goods and
Staff Give advice customers are
Cash register Sell goods brought together
Customer
Difference between the Product and Service
Industries

• Product • Services
• Tangible product • Intangible product
• Product can be • Product cannot be
inventoried inventoried
• Low customer contact • High customer contact
• Longer response time • Short response time
• Capital intensive • Labor intensive
 Operations Design
The following guideline can be used when new product or
service is designed
❑ Determine the target market and cost associated with the
design
❑ Keep operations and part necessary to manufacture the new
product to a minimum
❑ Focus on what customer require
❑ Design the product/service for process capability
❑ Standard procedures, material and processes must be put
into place to ensure easy manufacturability
❑ Design the product/service for ease of use
❑ Design the new product so that it can be assembled and
disassembled with ease
❑ Design for straight-line assembly
❑ Avoid special features
❑ Make design robust
❑ Take legal issues and product liability into account
❑ Take environmental issues into account.
 Capacity Planning

❑Capacity is the upper limit that an operation can

handle.
❑Capacity Planning – Maximum use of resources
to produce goods in a given time frame.
❑The basic questions in capacity handling are:
❑What kind of capacity is needed?
❑How much is needed?
❑When is it needed?
 The objectives of capacity planning
o The balance struck between capacity and demand will
influence the cost structure
o The balance struck between capacity and demand will
influence revenue
o If finished goods are manufactured for stock, then
working capital will be tied up
o Large fluctuation in demand may cause quality
problem
o Enhancement of the speed at which a customer’s
order can be filled may cause stock/inventory
problems
o The closer the demands are to the available capacity,
the more dependable the supply of goods will be.
Factors that influence Availability of Production
Capacity
o Process design
o Product design
o Product variety
o Product quality
o Production scheduling
o Material management
o Equipment maintenance
o People management
 Capacity Measurement
❑Design capacity
❑Maximum obtainable output
❑Effective capacity, expected variations
❑Maximum capacity subject to planned and expected
variations such as maintenance, coffee breaks,
scheduling conflicts.
❑Actual output, unexpected variations and demand
❑Rate of output actually achieved--cannot exceed effective
capacity. It is subject to random disruptions: machine
break down, absenteeism, material shortages and most
importantly the demand.
 Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

This definition of efficiency is not used very much Utilization is more important.
 Efficiency/Utilisation Example
for a Trucking Company
❑ Design capacity = 50 trucks/day available
❑ Effective capacity = 40 trucks/day, because 20% of truck
capacity goes through planned maintenance
❑ Actual output = 36 trucks/day, 3 trucks delayed at
maintenance, 1 had a flat tire

Actual Output 36 units / day

Efficiency = = = 90 %
Effective Capacity 40 units / day
Actual Output 36 units / day
Utilizatio n = = = 72 %
Design Capacity 50 units / day
 Determinants of Effective Capacity

