the definitive guide and service...

THE DEFINITIVE GUIDE TO MANUFACTURING

AND SERVICE OPERATIONS

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THE DEFINITIVE GUIDE TO MANUFACTURING

AND SERVICE OPERATIONSMASTER THE STRATEGIES AND

TACTICS FOR PLANNING, ORGANIZING, AND MANAGING HOW PRODUCTS AND SERVICES

ARE PRODUCEDCouncil of Supply Chain

Management Professionals and

Nada Sanders, Ph.D., Lehigh University

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Vice President, Publisher: Tim MooreAssociate Publisher and Director of Marketing: Amy NeidlingerExecutive Editor: Jeanne Glasser LevineConsulting Editor: Chad AutryOperations Specialist: Jodi KemperCover Designer: Chuti PrasertsithManaging Editor: Kristy HartSenior Project Editor: Betsy GratnerCopy Editor: Geneil BreezeProofreader: Debbie WilliamsIndexer: Lisa StumpfSenior Compositor: Gloria SchurickManufacturing Buyer: Dan Uhrig© 2014 by Council of Supply Chain Management ProfessionalsPublished by Pearson Education, Inc.Upper Saddle River, New Jersey 07458For information about buying this title in bulk quantities, or for special sales opportunities (which may include electronic versions; custom cover designs; and content particular to your business, training goals, marketing focus, or branding interests), please contact our corporate sales department at [email protected] or (800) 382-3419.For government sales inquiries, please contact [email protected]. For questions about sales outside the U.S., please contact [email protected]. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners.All rights reserved. No part of this book may be reproduced, in any form or by any means, without permission in writing from the publisher.Printed in the United States of AmericaFirst Printing December 2013ISBN-10: 0-13-343864-3ISBN-13: 978-0-13-343864-2Pearson Education LTD.Pearson Education Australia PTY, LimitedPearson Education Singapore, Pte. Ltd.Pearson Education Asia, Ltd.Pearson Education Canada, Ltd.Pearson Educación de Mexico, S.A. de C.V. Pearson Education—JapanPearson Education Malaysia, Pte. Ltd.Library of Congress Control Number: 2013951242

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Dedicated to all students who want to learn how the “engine of business” works.

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vii

CONTENTS Preface ........................................................................................ xiv

1 Operations Management Defined ............................................... 1Defining Operations Management ...........................................................1

The Transformation Role of Operations Management ....................2Differences in Manufacturing Versus Service Operations ...............3The Role of Manufacturing and Service Operations in the Organization and Supply Chain ...........................................................4

Organizational Decision Levels .................................................................5Key Terminology .........................................................................................6Critical Processes .........................................................................................8

Production Planning Processes ............................................................8Master Production Schedule (MPS) ................................................. 10Material Requirements Planning (MRP) ......................................... 10Rough Cut Capacity Planning (RCCP) ............................................ 10

Measuring Productivity Levels ............................................................... 11Inventory Determination ........................................................................ 13

Reasons for Carrying Inventory ........................................................ 13Types of Inventory .............................................................................. 15

Inventory Policy Choices ........................................................................ 16Fixed-Order Quantity System ........................................................... 16Fixed-Time Period System ................................................................. 17

Inventory Policy in a Fixed-Order Quantity System .......................... 19How Much to Order? .......................................................................... 19When to Order? ................................................................................... 21

Independent Versus Dependent Demand ............................................ 22ABC Inventory Classification ................................................................. 23Vendor Managed Inventory (VMI) ....................................................... 25Challenges Facing the Modern Operations Manager ......................... 25Discussion Questions .............................................................................. 26Endnote ..................................................................................................... 27

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viii THE DEFINITVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS

2 Key Elements and Processes ...................................................... 29Levels of Planning Decisions .................................................................. 29Strategic Versus Tactical Operations Decisions .................................. 31Production Planning................................................................................ 31

Different Types of Production Plans ................................................ 33Facility Requirements Planning ........................................................ 34

Resource Planning ................................................................................... 35Master Production Scheduling (MPS) ............................................. 35Material Requirements Planning (MRP) ......................................... 35Rough Cut Capacity Planning (RCCP) ............................................ 37

Scheduling Work ...................................................................................... 37High-Volume Operations .................................................................. 38Low-Volume Operations.................................................................... 38Sequencing Jobs ................................................................................... 39

Total Quality Management (TQM) ....................................................... 41Statistical Process Control (SPC): Process Capability and Control Charts ......................................................................................................... 44

Variation ............................................................................................... 45Process Capability ............................................................................... 45Process Control Charts ....................................................................... 48

Six Sigma ................................................................................................... 49Six Sigma Methodology ........................................................................... 50ISO Standards ........................................................................................... 51Theory of Constraints (TOC) ................................................................. 52The 5S ........................................................................................................ 54Discussion Questions .............................................................................. 55

3 Understanding Operations Strategies ...................................... 57What Operations Strategy Is and Why It Is Important ...................... 57Strategic Alignment ................................................................................. 58Competitive Priorities ............................................................................. 59

Cost ........................................................................................................ 61Quality .................................................................................................. 61

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ixContents

Time ...................................................................................................... 62Flexibility .............................................................................................. 63Operations Structure and Infrastructure ......................................... 63Order Winners and Order Qualifiers ............................................... 64

Process Strategy ........................................................................................ 65Intermittent Processes ........................................................................ 65Repetitive Processes ............................................................................ 66The Product-Process Matrix .............................................................. 66

Types of Operations Processes ............................................................... 68Facility Layout Strategies ........................................................................ 70

Fixed Position Layout ......................................................................... 70Process Layout ..................................................................................... 70Product Layout .................................................................................... 71Cellular Layouts ................................................................................... 72

Line Balancing .......................................................................................... 73Step 1: Identify Task Times and Precedence Relationships .......... 73Step 2: Determine Cycle Time ........................................................... 74Step 3: Assign Tasks to Workstation ................................................ 74Step 4: Compute Efficiency ................................................................ 74

Inventory Positioning Strategy ............................................................... 75Make-to-Order .................................................................................... 76Make-to-Stock ..................................................................................... 76Assemble-to-Order ............................................................................. 77

Comparing Inventory Positioning Strategies ....................................... 77Outsourcing Strategy ............................................................................... 79Outsourcing Versus Vertical Integration ............................................. 80Discussion Questions .............................................................................. 81Endnote ..................................................................................................... 82

4 Role of Technology in Managing Operations .......................... 83The Role of Technology .......................................................................... 83Types of Operations Technologies ........................................................ 84

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x THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS

Enterprise Resource Planning (ERP) .................................................... 85Evolution of ERP ...................................................................................... 86

Pre-Enterprise Resource Planning Software ................................... 87Real-Time Processing ......................................................................... 87Focus of Systems .................................................................................. 88

Benefits of ERP ......................................................................................... 89The Planning Capabilities of ERP .......................................................... 90

Step 1: Strategic Business Planning ................................................... 91Step 2: Production Planning .............................................................. 91Step 3: Master Production Schedule (MPS) .................................... 91Step 4: Materials Requirements Planning (MRP) ........................... 92Step 5: Capacity Requirements Planning (CRP) ............................. 92Step 6: Operations Execution and Control ...................................... 92

Two-Tier ERP ........................................................................................... 93Shortcomings of ERP Software .............................................................. 94Successful ERP Implementation ............................................................ 95

Step 1: Determine Technical Requirements .................................... 96Step 2: Software Installation ............................................................... 97Step 3: Data Cleaning .......................................................................... 97Step 4: Testing ...................................................................................... 97Step 5: Employee Training ................................................................. 97Step 6: Run Pilot .................................................................................. 98

Other Information Technologies ........................................................... 98Global Positioning Systems (GPS) .................................................... 98Radio Frequency Identification (RFID) ........................................... 99

Advantages and Disadvantages of Automation ................................. 100Automated Material Handling ............................................................. 101Flexible Manufacturing Systems (FMS) .............................................. 101Robotics ................................................................................................... 102E-Manufacturing .................................................................................... 103

Computer-Aided Design (CAD) ..................................................... 103Computer-Integrated Manufacturing (CIM) ................................ 104

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xi Contents

Emerging Technologies ......................................................................... 1043D Printing ......................................................................................... 104Responsive Web Design ................................................................... 105Small Data .......................................................................................... 106

Discussion Questions ............................................................................ 107

5 Understanding the Role of Global Operations in the Modern Marketplace ................................................................ 109

Benefits of Global Operations .............................................................. 111Factors Impacting Global Operations ............................................ 112

Challenges to Global Operations ......................................................... 114The Global Consumer ...................................................................... 115Global Versus Local Marketing ....................................................... 115Cultural Challenge ............................................................................ 116

Global Infrastructure Design ................................................................ 117Labor ................................................................................................... 117Transportation ................................................................................... 117Suppliers ............................................................................................. 118Importance of Technology ............................................................... 118

Cost Considerations............................................................................... 119Hidden Costs...................................................................................... 119Noncost Considerations ................................................................... 121The Reshoring Trend ........................................................................ 122

Importance of Total Cost of Ownership (TCO) ................................ 123Cost of Goods Sold or Landed Cost ................................................ 124Other “Hard” Costs ........................................................................... 124Potential Risk-Related Costs ............................................................ 126Strategic Costs .................................................................................... 127Environmental Costs ........................................................................ 128

The Role of Political and Economic Factors ...................................... 128Exchange Rate Fluctuations .................................................................. 130Regional Trade Agreements ................................................................. 131

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xii THE DEFINITVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS

Impact of Nontariff Barriers ................................................................. 132Discussion Questions ............................................................................ 133

6 Metrics and Frameworks for Assessing Performance ........... 135Importance of Metrics and Measurement .......................................... 135Categories of Metrics ............................................................................. 140

Organizational Focused Metrics ..................................................... 142Predictive and Outcome Metrics .................................................... 143Managing Trade-Offs ....................................................................... 144

Productivity Measures ........................................................................... 145Productivity ........................................................................................ 145Efficiency ............................................................................................ 146Cycle Time .......................................................................................... 147

Customer Service Measures .................................................................. 147Elements of Customer Service ......................................................... 148Critical Key Performance Indicators (KPIs) ................................. 151

Measurement Systems and Frameworks ............................................ 152Monitoring Options .......................................................................... 152Balanced Scorecard ........................................................................... 154

Discussion Questions ............................................................................ 158Endnote ................................................................................................... 159

Index ......................................................................................... 161

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xiii About the Authors

ABOUT THE AUTHORSNada Sanders is Iacocca Chair and Professor of Supply Chain Management at Lehigh University. She is an internationally recognized expert in the area of business forecasting and supply chain management. She received both her Ph.D. and MBA from the Ohio State University and is author of more than 100 scholarly publications. She has worked with numerous companies and is a frequently called-upon consultant, expert witness, and keynote speaker.

