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OMG 402 - Operations ManagementSpring 1997

CLASS 1: INTRODUCTION

Harry Groenevelt

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Agenda

• What is Operations Management?Why do we study it?

• Getting started: Process Analysis– process diagrams– first definitions and a fundamental relationship

• OMG 402 format and logistics

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INPUTS:

- Labor

- Management

- Equipment

- Materials

- Energy

- Information

- Customer Participation

PRODUCTION

PROCESS

OUTPUTS:

- PhysicalProducts

- Services

What is Operations Management?

Definition 1: the study of processes which convert inputs into outputs

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What is Operations Management?

Definition 2: A set of quantitative tools to– purchase and manage materials– schedule resources– distribute goods– design production processes– locate facilities– monitor and control quality– and more...

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What is Operations Management?

Definition 3: A set of quantitative and qualitative tools to– understand the ‘physics’ of service and

manufacturing systems– measure operational performance– manage for competitiveness

(cost, quality, flexibility, time)

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Why Do We Need to Understand Operations Management?

• Because the function of operations is to implement firm strategy.

Example 1: The Custom Foot shoe store, “custom footwear at off-the-rack prices” (see NYT article, 3/20/96)

An example of mass customization.

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in-store computerscans customer foot

data transmitted to factories in Italy

shoe producedto specifications

customer receives shoe within a

guaranteed time.

shoes delivered directly to customer

Why Do We Need to Understand Operations Management?Example: Custom Foot

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Operations at Custom Foot

• A burning question for investors, executives

and managers of Custom Foot:

What should be the promised lead time from customer order to delivery?

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Firm Strategy Operations

Operations at Custom Foot

• lead time is crucial to strategy.

• lead time interacts with:– capacity– inventory– cost

Custom Foot promised a two week lead time.Sounds good. But will they deliver?

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Why Do We Need to Understand Operations Management?

Other examples in your packet:

• American Standard: streamlining manufacturing operations and increasing flexibility brings enormous growth.

• American Airlines: preserving service quality in the face of massive system disruptions.

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Why Do We Need to Understand Operations Management?

A final example from Boeing:

“By early 1998 Boeing aims to double monthly production … ”

(Business Week, 9/30/96)

We will discuss the consequences of this.

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we’ll use aircraft assembly as an example:

Getting started: Process Analysis

1. defining a process - flow of materials and information.

2. a few definitions and a fundamental relationship in process flow.

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task: value added

flow: geographical or virtual movement

storage: time spent doing neither of the above

cockpitinstall

note: level of detail will depend on the purpose of the diagram!

Process Diagram: Define Material Flow

buffer

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information conveys who, what, where, when, how..

Examples:

Information storage:

routing slip order form

CADdata

credithistory

database

Process Diagram: Information Flow

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Process Analysis: A Few Definitions

throughput: the output of a production process per unit time (in aircraft/month, patients/hour, $/year).

Sometimes also called flow or ‘’.

stock: the inventory between the start and end of the process (in aircraft, patients, dollars). Sometimes also called number in system or work in process (WIP) or ‘L’.

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Process Analysis: A Few Definitions

lead time: time from entry into the system until exit from the system (in months, hours, years). Sometimes also called time in system or flow time or cycle time or ‘W’.

raw process time: time necessary to complete actual work. Or, time for one unit of the product to traverse an otherwise empty system.

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throughput = aircraft/month

parts for one aircraft

stock = number of aircraft in process

lead time = months from entrance to exit

processing

movement

storage

question: will raw processing time = lead time?

The Boeing Production Line

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John D.C. Little at MIT gave the first mathematical proof of the ‘law’ in 1961.

Process Analysis A Fundamental Relationship

Little’s Law:(average stock) = (average throughput)*(average lead time)

Warning: Little’s Law will apply to any process as long as:– consistent units are used.

– long-term averages are used (during the observation period we take a large ‘sample’ and most of what has come in has also gone out).

– consistent flows are measured (more on this later).

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Process Analysis: Little’s Law Example

(average stock) = (average throughput)*(average lead time)

At Boeing,avg. throughput = 5 aircraft/month, avg. lead time = 2 months

avg. stock = ______

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Little’s Lawand Boeing aircraft assembly

(average stock) = (average throughput)*(average lead time)

This time, measure ‘stock’ as the value of materials instead of aircraft.

Given: - $100 million/month cost of materials in aircraft sold

- 2 months production/aircraft

Question: What should be the current value of material WIP? Will it be exactly this?

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Little’s Law and Boeing aircraft assembly

Boeing plans to double throughput.

• What happens to WIP if lead time stays constant? What are the consequences?

• Can Boeing expect to hold lead time constant?

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creditcheck

loanapproval

outstanding requests ($) = _________________________

x ________________________

producecontract& sign

loan applications ($/month)

loans signed ($/month)

loans refused($/month)

Little’s Law,A loan processing example

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Other applications of Little’s Law

stock = throughput * lead time

Loanprocessing

Outstanding.Requests ($)

= *

Bond trading = *Order-to-

confirm time(minutes)

Correctionalfacility

# inmates = *

Supply chain =Annual cost of

goods sold($/yr)

*

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Final Words on Little’s Law

• Given two of the fundamental quantities (stock, throughput, lead time), can always find the third.

• Little’s Law is a valuable ‘back-of-the-envelope’ tool for estimating and fact-checking.

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Final Words on Little’s Law

• Some questions:– How do we predict system performance? Given

one fundamental quantity, how do we find the other two?

– How do we improve system performance? Can we increase throughput while decreasing WIP and lead times?

• To answer, we’ll need to discuss capacity and variability.

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Structure of OMG 402

• The ‘physics’ and measurement of production and service systems (weeks 1-3)

• Managing production (weeks 4-7)

• Logistics and supply chain management (weeks 7-8)

• Developing and distributing new products and services (weeks 8-9)

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Course Logistics

• Cases Packet• Handouts – many on the Simon fileserver or

Course web site• The Goal – used throughout the next few weeks• “K&R” – suggested reading• Labs – a time for careful problem-solving• Teaching Assistants and Office Hours• Feedback

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Course Logistics

• Class requirements– Team exercises (20%)– Individual exercises (20%)*– Case discussion (ungraded, but…)– Midterm exam (25%)– Final exam (35%)

* for each individual exercise, a subset of the problems will be selected randomly for grading.

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Course Logistics

• First Written Assignment is a Field Study– Short description (1/2 page maximum)– process flow diagram – statistics gathered– questions answered

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Conclusion

The Goals of OMG402

• Understand relationships between operations and firm success, operations and other functional areas;

• Acquire the knowledge and skills that are vital to the operations manager;

• Apply knowledge and skills to cutting-edge problems in services and manufacturing.