❑ Facilities - layout of facilities

❑ Products or services – product/service mixes

❑ Processes – quality of processes

❑ Human considerations – motivation of staff

❑ Operations - scheduling and synchronization problems

❑ Supply Chain factors - material shortages

❑ External forces - regulations

 Flexible Manufacturing Systems (FMS)
o Any manufacturing company that wants to be at the
forefront of its industry will have to seriously consider
using flexible manufacturing systems.
o An FMS is characterized by the following features:
o An automated loading mechanism loads and unload material
and tools
o Tool changes can take place at two machines simultaneously
o A tool storage and changing system will be found at each of the
machine
o An automated material-handling system moves materials
when required
o At each machine, the materials will be automatically loaded
and stacked when completed or waiting to be loaded
o A computer programme controls the complete FMS
 Advantages of FMS
o Labour costs can be reduced significantly
o Better quality product can be produced
o The flexibility and efficiency of automation is combined
in and FMS
o Eliminate the need for jobs to be moved between
machines or work center by hand
o Lower capital investment
o Saving in machinery set-up times can be achieved
o Almost no work-in-process is retained
o Being able to program the machine means that a once-
off unique job can be done without affecting the
efficiency of that machine
o The machines in a group can be reprogrammed at
random, without affecting capacity, quality or efficiency
 Disadvantages of FMS
o An FMS can handle only narrow range of
products
o Given the narrow range, only products that
use the same machine can be manufactured
by an FMS
o Much longer planning and development times
are needed, given the complexity of the
machines involved.
o Before management decides to implement
and FMS, a thorough investigation must be
done into whether such an undertaking will
be viable.
 Just-in-Time
❑JIT philosophy means getting the right quantity of
goods at the right place and the right time
❑JIT exceeds the concept of inventory reduction; it is
an all-encompassing philosophy geared to eliminate
waste, anything that does not add value
❑A broad JIT view – or lean production/lean systems -
is one that encompasses the entire organization
 Benefits of JIT
• Reduction in inventories
• Improved quality
• Reduced space requirements
• Shorter lead times
• Lower production costs
• Increased productivity
• Increased machine utilization
• Greater flexibility
In order to become a world-class company it is fundamentally
important to eliminate and to avoid all 7 types of waste in
manufacturing and also in service processes:
❑ Overproduction arises when the company is producing more
than the customer really requires
❑ Inventory waste : Inventory is the quantity of items on stock,
which are required to manufacture a product. These goods also
cause costs to the company. When they are not used they utilize
valuable warehouse space, may become obsolete and may require
raw materials, which cannot be used for more important goods
❑ Defects (scrap, rework): Rework is required when products and
components are defective or damaged and they have to be
reworked
❑ Waiting time
❑ (Unnecessary) Transportation
❑ (Unnecessary) Motion
❑ Over-processing : It can also mean producing products of a
higher quality than required.
 Inventory Management

Inventory is the raw materials, component

parts, work-in-process, or finished products
that are held at a location in the supply chain.

The objective of inventory management is

to strike a balance between inventory
investment and customer service
 Types of Inventory
❑ Raw material
❑ Purchased but not processed
❑ Work-in-process
❑ Undergone some change but not completed
❑ A function of cycle time for a product
❑ Maintenance/repair/operating (MRO)
❑ Necessary to keep machinery and processes
productive
❑ Finished goods
❑ Completed product awaiting shipment
 Relevant Inventory Costs
Item Cost Cost per item plus any other direct costs
associated with getting the item to the plant

Holding Capital, storage, and risk cost typically stated as

Costs a % of the unit value,
e.g. 15-25%

Ordering Fixed, constant dollar amount incurred for each

Cost order placed

Shortage Loss of customer goodwill, back order handling,

Costs and lost sales
 Productivity

Units produced
Productivity =
Input used

❑ Measure of process improvement

❑ Represents output relative to input
❑ Only through productivity increases
can our standard of living improve
 Productivity Calculations
Labour Productivity
Units produced
Productivity =
Labor-hours used

1,000
= = 4 units/labor-hour
250

One resource input  single-factor productivity

 Multi-Factor Productivity
Output
Productivity =
Labor + Material + Energy
+ Capital + Miscellaneous

❑ Also known as total factor productivity

Multiple resource inputs  multi-factor productivity

Productivity measures are useful for
❑ Tracking an operating unit’s performance
over time
❑ Judging the performance of an entire industry
or country
 Calculating Productivity
• 6 bricklayers laid 900m2 of bricks in one 8-hour
shift. Calculate productivity in terms of m2 of
bricks laid per hour per bricklayer
• The total production run for a machine in a
12-hour shift is 16000 items. Out of the total
production run, only 12650 items can be used.
Calculate the productivity in terms of items
produced per hour worked.
 Why Productivity Matters
❑High productivity is linked to higher standards of
living
❑As an economy replaces manufacturing jobs with lower
productivity service jobs, it is more difficult to maintain high
standards of living
❑Higher productivity relative to the competition
leads to competitive advantage in the marketplace
❑Pricing and profit effects
❑For an industry, high relative productivity makes
it less likely it will be supplanted by foreign
industry
 Key Steps for Improving Productivity
❑Develop productivity measures for all operations
❑Determine critical (bottleneck) operations
❑Develop methods for productivity improvements
❑Establish reasonable goals
❑Get management support (make it clear that
management supports and encourages productivity
improvements.)
❑Measure and publicize improvements
❑Invest on labor force by training and education