Founded in 1963, the Council of Supply Chain Management Professionals (CSCMP) is the preeminent worldwide professional association dedicated to the advancement and dissemination of research and knowledge on supply chain management. With more than 8,500 members representing nearly all industry sectors, government, and academia from 67 countries, CSCMP members are the leading practitioners and authorities in the fields of logistics and supply chain management. The organization is led by an elected group of global officers and is headquartered in Lombard, Illinois, USA.

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xiv THE DEFINITVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS

PREFACEOperations management is the “engine of business.” It is the business function responsible for creating the goods and services companies sell. Today’s fierce global competition, rapid economic changes, and advancements in both information and processing technologies have all helped place operations management in the limelight of business. Operations management is the business function that can help companies succeed in this highly competitive landscape because, without operations management, there would be no products to sell.

Operations concepts are far reaching. Operations management decisions impact every organization and are equally important to service organizations as they are to manufacturing. Operations management is also equally important in informing strategic as well as tactical decisions. This book explains the foundational concepts of operations management for both manufacturing and service operations and is intended to serve as an important resource.

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11

1 OPERATIONS MANAGEMENT

DEFINED

Defining Operations Management Every business is managed through multiple business functions each responsible for managing certain aspects of the business. Figure 1-1 illustrates this by showing that the vice president of each of these functions reports directly to the president or CEO of the company. Marketing is responsible for sales, generating customer demand, and understanding customer wants and needs. Finance is responsible for managing cash flow, current assets, and capital investments. MIS is responsible for managing flows of information. Most of us have some idea of what finance and marketing are about, but what does operations management do?

PRESIDENT OR CEO

MARKETING

ManagesCustomers

OPERATIONS

Manages Creationof Goods and

Services

MIS

ManagesInformation

FINANCE

Manages Money

Figure 1-1 Organizational chart

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2 THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS

Operations management (OM) is the business function responsible for managing the process of creation of goods and services. It involves planning, organizing, coordinat-ing, and controlling all the resources needed to produce a company’s goods and ser-vices. Because operations management is a management function, it involves managing people, equipment, technology, information, and all the other resources needed in the production of goods and services. Operations management is the central core function of every company. This is true regardless of the size of the company, the industry it is in, whether it is manufacturing or service, or is for-profit or not-for-profit.

Consider a pharmaceutical company such as Merck. The marketing function of Merck is responsible for promoting new pharmaceuticals to target customers and bringing cus-tomer feedback to the organization. Marketing is essentially the window to customers. The finance function of Merck makes sure that they have needed capital for different processes including R&D. However, it is the operations function that plans and coordi-nates all the resources needed to design, produce, and deliver the various pharmaceu-ticals to hospitals, pharmacies, and other locations where needed. Without operations, there would be no products to sell to customers.

The Transformation Role of Operations Management We say that operations management performs a transformation role in the process of converting inputs such as raw materials into finished goods and services. These inputs include human resources, such as workers, staff, and managers; facilities and processes, such as buildings and equipment; they also include materials, technology, and informa-tion. In the traditional transformation model outputs are the goods and services a com-pany produces. This is shown in Figure 1-2 .

At a manufacturing plant the transformation is the physical change of raw materials into products, such as transforming steel into automobiles, cloth into jackets, or plastic into toys. This is equally true of service organizations. At a university OM is involved in organizing resources, such as faculty, curriculum, and facilities, to transform high school students into college graduates. At an airline it involves transporting passengers and their luggage from one location to another.

OUTPUTS:

Products(Goodsand/or

Services)

INPUTS:

EnergyMaterialsPeople

EquipmentInformation

Capital

TRANSFORMATIONROLE OF OM

Figure 1-2 The transformation role of operations management

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3Chapter 1 Operations Management Defined

The transformation role of OM makes this function the “engine room” of the organiza-tion. As a result it is directly responsible for many decisions and activities that give rise to product design and delivery problems. The design and management of operations strongly influence how much material resources are consumed to manufacture goods or deliver a service, making sure that there is enough inventory to produce the quantities that need to be delivered to the customer, and ensuring that what is made is in fact what the customer wants. Many of these decisions can be costly. It is for this reason that OM is a function companies go to in order to improve performance and the financial bottom line.

Differences in Manufacturing Versus Service Operations All organizations can be broadly divided into two categories: manufacturing organiza-tions and service organizations. Although both categories have an OM function, these differences pose unique challenges for the operations function as the nature of what is being produced is different. There are two primary distinctions between these catego-ries of organizations. First, manufacturing organizations produce a physical or tangible product that can be stored in inventory before it is needed by the customer. Service organizations, on the other hand, produce intangible products that cannot be produced ahead of time. Second, in manufacturing organizations customers typically have no direct contact with the process of production. Customer contact occurs through distribu-tors or retailers. For example, a customer buying a computer never comes in contact with the factory where the computer is produced. However, in service organizations the customers are typically present during the creation of the service. Customers here usu-ally come in contact with some aspect of the operation. Consider a restaurant or a barber shop, where the customer is present during the creation of the service.

The differences between manufacturing organizations and service organizations are typically not as clear-cut as they might appear in the preceding example. Usually there is much overlap between them, and their distinctions are increasingly becoming murky. Most manufacturers provide services as part of their business, and many service firms manufacture physical goods they use during service delivery. For example, a manufac-turer of jet engines, such as Rolls Royce, not only produces engines but services them. A barber shop may sell its own line of hair care products.

We can further divide a service operation into high contact and low contact segments. High contact segments are those parts of the operation where the customer is present, such as the service area of the post office or the dining area of a restaurant. However, these services also have a low contact segment. These can be thought of as “back room” or “behind the scenes” segments. Examples would include the kitchen segment at a fast-food restaurant or the laboratory for specimen analysis at a hospital.

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Finally, in addition to pure manufacturing and pure service, there are companies that have some characteristics of each type of organization. It is difficult to tell whether these companies are actually manufacturing or service organizations. An excellent example is an automated warehouse or a mail-order catalog business. These businesses have low customer contact and are capital intensive. They are most like manufacturing organiza-tions yet they provide a service. We call these companies quasi-manufacturing organiza-tions .

The operational requirements of these two types of organizations are different, from labor to inventory issues. These differences are shown in Table 1-1 . As a result, it is important to understand how to manage both service and manufacturing operations.

Table 1-1 Comparing Manufacturing and Service Operations Manufacturers Services

Tangible product. Intangible product. Product can be inventoried. Product cannot be inventoried. Low customer contact. High customer contact. Longer response time. Short response time. Capital intensive. Labor intensive.

The Role of Manufacturing and Service Operations in the Organization and Supply Chain Operations management plays a critical role in the organization and supply chain. With-out OM there would be no products to sell. However, operations cannot work in isola-tion from other business functions. Recall that each business function manages unique aspects of the business, and they all must work together. For example, operations must work with marketing to understand the exact wants of a particular group of custom-ers. It can then design the exact products customers want and create the production processes to efficiently produce these products. Marketing, on the other hand, must understand operations’ capabilities, including the types of products it can produce and the limitations of the production process. Without communication between marketing and operations, the company may find itself in a situation where it is producing products the customers don’t want.

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Operations must also work closely with purchasing to understand availability of materi-als, cost and quality issues, availability of sources of supply, and lead times. Operations links marketing—with its ties to customers—to sourcing—with links to sources of sup-ply. Operations must understand exactly what customers want and be able to ensure that sourcing can get the materials needed at the right price and at the right time to support product designs, or offer alternative material options.

Ensuring that OM fits in with the other organizational functions is necessary but not suf-ficient. The reason is that each company depends on other members of its supply chain to be able to deliver the right products to its customers in a timely and cost-effective manner. In the upstream part of a company’s supply chain, a company depends on its suppliers for the delivery of raw materials and components in time to meet produc-tion needs. If deliveries of these materials are late, or are of poor quality, production will be delayed, regardless of how efficient a company’s operations process is. On the downstream side, a company depends on its distributors and retailers for the delivery of the product to the final customer. If these are not delivered on time, are damaged in the transportation process, or are poorly displayed at the retail location, sales will suffer. Also, if the operations function of other members of the supply chain is not managed properly, excess costs will result, which will be passed down to other members of the supply chain in the form of higher prices.

The bottom line is that companies that comprise a supply chain need to coordinate and link their operations functions so that the entire chain is operating in a seamless and efficient manner. Just consider the fact that most of the components Dell uses are warehoused within a 15-minute radius of its assembly plant, and Dell is in constant com-munications with its suppliers. Dell considers this to be essential to produce and deliver components in a timely fashion.

Organizational Decision Levels Generally there are two levels of decisions in an organization. The first are strategic deci-sions . These decisions are broad in scope and long-term in nature. As a result they set the direction for the entire company. The second are tactical decisions , which are narrow in scope and short-term in nature. These two sets of decisions are intertwined with strategic decisions being made first and determining the direction of tactical decisions, which are made more frequently and routinely. Therefore, we have to start with strategic decisions and then move on to tactical decisions. This relationship is shown in Figure 1-3 .

Strategic decisions set the tone for the other more specific decisions. They ask questions such as: What market are we in (and not in)? What are our unique strengths? How do we compete (and not compete)? These decisions are important as they define exactly

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how a company competes in the marketplace and exactly in what markets using specific strengths.

Tactical decisions focus on more specific day-to-day issues, such as the quantities and timing of specific resources, and how specific resources are used. They are bound by strategic decisions. Tactical decisions must be aligned with strategic decisions because they are the key to the company’s effectiveness in the long run. Tactical decisions provide feedback to strategic decisions, which can be modified accordingly. Without the direc-tion provided by strategic decisions, companies may pursue competition in areas that do not directly contribute to the business plan and waste resources. Consider for example a company such as Southwest Airlines, which has always had a clear strategic direction to compete on cost. This has directly impacted tactical decisions, such as pursuing cost cutting efforts in operations in the form of no frills and one aircraft to minimize sched-uling costs.

TACTICAL DECISIONS:

Operations Design

STRATEGIC DECISIONS:

Operations Strategy

Figure 1-3 Levels of operations decisions

Key Terminology Operations management requires making many strategic and tactical decisions. Here we look at some key operations management decisions and associated key terminology:

■ Capacity planning —The process of determining the production capacity needed by an organization to meet changing demands for its products. Different types of capacity exist. For example, design capacity is the maximum amount of work that an organization is capable of completing in a given period; effective capacity is the maximum amount of work that an organization is capable of completing in a given period due to constraints such as quality problems, delays, and material management.

■ Efficiency —Performing activities at the lowest possible cost.

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■ Enterprise resource planning (ERP) —Large, sophisticated software systems used for identifying and planning the enterprise-wide resources needed to coor-dinate all activities involved in producing and delivering products.

■ Forecasting —The process of predicting future events, including product demand.

■ Just-in-time —A philosophy designed to achieve high-volume production through elimination of waste and continuous improvement.

■ Lean systems —Sometimes synonymous with just-in-time, it is a philosophy that takes a total system approach to creating efficient operations through the elimina-tion of waste.

■ Location analysis —Identifying the best location for facilities.

■ Mass customization —The ability of a firm to highly customize its goods and services at high volumes through its operations management function.

■ Operations management (OM) —The business function that refers to the trans-formation process of converting raw materials into finished goods and services; OM used to be called production and operations management (P&OM) or just production. As the field evolved from being primarily tactical (e.g., making inven-tory and scheduling decisions on the manufacturing floor) to being strategic (today there are many CEOs from the OM field), the term moved to focus on the broad notion of operations rather than mere production.

■ Product design —The process of deciding on the unique and specific features of a product.

■ Process selection —The process of identifying the unique features of the produc-tion process that will give the product its unique characteristics. Process selection typically goes hand in hand with product design, as we need to create a pro-cess that gives rise to the particular product design desired. An excellent product design is worthless if a process for its creation cannot be developed.

■ Productivity —A measure of how efficiently an organization converts inputs into outputs. It is usually measured by a ratio of output divided by input. Productivity is essentially a scorecard of how efficiently resources are used and a measure of competitiveness. Productivity is measured on many organizational levels—from measuring labor and machine productivity to measuring the productivity of an entire organization or even a nation. As a result it is of interest to a wide range of people.

■ Quality management —The process used to ensure the quality of a product, including measuring quality and identifying quality problems.

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■ Reengineering —The process of redesigning a company’s processes to increase efficiency, improve quality, and reduce costs. In many companies things are done in a certain way that has been passed down over the years. Operations manage-ment is a key player in a company’s reengineering efforts.

■ Scheduling —The process of deciding on the timing and use of resources within an operation; it addresses questions such as who will work on what work schedule and in what sequence jobs will be processed.

■ Total quality management (TQM) —A philosophy that seeks to improve quality by eliminating causes of product defects and by making quality the responsibility of everyone in the organization. With TQM everyone in the company is respon-sible for quality. Practiced by some companies in the 1980s, TQM became per-vasive in the 1990s and is an area of operations management that no competitive company has been able to ignore.

■ Value added —A term used to describe the net increase created during the trans-formation of inputs into outputs. The OM function seeks to create value added in the transformation process.

Critical Processes Several critical processes drive the success of business operations. This section explains the most common ones.

Production Planning Processes Production planning is an integral part of the business planning process. This process begins when management of an organization gathers input from the various organiza-tional functions—such as finance, marketing, operations, and engineering—to develop a business plan. The business plan, with its long-term focus, provides the company’s direction and objectives for the next two to ten years. The business plan is then typically updated and reevaluated annually. The business plan, which states the company’s objec-tives for profitability, growth rate, and return on investment, is typically the starting point for the organization’s production plan, often termed the aggregate plan. So what is a production plan?

The aggregate or production plan is an organizational plan that identifies the resources needed by operations management to support the business plan over the next 6 to 18 months. The aggregate plan details the aggregate production rate and the size of the workforce, which enables planners to determine the amount of inventory to be held; the amount of overtime or undertime authorized; any authorized subcontracting, hiring, or

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firing of employees; and back-ordering of customer orders. The production plan is usu-ally updated and reevaluated monthly by operations management.

A company typically develops the production plan based on a composite product that represents the expected product mix. To minimize the level of details, individual prod-ucts are not represented in the aggregate plan. Think about how many different products most companies have, and you can see that it would become cumbersome to include every product in the plan. Companies may group products into major product families to facilitate production planning. For example, a paint company may produce many dif-ferent products, such as different colors of paint, different finishes (e.g., gloss versus flat), and container sizes (e.g., gallon or half gallon). Including all of these in a plan would be cumbersome. The aggregate plan considers a composite product—such as “gallons of paint” in this example—as a product measure.

The goal of the aggregate plan is to develop a plan for all the operations resources—machines, labor, and inventory—to produce the amount of product needed over a cer-tain period of time. The aggregate plan will then specify for a particular period, say, the month of January, how many units of product are produced, how much labor is needed, and how much inventory. The goal is to have a big picture; using a composite product, or product families, reduces the level of detail but still provides the information needed for decision making. Common terms of output used in the aggregate plans are units, gallons, pounds, standard hours, and dollars. For example, a simplified production plan is shown in Table 1-2 .

Table 1-2 A Simplified Production Plan QUARTER 1 2 3 4

Demand 8,000 11,000 14,000 15,000 (Demand is given in units, say gallons or dollars.) Produce 12,000 12,000 12,000 12,000 (In this case we chose to produce average demand.) Inventory 4,000 5,000 3,000 0 (Inventory is computed as Amount Produced + Inventory from previous period – Demand.) Labor 6 workers 6 workers 6 workers 6 workers (We assumed that each worker produces 2,000 units per quarter.)

To summarize, the purpose of the production or aggregate plan is to develop produc-tion rates and authorize resources that allow the company to meet the objectives of the strategic business plan.

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Master Production Schedule (MPS) The plan below the production plan is a master production schedule (MPS). An MPS is the anticipated production schedule for the company expressed in specific configura-tions, quantities, and dates. It is stated as specific finished goods. It details how opera-tions will use available resources and which units or models will be built in each time frame. This allows marketing to make informed commitments to customers. The MPS and the detailed sales plan are reviewed weekly or even daily.

The MPS is used as an anticipated schedule for building specific finished products and providing specific services. The key distinction here is that the MPS is a statement of pro-duction or services and is not a statement of demand—a plan to satisfy customer demand while considering operational effectiveness and cost. Due to this, individual products can be finished ahead of time and held in inventory rather than finished as needed. The master scheduler or office manager balances customer service and capacity usage.

The aggregate plan shows how many products or services are planned for each time period. The MPS identifies the specific products or services planned for a given period. The relationship of these plans is shown in Figure 1-4 .

Material Requirements Planning (MRP) The authorized MPS is a critical input into material requirements planning (MRP), the next plan below the MPS. MRP is a plan that uses the MPS, bill of material data, and inventory records to calculate specific requirements for materials. The MPS tells the MRP system what the company plans to build and when. The MRP system then calcu-lates the materials needed to build the products in the schedule and plan for the neces-sary materials. Notice that as we move from the business plan through the production plan, MPS, and then MRP we progressively become more specific and detailed.

Rough Cut Capacity Planning (RCCP) This is the process of converting the MPS into specific capacity requirements for key resources such as direct labor and machine time. This process calculates a rough esti-mate of the workload placed on critical resources by the proposed MPS. This workload is compared against demonstrated capacity for each critical resource. This comparison enables the master scheduler to develop a feasible MPS.

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PRODUCTION PLAN

MATERIALREQUIREMENT

PLANNING

MASTER PRODUCTIONSCHEDULE

ROUGH CUT CAPACITYPLANNING

BUSINESS PLAN

Figure 1-4 The relationships of different planning processes

Measuring Productivity Levels Recall that operations management is responsible for managing the transformation of numerous inputs into a range of outputs, such as goods or services. But how do we know whether this transformation process is efficient? A measure of how efficiently inputs are converted into outputs is called productivity . Productivity measures how well resources are used. It is computed as a ratio of outputs (goods and services) to inputs (labor and materials). The more productive a company is, the better it uses its resources. The equa-tion is as follows:

Productivity = output/input

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This measure of productivity can be used to measure the productivity of one worker or many, as well as the productivity of a machine, a department, the whole firm, or even a nation. Total productivity is used when measuring productivity for all inputs combined, such as labor, machines, and capital. For example, let’s say a company produces weekly the equivalent of $10,000 in output in the form of finished goods. Let’s also say that the weekly value of all the inputs combined—including labor, materials, and other costs—is $5,000. Total productivity for the week for the company is

Total Productivity = output/input = $10,000/$5,000 = 2.0

Although total productivity is valuable to give a company a sense of how it is doing on the whole, it is often much more useful to measure the productivity of one variable at a time. This allows us to evaluate how efficiently various resources are being used. Partial productivity or single-factor productivity is when we compute productivity as the ratio of output relative to a single input. For example, we can compute machine productivity or labor productivity. For machine productivity we can see how many units a machine is processing over a certain period of time; similarly for labor productivity we can compute how many units a worker can process over a certain period of time, such as a day, hour, or month.

The interpretation of productivity is not as easy as you might think. Productivity is a relative measure that should be tracked over time. This allows us to benchmark against ourselves, our competitors, and our industry. Just looking at the number, such as the 2.0 in the previous computation of total productivity, does not reveal much. Consider, for example, if one worker at a sub shop produced 20 subs in 2 hours, the productivity of that worker is 10 subs per hour. This number by itself does not tell us much. However, if we compare it to the productivity of two other workers, one who produces 8 per hour and another 5 per hour, it is much more meaningful. Although this is a simplistic example, it illustrates the point that performance expectations are relative, and they need to be benchmarked and compared over time. By comparing our productivity over time and against similar operations, we have a much better sense of how high our productivity really is.

Another criterion for evaluating productivity and setting standards for performance is considering the company’s strategy for competing in the marketplace. This is called a competitive priority , and it defines how a company competes. A company that competes based on speed would probably measure productivity in units produced over time. How-ever, a company that competes based on cost might measure productivity in terms of costs of inputs such as labor, materials, and overhead. On the other hand, a company that competes on quality may measure productivity based on the number of errors made. The important thing is that the productivity measure selected provides information on how the company is doing relative to the competitive priority it defines as most important.

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Inventory Determination Inventory is quantities of goods in stock. This is true for any product, material, or good. Consider the books or CDs on your bookshelf. They comprise an inventory of books. They provide you with a certain value from enjoying them to the monetary value you paid for them. They cost money to purchase—money that cannot be used for some-thing else. The same is true for inventory companies hold in stock. When we talk about inventory we are simply talking about quantities of materials a company has in storage. This material serves many purposes, but it also ties up a great deal of funds. As a result, managing inventory throughout the entire supply chain is important.

All organizations—both manufacturing and service organizations—carry inventory. A great deal of inventory must be carried to support basic processes of the operation. In manufacturing, inventory can take a variety of forms. This includes raw materials and component parts, which are delivered from suppliers, work-in-process (WIP) inventory, or finished goods. Inventory also includes supplies and equipment. Inventory can tie up funds if it sits unutilized in stock; however, not having enough inventory when needed can mean stockouts or production delays. As a result managing inventory is a critical part of operations management.

The major decisions in inventory relate to when to replenish stock, and how large orders should be. This is called an inventory policy . An inventory policy addresses the basic questions of when and how much to order. To understand more about determining an inventory policy we need to first look at some reasons for carrying inventory.

Reasons for Carrying Inventory Organizations carry inventory for many reasons, and all companies—even those that practice lean systems—carry inventory. In fact, organizations cannot run without a cer-tain amount of inventory. Some reasons that organizations carry inventory are as follows:

1. Protect against stockouts —One reason for carrying inventory is that goods can-not arrive immediately when you run out of stock. A certain amount of lead time is needed for goods to be produced and delivered. You have to make sure that you have enough inventory in stock to cover demand during the period of lead time. Lead time will have a certain amount of variation, which may result from shipping delays, production problems at the supplier site, lost orders, defective materials, and numerous other problems so you have to plan to be prepared. Also, sources of supply are rarely at the same location as demand, and you cannot locate a production facility everywhere there is demand. As a result, inventory has to be transported from one location to another, and sometimes held in a distribution center to be distributed when needed at the various locations. The result is the need to carry inventory to protect against possible stockouts.

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2. Maintain independence of operations —During the production process as well as the supply chain, the product is moved through many different operations that have different processing rates. The challenge is balancing different processing capabilities, and it is not always possible. Therefore, you need a cushion between operations, and inventory at different points in the system serves this purpose. Extra inventory strategically placed evens out differences in processing capabil-ity. Extra stores of inventory can be placed at various points in the supply chain network, or at work centers within a facility, to give it flexibility.

Just consider the high interdependence of work stations on an assembly line. Inventory is typically placed between work stations to decrease their interdepen-dence. Otherwise, work stoppage at one station may disrupt or otherwise shut down the entire assembly line. Also consider that there is natural variation in processing times between identical operations due to randomness. As a result it is desirable to create a cushion of inventory so that output can occur at a constant rate.

3. Balance supply and demand —Balancing supply on one side of the supply chain with demand on the other is always a challenge. Demand is never known with certainty and holding extra inventory enables an organization to meet unexpected surges in demand. Also, consider that demand occurs intermittently, rather than on a continuous basis. An example might be retail sales, which are slower on weekday mornings but high over the weekends. Not having extra inventory might mean missed sales. Carrying inventory helps to address these natural variations in demand.

Seasonal demand patterns also contribute to high and low periods of demand, such as ice cream sales in the summer or snow shovel sales in the winter. It would be costly for production facilities to produce products in unison with the season-ality of demand. This might mean closed facilities and unemployed workers dur-ing low seasons, and overtime production during high seasons. A more common strategy is for companies, and their supply chains, to produce at a more uniform rate during the year. In this case extra products are stored in inventory and used during peak seasons.

4. Protect against uncertainty —Many unexpected events occur that impact both supply and demand. This is due to randomness and could be anything from a batch of damaged goods being received, to an unexpected delay due to weather, or a strike at a supplier’s plant. Companies carry extra inventory in stock to protect themselves, or buffer, against these uncertainties. This is a “just in case” scenario. However, companies know that they have to be prepared so that they don’t run out of stock.

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5. Economic purchase orders —You have heard about keeping inventories low, but in this scenario inventory may be purchased in large quantities. There are a num-ber of reasons why this might be advantageous. For example, suppliers sometimes offer price discounts to encourage customers to purchase larger quantities at one time. Similarly, buying in large quantities might result in savings associated with transporting larger quantities at one time. Also, anticipating some type of price increase, shortage, or disruption might lead companies to buy larger quantities. Purchasing larger quantities in anticipation of shortages, for example, is a com-mon supply chain strategy.

Types of Inventory To better understand inventory we need to look at different types of inventories and their purposes, as their quantities are computed differently. Together they collectively add up to inventory costs for the organization. Let’s look at these here:

■ Cycle stock —This category of inventory is computed for immediate use and is also called lot size inventory. It is computed based on expected demand over a certain time period and assumes demand is known. This simply computes how much stock is needed to cover demand over a set period of time. It also accounts for the fact that products are typically produced in batches. This is the quantity, or the size, of the batch that is produced during the production cycle. Therefore it is called cycle stock .

■ Safety stock —This is inventory carried to serve as a cushion for uncertainties in supply and demand. It can be in the form of finished goods to cover unexpected demand, raw materials to guard against supply problems, or work-in-process inventories to guard against production stoppages.

■ Seasonal inventory —These inventories are carried to compensate for differences in the timing of supply and demand, and to smooth out the flow of products throughout the supply chain. They are called seasonal inventories as they are often used when demand fluctuations are significant, but predictable, such as with seasonal variation. This is where companies carry extra inventory during a low season in anticipation of higher demands during the high season. Finally, these are inventories that are carried in anticipation of a price increase or a shortage or products. For this reason they are sometimes called hedge inventory.

■ Transportation or pipeline inventory —This is inventory that is in transit and exists merely because the points of demand and supply are not same. At any one time a global supply network has a large percentage of its inventory in transit—on a barge, truck, or rail—being moved from one location to another, or waiting to be loaded or unloaded.

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■ Maintenance, repair, and operating (MRO) items —In addition to inventories that directly support product creation, other inventories are used indirectly. These are MRO items and include everything from office supplies and forms, to toilet paper and cleaning supplies, to tools and parts needed to repair machines. Col-lectively, MRO items make up a significant amount of inventory and need to be managed like all other inventories. Just think about the amount of paper, pencils, and other supplies in an office. You expect them to be there, and without them work can be significantly hampered.

Inventory Policy Choices As discussed earlier an organization’s inventory policy must answer the two basic ques-tions: when to order and how much to order . There are two basic categories or choices in inventory policy that accomplish this: fixed-order quantity systems and fixed-time period systems. They work in slightly different ways. Let’s look at these now.

Fixed-Order Quantity System The first policy choice is through a system called a fixed-order quantity system . Therefore, two variables define this system and answer the two basic questions of when to order and how much. The first is an order quantity, Q, and the second is a reorder point, ROP. As the name suggests, the quantity ordered with this system is constant or fixed and is denoted by Q. An order is placed when the inventory position drops to some predeter-mined level. This predetermined level is called the reorder point and is usually noted as ROP. Together these variables specify when to place an order: when inventory reaches the ROP. They also specify how much to order: the quantity Q.

A graphical presentation of this model is shown in Figure 1-5 . Notice that the system assumes a constant demand rate of d by which the inventory position (IP) is reduced. When the IP reaches the ROP, an order is placed for the quantity Q. When goods arrive, the inventory is replenished, and all at once the inventory position is increased by Q. However, inventory cannot arrive the moment an order is placed as there is a certain amount of lead time, L, during which we have to wait for the order.

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Demand Rate d

InventoryPosition

ROP

TimeLL

One Cycle

Lead Time

Q

Figure 1-5 Fixed-order quantity system

Here inventory is monitored on a continual basis, and the assumption is that we always know the current level of inventory. When inventory levels reach the ROP, an order of quantity Q is placed. For example, let’s assume that a grocer uses a fixed-order quantity system for its inventory of canned tomato soup. Its policy may be that it always orders 200 cans of soup, for which it gets a nice quantity discount, and the order is made when the number of cans of soup drops to 25. Therefore, the ROP = 25, and the Q = 200.

In the classic version of this system Q is computed as the economic order quantity (EOQ)—an economically optimal order quantity—which we will compute later. For this reason this system is sometimes called the economic order quantity (EOQ) model . Other terms used to describe it are the Q-model as the quantity Q is constant. Sometimes it is called a continuous review system , as the inventory levels are continuously monitored. The model has even been called a sawtooth model , as the graph of inventory looks like a sawtooth. All these terms refer to the same type of inventory system, describing different features of the system itself.

Fixed-Time Period System The second inventory policy is determined by a system called a fixed-time period system shown in Figure 1-6 . This system checks inventory levels in fixed time intervals labeled as T. The result is that the quantity ordered varies based upon the inventory position when the system is checked. The system sets a target inventory level it wants to maintain, say R. Inventory is checked every T intervals, say every week or every two weeks, and an order is placed to restore the inventory level back to R. Based on the inventory level at time period T, the amount of inventory that needs to be ordered will be some quantity Q that varies from period to period. This quantity Q is the difference between the target inventory R and how much inventory is in stock—the IP at time T:

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Q = R – IP

where:

Q = order quantity

R = target inventory level

IP = inventory position

Two variables define this system and answer the two basic questions of when to order and how much: T and Q. They specify when to place an order: at time interval T. They also specify how much to order: quantity Q, computed as the difference between the target inventory, R, and the inventory position, IP. Sometimes this system is called the periodic review system to indicate that the inventory level is checked periodically, rather than continuously.

InventoryPosition (IP)

Target Inventory Level R

Q1

T1 T2 T3

Q2

Time

R

Figure 1-6 Fixed-time period system

We can assume that an auto manufacturer uses a fixed-time period mode for its inven-tory of alternators. Also, let’s say its policy is to check inventory levels every two weeks, and that it has a target inventory level R = 5,000 alternators. If after two weeks the com-pany checks its inventory level and finds its inventory position IP = 2,800 alternators, it would place an order for quantity Q = R – IP = 5,000 – 2,800 = 2,200 alternators. This is essentially how this policy system works.

The biggest difference between the fixed-order quantity system and the fixed-time period systems is in the timing and quantities of the orders placed. With the fixed-order quan-tity system inventory is checked on a continual basis and the system is prepared to place orders multiple times per year on a random basis. This has an advantage of providing greater system responsiveness, but it also requires administrative processes to be in place

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on a continual basis. In addition, as different inventory items reach their reorder points at different time periods, it might be difficult to obtain quantity discounts based on a bundled order.

The fixed-period order system requires carrying more safety stock inventory. The reason is that with this system we do not check the IP on a regular basis, and a sudden surge of demand could lead to a stockout. This system, however, allows more organized purchas-ing as inventory levels are checked in set time intervals. Orders can be bundled and quan-tity discounts obtained more easily, which can provide an advantage. In a fixed-order quantity system different items may reach reorder points at different times generating many orders at random intervals. On the other hand, a fixed-period system could ensure that inventory levels are checked on a regular basis for all items—say every two weeks. Then the orders for all the items could be bundled.

Inventory Policy in a Fixed-Order Quantity System A fixed-order quantity system is one of the most important in inventory management. For that reason we need to look at how to compute the two variables that define it: the order quantity Q and the reorder point ROP. Before we do that, however, we need to look at the assumptions this system makes. Most importantly, the system assumes that all the variables occur at a constant rate and their values are known with certainty. For example, the system assumes that the demand, D, occurs at a constant rate and that there is no variability in demand. Also, the lead time, L, is constant, the holding cost, H, is known and fixed, as are stockout cost, S, and unit price, C. Although these assumptions are not realistic the model is highly robust and provides excellent results despite these assumptions.

How Much to Order? The first decision in the fixed-order quantity model is to select the order quantity Q. Recall that there are a number of inventory costs, most notably inventory holding cost and ordering cost. We want to select the “best” order quantity that minimizes these costs—the EOQ mentioned previously. This is computed by looking at the total annual inventory cost and finding the order quantity that minimizes it. Consider that the total annual cost is comprised of annual purchase cost, annual ordering cost, and annual hold-ing cost, and looks as follows:

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Total cost = Purchase cost + Ordering cost + Holding cost

TC = DC + (D/Q) S + (Q/2) H

where

TC = Total cost

D = Annual demand

C = Unit cost

Q = Order quantity

S = Ordering cost

H = Holding cost

The first term in the equation, DC, is the annual purchase cost for items. It is comprised of annual demand (D) times the unit cost of each item (C). The second term (D/Q) S is the annual ordering cost. It is computed as the number of orders placed per year (D/Q), times the cost of each order, S. Finally, the third term is annual holding cost where (Q/2) is the average inventory held. Remember that our maximum inventory is Q units when the order is received. When inventory is depleted we have zero. Therefore on average we have Q/2 units in inventory. H is the annual holding cost per unit of inventory.

The behavior of the two costs is shown in Figure 1-7 . Notice that inventory holding cost increases with the order quantity, Q. The reason is that higher order quantities mean holding more inventory. However, this also means that we are ordering less frequently so ordering cost decreases. The opposite is true as the order quantity Q is decreased. A smaller order quantity results in a lower holding cost, but a higher ordering cost, as we are ordering more frequently.

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Costs Ordering Costs

Total Cost

Holding Costs

EconomicOrderingQuantity

Order Size

Figure 1-7 Ordering versus holding cost

The objective is to pick an order quantity that minimizes the sum of both the holding and ordering costs, which is the minimum point on the total cost curve. To compute this we use calculus and end up with the following classic computation of the “best” or optimal order quantity, the EOQ:

EOQ = 2 2DS/H

When to Order? The EOQ answers the question of how much to order, but we still need to determine when to order. Assume that the demand rate (D) and lead time (L) are constant and known with certainty. In that case the ROP would simply be enough inventory to ensure that demand is covered during the length of the lead time. In this simple case, the ROP would be computed as

ROP = demand during lead time

ROP = D L

Let’s assume that lead time L for a product is one week and the demand, d , is 250 units per week. The ROP would be

Reorder Point = ROP = D x L = 1 week x 250 = 250 units

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This means that every time inventory reaches 250 units an order is placed for the eco-nomic order quantity Q.

Unfortunately, D and L are rarely fixed, and demand is often higher than expected. As a result we often have to carry a bit more inventory to address this uncertainty. This is called safety stock or buffer stock and is inventory we carry in addition to the demand during lead time. Safety stock is added to the ROP calculation and is computed as follows:

ROP = demand during lead time + safety stock

ROP = D L + SS

Safety stock is computed based on the service level a company wants to maintain, which is simply the chance that we will not run out of stock. This is set by the company based on the level of service it wants to provide for a particular product and customer base. Higher service levels mean higher levels of inventory. Another factor that is used to compute safety stock is the variability of demand. The higher the variability and the higher the service level the higher the safety stock, or the amount added to the final computation of the ROP.

Independent Versus Dependent Demand Another way to understand inventory is to separate it into two broad categories: depen-dent and independent demand. Understanding this difference is important as the entire inventory policy for an item is based on this. Independent demand is demand for a finished product , such as a computer, a bicycle, or a pizza. Dependent demand, on the other hand, is demand for component parts or subassemblies . For example, this would be the microchips in the computer, the wheels on the bicycle, or the cheese on the pizza.

The two inventory systems we discussed are used to determine order quantities for inde-pendent demand. But how do we compute quantities for dependent demand? Quantities for dependent demand are derived from independent demand, which we call the “par-ent.” For example, we can forecast the amount of automobiles we expect to sell, then we can derive the quantities needed of wheels, tires, braking systems, and other component parts. For example, if a company plans to produce 200 cars in a day, it would need 800 wheels, 400 windshield wipers, and 200 braking systems. The number of wheels, windshield wipers, braking systems, and other component parts is dependent upon the quantity of the independent demand item from which it is derived.

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The relationship between independent and dependent demand is depicted in a bill of materials (BOM) , a type of visual diagram that shows the relationship between quanti-ties. An example is shown in Figure 1-8 . Item A is the independent demand item. All the other items are dependent demand. The quantities that go into the final item are shown in parentheses. Notice that two units of C are combined with one unit of B to make the final product. Similarly, two units of D and one unit of E are combined to make one unit of B.

Dependent Demand

Independent Demand

B (1)

E (1) D (1)D (2)

C (2)

A

Figure 1-8 A bill of materials (BOM)

Dependent demand order quantities are computed using a system called material requirements planning (MRP) , which considers not only the quantities of each of the component parts needed, but also the lead times needed to produce and receive the items. For example, 20 units of A means that 20 units of B are needed, as are 40 units of C; similarly, 40 units of D and 20 units of E are needed. However, the system must also take into account differences in lead times, as receiving D may have a different lead time than receiving E. This means that the orders should be placed at different times. This system can also be tied to costs of goods and can link internal and external members of the supply chain.

ABC Inventory Classification An important aspect of managing inventory is to have a way to classify it based on its importance. All items in the supply chain are not of equal importance. Some are very important, such as specialized surgical equipment. Others are less important, such as latex gloves in a hospital. The first step in managing inventory is to classify inventory based on its degree of importance to manage it properly. The tool for this is ABC classi-fication. Classifying inventory based on degree of importance allows us to give priority to important inventory items and manage those with care. It also prevents us from wasting precious resources on managing items that are of less importance.

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ABC classification is based on Pareto’s Law, which states that a small percentage of items accounts for a large percentage of value. This value can be sales, profits, or other mea-sure of importance. Roughly 10 percent to 20 percent of inventory items account for 70 percent to 80 percent of inventory value. These highly valuable items are classified as A inventory items. Moderate value items account for approximately 30 percent of inven-tory items and contribute to roughly 35 percent of the total. They are called B items. Finally, approximately 50 percent of the items only contribute to roughly 10 percent of total inventory value. These are called C items and are of least importance. Figure 1-9 provides an example of ABC analysis.

Percentageof Dollar Value

20 40 60 80 100Percentage of Items

C Inventory ItemsB Items

A Items

Figure 1-9 ABC classification of inventory

The steps to conduct an ABC analysis are as follows:

1. Determine annual usage or sales for each item.

2. Determine the percentage of the total usage or sales by item.

3. Rank the items from highest to lowest percentage.

4. Classify the items into groups.

After ranking the items from highest to lowest percentage, do not force groups to fit the preset percentages, as these are rough estimates. Rather, there are typically natural break-ing points that will occur. The data will naturally group itself and these are groupings that should be used.

ABC analysis is extremely important for determining order policies. The most sophisti-cated inventory systems should be used for A items. In fact, many managers personally oversee these. By contrast, C items are typically left for automated ordering systems as they do not warrant the cost of managerial involvement.

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Vendor Managed Inventory (VMI) A unique yet important aspect of managing inventory considers who owns it. Histori-cally companies owned and managed all of their inventories. They were responsible for the storing, controlling, replenishing, and overall management of the inventory. With supply chain management (SCM), most of this has changed. Today, many firms have implemented vendor management inventory (VMI) arrangements. Here, the vendor is responsible for managing the inventory located at a customer’s facility. The vendor stocks the inventory, places replenishment orders, and arranges its display. The vendor typically owns the inventory until it is purchased by the customer.

VMI offers a number of important advantages to both the customer and the vendor. The vendor has greater control over its product. The vendor is required to work much more closely with the customer, giving the vendor a better understanding of how to serve the market. The customer, in turn, has less responsibility and financial burden over the inventory items. VMI requires both the vendor and the customer to work closely together. It represents one of the many partnership arrangements that have evolved in supply chain management.

Challenges Facing the Modern Operations Manager Despite all the tools and systems at their disposal, operations managers face extensive challenges when it comes to managing an organization’s resources. The global market-place is characterized by its substantial size and dynamic makeup. The operations man-ager must grasp this reality to maintain optimal process performance in a shifting global landscape. Successful operations managers stay abreast of these trends and implement proactive systems to take advantage of them. Globalization, technology advancements, and redefined marketplace priorities are among the many challenges at hand today.

Globalization has radically altered the way operations managers conduct their day-to-day activities. Landforms, distances, and time zones no longer separate people from infor-mation. Because of this, modern corporations can—and, in some competitive instances, must—base their operations in any number of countries to minimize costs and maximize performance efficiency. Consider Toyota, an automobile company headquartered in Tokyo, Japan. Toyota has made significant investments in American operations. Even though companies such as Ford and GM pride themselves on domestic manufacturing, Toyota’s popular Avalon model is actually considered one of the most “American-made” cars. Assembled in Kentucky, the Avalon contains nearly 85 percent North American parts. 1 Globalization turned Toyota and other foreign automakers into giants in the United States—and nearly put American automakers out of business.

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The instantaneous availability of information is directly attributable to modern techno-logical advancements. As you will see in subsequent chapters, technologies such as global positioning systems (GPS) and radio-frequency identification (RFID) have revolution-ized inventory management. Corporations can now account for inventory in real time, no matter how dispersed it is. What’s more, these technological advancements have made planning systems more precise, thereby narrowing operations managers’ margins for error. Technology is moving at breakneck speed. Keeping up can be rewarding, but failing to do so can be catastrophic.

The global marketplace has been, and is continuing to be, redefined by new priorities. With a growing population depending on a fixed amount of resources, companies are being forced to make sustainability a priority. There is no better example of corporate sustainability than at search engine giant Google. Google is famous for making use of renewable energy resources. Instead of lawn mowers, it invites goats to trim the grass of its green areas. Customer priorities are changing, too, especially when it comes to health. Because of social and political pressure, fast food companies such as McDonalds have introduced fruit to their children’s menus. Burger King recently released a new version of its French fries. Known as “Satisfries,” these French fries have 30% fewer calories than Burger King’s traditional fries. Changes such as these are impacting the ways businesses must conduct operations management and will continue to create operational chal-lenges. The companies with the most savvy operations managers will be able to embrace the adversity challenges present and change the marketplace in the process.

Discussion Questions 1. What are some characteristics of operations management that make it a core busi-

ness function?

2. Explain the “transformation role” of operations management.

3. Differentiate between the two categories of organizations.

4. Cite examples of how operations management works in tandem with other busi-ness functions. How can poor operations management affect the entire supply chain?

5. Define strategic decisions and tactical decisions . Which type of decision should an organization make first? Why is it important to start with one before the other?

6. What is the difference between productivity and efficiency ?

7. What is the purpose of the production—or aggregate—plan?

8. Detail the relationships among the critical planning processes.

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9. How should productivity be measured? Should all organizations/industries mea-sure productivity the same way? Why or why not?

10. How can carrying inventory protect against stockouts, balance supply/demand, and protect against uncertainty? What are the consequences of not carrying inventory?

11. Explain how each inventory management system determines its order timing and its order quantity.

12. How does the Pareto Law assist in ABC classification?

13. VMI offers a vendor greater control over its products. How does VMI also help the customer?

Endnote 1. http://editorial.autos.msn.com/what-are-the-most-american-made-

automobiles#2 .

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http://editorial.autos.msn.com/what-are-the-most-american-madeautomobiles#2

http://editorial.autos.msn.com/what-are-the-most-american-madeautomobiles#2

161

NUMBERS 3D printing, 104 - 105 5S, 54 - 55 7-Eleven, 100

A ABC analysis, 24 ABC inventory classification, 23 - 24 aggregate plans, 9 , 30 AGV (automated guided vehicle), 101 AS/RS (automated storage and retrieval

systems), 101 assemble-to-order, 75 , 77 - 79 assignable variation, 45 assigning tasks to workstations, 74 automated guided vehicle (AGV), 101 automated material handling, 101 automation, 100 - 101 average number of jobs in the

system, 41

B balanced scorecards, 154

benefits of, 158 elements of, 155 newer versions, 156 - 157 original design, 154 - 156

balancing, supply and demand, 14 barriers, nontariff barriers, global

operations, 132 - 133

batch processes, 67 benefits of

balanced scorecards, 158 ERP (enterprise resource planning),

89 - 90 global operations, 111 - 112

BOM (bill of materials), 23 , 32 MRP (material requirements plan-

ning), 36 brand image, 127 Burger King, 26 business plans, hierarchies, 29

C CAD (computer-aided design), 84 , 104 CAM (computer-aided manufacturing),

84 , 103 capacity planning, 6 capacity requirements planning

(CRP), 92 categories, of metrics, 140 - 142 cause and effect diagrams, 43 cellular layouts, 72 challenges

to global operations, 114 - 115 culture, 116 global consumers, 115 marketing, 115 - 116

for operations managers, 25 - 26

INDEX

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162 THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS162

charts Gantt charts, 38 process control charts, 48 - 49

chase production plans, 33 - 34 checksheets, 43 China, 120

labor costs, 120 CIM (computer-integrated manufactur-

ing), 104 Coca-Cola, marketing, 115 communication, metrics, 141 comparing

intermittent processes and repetitive processes, 68

inventory positioning strategies, 77 - 79 competitive priorities, 59 - 60

cost, 61 flexibility, 63 operations structure and infrastruc-

ture, 63 - 64 order winners and order qualifiers,

64 - 65 quality, 61 - 62 time, 62

computer-aided design (CAD), 84 , 104 computer-aided manufacturing (CAM),

84 , 104 computing efficiency, 74 - 75 consistency of order cycle, customer

service measures, 150 constraints, TOC (theory of con-

straints), 53 consumers, global consumers, 115 continuous improvement, metrics, 139 continuous processes, 67 continuous review system, 17 control, metrics, 141

control charts, 43 , 48 - 49 cost

competitive priorities, 61 end-of-life cost, 125 environmental costs, TCO (total cost

of ownership), 128 global operations, 113 , 119

hidden costs, 119 - 121 noncost considerations, 121 - 122 reshoring, 122 - 123

of goods sold, TCO (total cost of own-ership), 124

“hard” costs, 124 - 125 opportunity cost, 126 potential risk-related costs, 126 - 127 product liability, 126 quality, 126 rework, 126 strategic costs, TCO (total cost of

ownership), 127 - 128 TQM (total quality management), 42 travel costs, 125

CR (critical ratio), 40 critical processes

MPS (master production schedule), 10 MRP (material requirements

planning), 10 production planning processes, 8 - 9

critical processes RCCP (rough cut capacity planning), 10

critical ratio (CR), 40 CRP (capacity requirements

planning), 92 culture

challenges to global operations, 116 global operations, 114

customer service, elements of, 148 - 151

9780133438642_Book 1.indb 162 11/26/13 9:40 AM

163 Index

customer service measures, 147 - 148 elements of customer service, 148 - 151 KPIs (key performance indicators),

151 - 152 CVS, 84 cycle stock, 15 cycle time

determining, 74 productivity measures, 147

D Dairy Queen, 99 data, small data, 106 data cleaning, ERP (enterprise resource

planning), 97 decisions

organizational decision levels, 5 strategic decisions, 6 tactical decisions, 6

Dell, 5 dependent demand versus independent

demand, 22 - 23 Drucker, Peter, 140

E earliest due date (EDD), 40 economic order quantity (EOQ), 17 economic purchase orders, 15 economic stability of suppliers, 127 economies, global operations, 114 ,

128 - 130 EDD (earliest due date), 40 efficiency, 6

computing, 74 - 75 productivity measures, 146

e-manufacturing CAD (computer-aided design), 104 CIM (computer-integrated manufac-

turing), 104 emerging technologies, 104

3D printing, 104 - 105 responsive Web design, 105 - 106 small data, 106

employee training, ERP (enterprise resource planning), 97 - 98

end-of-life cost, 125 enterprise resource planning. See ERP

(enterprise resource planning) environmental costs, TCO (total cost of

ownership), 128 environmental factors,

globalization, 111 EOQ (economic order quantity), 17 ERP (enterprise resource planning), 7 ,

84 - 87 benefits of, 89 - 90 evolution of, 86 - 89 implementing, 95 - 96

data cleaning, 97 determining technical

requirements, 96 employee training, 97 - 98 running pilots, 98 software installation, 97 testing, 97

planning capabilities, 90 CRP (capacity requirements plan-

ning), 92 MPS (master production schedule),

91 - 92 MRP (material requirements plan-

ning), 92 operations execution and control,

92 - 93

9780133438642_Book 1.indb 163 11/26/13 9:40 AM


production plans, 91 strategic business plans, 91

software shortcomings, 94 - 95 two-tier ERP, 93 - 94

ERP II, 87 evolution of ERP (enterprise resource

planning), 86 - 89 exchange rate fluctuations, global op-

erations, 130 - 131 expectations, metrics, 141 exposure to recession, 127

F facilities requirements planning, 34 - 35 facility layout strategies, 70

cellular layouts, 72 fixed position layout, 70 process layout, 70 - 71 product layout, 71 - 72

FCFS (first come, first served), 40 FedEx, operations strategy, 57 financial plans, 30 first come, first served (FCFS), 40 fishbone diagrams, 43 fixed position layout, 70 fixed-order quantity system, 16 - 17 , 19

how much to order, 19 - 21 when to order, 21 - 22

fixed-time period system, 17 - 19 flexibility, competitive priorities, 63 flexible manufacturing systems (FMS),

101 - 102 FMS (flexible manufacturing system),

101 - 102 follow-up, customer service

measures, 151 forecasting, 7

G Gantt charts, 38 global consumers, 115 global environment factors, 111 global inventory pipelines, 121 global operations

benefits of, 111 - 112 challenges to, 114 - 115

culture, 116 global consumers, 115 marketing, 115 - 116

considerations for, 112 costs, 113 , 119

hidden costs, 119 - 121 noncost considerations, 121 - 122 reshoring, 122 - 123

culture, 114 economic factors, 128 - 130 economies, 114 exchange rate fluctuations, 130 - 131 factors that impact, 112 - 114 infrastructure, 113 - 114 , 117

labor, 117 suppliers, 118 technology, 118 - 119 transportation, 117 - 118

inventory pipelines, 121 markets, 113 nontariff barriers, 132 - 133 political factors, 128 - 130 politics, 114 regional trade agreements, 131 - 132 TCO (total cost of ownership). See

TCO (total cost of ownership) technology, 114

global positioning systems (GPS), 98 - 99 global supply chains, 111

9780133438642_Book 1.indb 164 11/26/13 9:40 AM

165 Index

global trade, 110 globalization, 25 , 109 - 111 Google, 26 GPS (global positioning systems), 98 - 99 graphs, 43

H “ hard” costs, 124 - 125 hidden costs, global operations, 119 - 121 hierarchies, business plans, 29 high performance design, 61 high-volume operations, scheduling

work, 38 histograms, 43 holding cost versus ordering, 20 Hull, Chuck, 105 hybrid aggregate plans, 34

I identifying task times, 73 IMF (International Monetary

Fund), 110 implementing ERP (enterprise resource

planning), 95 - 96 data cleaning, 97 determining technical

requirements, 96 employee training, 97 - 98 running pilots, 98 software installation, 97 testing, 97

improvement, metrics, 141 independent demand versus dependent

demand, 22 - 23 information technology, 84 - 85

infrastructure competitive priorities, 63 - 64 global operations, 113 - 114 , 117

labor, 117 suppliers, 118 technology, 118 - 119 transportation, 117 - 118

intellectual property risk, 126 intermittent processes, 65 - 66 , 69

comparing, to repetitive processes, 68 International Monetary Fund

(IMF), 110 Internet, 84 inventory, 13

ABC classification, 23 - 24 cycle stock, 15 MRO (maintenance, repair, and oper-

ating) items, 16 reasons for carrying, 13 - 15 safety stock, 15 seasonal inventory, 15 transportation/pipeline inventory, 15 VMI (vendor managed inventory), 25

inventory pipelines, global operations, 121

inventory policies, 13 fixed-order quantity system, 16 - 17 , 19

how much to order, 19 - 21 when to order, 21 - 22

fixed-time period system, 17 - 19 inventory position (IP), 16 inventory positioning strategies, 75

assemble-to-order, 77 comparing, 77 - 79 make-to-order, 76 make-to-stock, 76 - 77

IP (inventory position), 16

9780133438642_Book 1.indb 165 11/26/13 9:40 AM


ISO (International Organization for Standards), 51 - 52

ISO 9000, 52 ISO 14000, 52

J-K job flow time, 41 job lateness, 41 job priority, 39 job sequencing, 39 - 41 just-in-time, 7 Korea, 120 KPIs (key performance indicators),

151 - 152

L labor, global operations

infrastructure, 117 labor costs, 120 landed costs, 124 last come, first served (LCFS), 40 lean systems, 7 level production plans, 33 levels of planning decisions, 29 line balancing, 73

assigning tasks to workstation, 74 computing efficiency, 74 - 75 determining cycle time, 74 identifying task times and precedence

relationships, 73 line processes, 67 location analysis, 7 longest processing time (LPT), 40 low-volume operations, scheduling

work, 38 LPT (longest processing time), 40

M maintenance, repair, and operating

(MRO) items, 16 makespan, 41 make-to-order, 75 - 79 make-to-stock, 75 - 79 manufacturing

roles in organizations and supply chains, 4 - 5

versus service operations, 3 - 4 marketing, global versus local, 115 - 116 markets, global operations, 113 mass customization, 7 master production schedule. See MPS

(master production schedule) material requirements planning. See

MRP (material requirements plan-ning)

McDonald’s, 26 suppliers, 118

measurements . See also performance measurements

customer service measures, 147 - 148 elements of customer service,

148 - 151 monitoring options, 152 - 153 productivity measures, 145

cycle time, 147 efficiency, 146 productivity, 145 - 146

measuring productivity, 11 - 12 Merck, OM (operations management), 2 metrics, 135 - 136

categories, 140 - 142 defining, 138 ensuring continuous

improvement, 139

9780133438642_Book 1.indb 166 11/26/13 9:40 AM

167 Index

getting buy-in from senior manage-ment and employees, 138

good metrics, 136 measuring and sharing results, 139 organizational focused metrics, 142 predictive and outcome metrics,

143 - 144 trade-offs, 144 - 145 understanding what data is needed

and how to collect it, 139 MIS (management information sys-

tems), 88 monitoring options, 152 - 153 MPS (master production schedule), 10 ,

30 , 32 , 35 ERP (enterprise resource planning),

91 - 92 MRO (maintenance, repair, and operat-

ing) items, 16 MRP (material requirements planning),

10 , 32 , 35 - 36 BOM (bill of materials), 36 ERP (enterprise resource

planning), 92

N NAFTA (North American Free Trade

Agreement), 132 nationalization of business, 129 NC (numerically controlled)

machines, 102 Nike, hidden costs, 120 Nokia, 100 nontariff barriers, global operations,

132 - 133

North American Free Trade Agreement (NAFTA), 132

numerically controlled (NC) machines, 102

O OM (operations management), 1 - 2

defined, 7 manufacturing versus service opera-

tions, 3 - 4 transformation role of, 2 - 3

operation processes, types of, 68 operations execution, ERP (enterprise

resource planning), 92 - 93 operations management. See OM operations managers, challenges for,

25 - 26 operations strategy, 57 - 58

competitive priorities, 59 - 60 cost, 61 flexibility, 63 operations structure and infrastruc-

ture, 63 - 64 order winners and order qualifiers,

64 - 65 quality, 61 - 62 time, 62

facility layout strategies, 70 cellular layouts, 72 fixed position layout, 70 process layout, 70 - 71 product layout, 71 - 72

inventory positioning strategies, 75 assemble-to-order, 77 comparing, 77 - 79 make-to-order, 76 make-to-stock, 76 - 77

9780133438642_Book 1.indb 167 11/26/13 9:40 AM


line balancing, 73 assigning tasks to workstation, 74 computing efficiency, 74 - 75 determining cycle time, 74 identifying task times and prece-

dence relationships, 73 outsourcing strategies, 79 - 80 process strategy, 65

intermittent processes, 65 - 66 product-process matrix, 66 - 68 repetitive processes, 66

operations strategy strategic alignment, 58 - 59

opportunity cost, 126 order convenience, customer service

measures, 150 order information availability, customer

service measures, 149 order qualifiers, competitive priorities,

64 - 65 order winners, competitive priorities,

64 - 65 ordering, versus holding cost, 20 organizational decision levels, 5 organizational focused metrics, 142 outsourcing, 79 - 80 , 120

versus vertical integration, 80 - 81

P Pareto charts, 43 Pareto’s Law, 24 performance measurements, 137 - 138 .

See also metrics inappropriate measures, 137

pipeline inventory, 15

planning capabilities, ERP (enterprise resource planning), 90

CRP (capacity requirements plan-ning), 92

MPS (master production schedule), 91 - 92

MRP (material requirements plan-ning), 92

operations execution and control, 92 - 93

production plans, 91 strategic business plans, 91

planning decisions aggregate plans, 30 financial plans, 30 levels of, 29 production plans, 30 strategic business plans, 29 top-level plans, 29

political stability of the source country, 127

politics, global operations, 114 , 128 - 130 post-transaction, customer service mea-

sures, 151 potential risk-related costs, 126 - 127 predictive and outcome metrics,

143 - 144 pre-enterprise resource planning soft-

ware, 87 pre-transaction elements of customer

service, 148 priorities, competitive priorities. See

competitive priorities priority rules, 39 - 40 problems with ERP software, 94 - 95 process capability, 45 - 48 , 62 process control charts, 48 - 49

9780133438642_Book 1.indb 168 11/26/13 9:40 AM

169 Index

process layout, 70 - 71 process quality, 62 process selection, 7 process strategy, 65

intermittent processes, 65 - 66 product-process matrix, 66 - 68 repetitive processes, 66

process technology, 84 product design, 7 product flexibility, 63 product layout, 71 - 72 product liability, 126 product substitution, customer service

measures, 150 product technology, 84 product tolerance range, 48 product variety, 68 product volume, 65 production planning, 31 - 32 production planning processes, 8 - 9

facilities requirements planning, 34 - 35 production plans, 9 , 30

ERP (enterprise resource planning), 91

types of, 33 - 34 chase production plans, 33 - 34 hybrid aggregate plans, 34 level production plans, 33

productivity, 7 , 145 - 146 measuring, 11 - 12

productivity measures, 145 cycle time, 147 efficiency, 146 productivity, 145 - 146

product-process matrix, 66 - 68 project processes, 67

protecting against stockouts, 13 against uncertainty, 14

protectionism, 129 prototype development costs, 125

Q Q-model, 17 quality

competitive priorities, 61 - 62 cost, 126 TQM (total quality management),

41 - 43 quality control, TQM (total quality

management), 43 quality management, 7 , 135

R radio frequency identification (RFID),

99 - 100 random variation, 45 RCCP (rough cut capacity planning),

10 , 32 , 37 real-time processing, 87 - 88 reengineering, 8 regional trade agreements, global opera-

tions, 131 - 132 repetitive processes, 66 , 68

comparing to intermittent processes, 68

reporting, metrics, 141 reports, 153 reshoring, 122 - 123 resource planning, 35

MPS (master production schedule), 35 MRP (material requirements plan-

ning), 35 - 36

9780133438642_Book 1.indb 169 11/26/13 9:40 AM


resource planning RCCP (rough cut capacity planning), 37

responsive Web design, 105 - 106 results, sharing, 139 rework, 126 RFID (radio frequency identification),

99 - 100 robotics, 102 - 103 roles

of manufacturing, in organizations and supply chains, 4 - 5

of service operations, in organizations and supply chains, 4 - 5

of technology, 83 - 84 rough cut capacity planning, 10 , 32 , 37 running pilots, ERP (enterprise re-

source planning), 98 RWD (responsive Web design), 105 - 106

S S&OP (sales and operations

planning), 29 safety, 5S, 54 safety stock, 15

fixed-order quantity system, 22 sales and operations planning

(S&OP), 29 Samsung, hidden costs, 121 SAP (Systems, Applications, and Prod-

ucts in Data Processing), 86 real-time processing, 87 - 88

satisfaction, 5S, 55 scatter diagrams, 43

scheduling, 8 work, 37 - 38

high-volume operations, 38 low-volume operations, 38 sequencing jobs, 39 - 41

SCM (supply chain management), 25 scorecards, 153

balanced scorecards, 154 benefits of, 158 newer versions, 156 - 157 original design, 154 - 156

seasonal inventory, 15 security, 5S, 55 sequencing jobs, 39 - 41 service operations

versus manufacturing, 3 - 4 roles in organizations and supply

chains, 4 - 5 sharing results, 139 shortest processing time (SPT), 40 Singapore Airlines, operations

strategy, 58 Six Sigma, 49 - 50 Six Sigma methodology, 50 - 51 slack per remaining operations

(S/RO), 40 small data, 106 SMART, 152 software, ERP (enterprise resource plan-

ning), shortcomings of, 94 - 95 sorting, 5S, 54 Southwest Airlines, 31

operations strategy, 58 SPC (statistical process control), 44

process capability, 45 - 48 process control charts, 48 - 49 variation, 45

9780133438642_Book 1.indb 170 11/26/13 9:40 AM

171 Index

special handling of shipments, customer service measures, 150

SPT (shortest processing time), 40 SQC (statistical quality control), 44 SRM (supplier relationship manage-

ment), 86 S/RO (slack per remaining

operations), 40 standardize, 5S, 54 standards, ISO (International Organiza-

tion for Standards), 51 - 52 statistical process control (SPC), 44 statistical quality control (SQC), 44 stockout level, customer service mea-

sures, 149 stockouts, protecting against, 13 straightening, 5S, 54 strategic alignment, 58 - 59 strategic business plans, 29

ERP (enterprise resource planning), 91

strategic costs, TCO (total cost of own-ership), 127 - 128

strategic decisions, 6 versus tactical operations decisions, 31

strategy, operations strategy, 57 - 58 strategy maps, 157 structure, competitive priorities, 63 - 64 supplier relationship management

(SRM), 86 suppliers, global operations infrastruc-

ture, 118 supply and demand, balancing, 14 supply chain management (SCM), 25 supply chains, global, 111 sustain, 5S, 54

system accuracy, customer service mea-sures, 149

systematic cleaning, 5S, 54

T tactical decisions, 6 tactical operations decisions, versus

strategic decisions, 31 Taiwan, 120 tardiness, 41 task times, identifying, 73 tasks, assigning to workstations, 74 TCO (total cost of ownership), 122 - 124

costs of goods sold, 124 environmental costs, 128 “hard” costs, 124 - 125 potential risk-related costs, 126 - 127 strategic costs, 127 - 128

technology automated material handling, 101 automation, 100 - 101 e-manufacturing

CAD (computer-aided design), 104 CIM (computer-integrated manu-

facturing), 104 emerging technologies, 104

3D printing, 104 - 105 responsive Web design, 105 - 106 small data, 106

ERP (enterprise resource planning), 85 - 87

evolution of, 86 - 89 FMS (flexible manufacturing system),

101 - 102 global operations, 114

9780133438642_Book 1.indb 171 11/26/13 9:40 AM


global operations infrastructure, 118 - 119

GPS (global positioning systems), 98 - 99

information technology, 84 - 85 Internet, 84

process technology, 84 product technology, 84 RFID (radio frequency identification),

99 - 100 robotics, 102 - 103 role of, 83 - 84

testing, ERP (enterprise resource plan-ning), 97

Thailand, 120 theory of constraints, 52 - 53 time, competitive priorities, 62 TOC (theory of constraints), 52 - 53 tools of quality control, 43 top-level plans, 29 total cost of ownership (TCO). See TCO

(total cost of ownership) total productivity, 12 total quality management. See TQM

(total quality management) Toyota, 25 , 131 TQM (total quality management), 8 ,

41 - 43 cost, 42 quality control, 43

trade, global trade, 110 trade agreements, global operations,

131 - 132 trade-offs, metrics, 144 - 145 transaction elements, customer service

measures, 149 transformation role of OM (operations

management), 2 - 3

transportation, global operations, 117 - 118

transportation inventory, 15 transshipments, 150 travel costs, 125 trigger price mechanisms, 133 two-tier ERP, 93 - 94

U-V uncertainty, protecting against, 14

value added, 8 variation SPC (statistical process con-

trol), 45 vendor managed inventory (VMI), 25 vertical integration, versus outsourcing,

80 - 81 VMI (vendor managed inventory), 25 VOC (voice of the customer), 42

W-X-Y-Z Walgreens, 84 Walmart

culture, 114 globalization, 109 RFID (radio frequency

identification), 100 work, scheduling, 37 - 38

high-volume operations, 38 low-volume operations, 38 sequencing jobs, 39 - 41

work centers, priority rules, 40 workstations, assigning tasks to, 74

9780133438642_Book 1.indb 172 11/26/13 9:40 AM

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