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Operations Management

Higher Business Management

2008 - 2009

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OperationsA memory aid!

Think of what happens in an operating theatre

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Operating SystemAn Operating System is a

configuration of resources to provide a product or service

Raw Materials Machinery Workers

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Operating SystemWhat could we make?

Paper, Scissors, People

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Operating SystemWe need to be organisedWe need to develop procedures

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Operations ManagementOperations Management is a

transforming process turning inputs (resources) into outputs (goods and services)

The key here is efficient management of resources

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Operations ManagementA Transformation Process

PROCESSINPUT OUTPUT

InformationFinancePeople

MaterialsMachinery

GoodsServices

Customer/Employee Satisfaction

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THE PRODUCTION PROCESS FOR BREADTHE PRODUCTION PROCESS FOR BREAD

INPUT Raw Materials (LAND) eg flour, yeast, water

Human Resources (LABOUR) the workers and managers

Man-made Resources (CAPITAL) eg ovens and baking trays

PROCESS The process for the manufacturing of bread will include measuring, sifting, mixing, kneading the bread, heating and cooling.

OUTPUTThe finished product, loaves of bread, distributed to the consumers

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Some Product Thoughts Deluxe Double Chocolate Chip Cookies

Freddie’s Fish

Collette’s Computer Manufacture

Krazzy Kazz’s Cars

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Input IssuesBest PriceReliability of SuppliersDelivery TimesQualityQuantities AvailableStorage Space (Raw Materials)

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Process Issues Average Demand per Week Production Capacity Available Working Procedures (eg H&S) Storage Space (Finished Product) Efficiency/Productivity Payment Systems Quality Stock Control

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Output IssuesPackaging Individual/Groups of

ItemsNature/Size of ContainersStorage Space (Before Dispatch)Organising Customer OrdersTransportation (Storage/Customers)Customer Requirements

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A Complicated FunctionOperations Management is a complex

area which can be further broken down into the following key areas:

A) planningB) productionC) purchasingD) storage and stock controlE) distribution/logistics

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PlanningTo be most efficient production

should take place at a constant level

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Planning In reality this is not possible:

Consumer Demand Staff Shortages Machinery Breakdowns Maintenance

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Production Systems How will the manufacturer produce goods?

Start with the factory layout - where will each part of production take place? Who will complete?

The splitting up of production into a number of different jobs is called the division of labour

A successful system will need a flow of stocks from one job to another to make sure that there are no delays due to shortages or bottlenecks

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What Production System?The Nature of the Product

Washing Machines Bread House Atlas Farming New Bridge

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What Production System? Market Size

Where the firm is producing large numbers of standard products the production can be simplified eg Irn Bru

Customised products for individual clients need a great deal of client input eg customised software or stained glass windows

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What Production System?Resources

Materials People Buildings Machinery/Tools Finance Time

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What Production System? Business Development

Small firms, small productions, production system limited eg Wallace & Gromit Cheese

As firms grow they can increase their capacity and produce a greater variety of goods

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What Production System?Labour Intensive Systems

A labour intensive system is one which relies more heavily on its workforce than machinery

‘Tattie Holidays’ Strawberry Picking Clothing Promotion

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What Production System?Labour Intensive Systems

Labour is cheaper than machinery Skill in craftsmanship required Can’t use machinery - working

environment Ability required to think/reason/use

initiative/make decisions Flexibility in production

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What Production System? Capital Intensive Systems

A Capital Intensive System is most common when:

Supply of labour is limited Production benefits from machine efficiency

and consistency Production is routine and repetitive

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Automation CAM (Computer Aided Manufacture) CAD (Computer Aided Design) Robotics

Allows firms to design, develop and produce products with high quality

Ability to make a wider range of similar products to appeal to different segments of the market

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Automation Advantages

Complicated tasks completed quickly High accuracy Less waste Quality consistent

Disadvantages Machinery is more likely to break down Narrow range of tasks

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Sony WalkmanAt present, Sony has at least 12 different versions of the Sony Walkman on the market. Each has the same basic features, all of which are made on the same production line

Using technology in the design and production of the Walkman, Somy can add different features to each model to appeal to different consumers

Prices vary as more advanced features are added

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Activities

Wallace & Gromit - Stinking Bishop

Research and produce a short report on the production of the cheese Stinking Bishop and the Wallace & Gromit effect

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Activities

Sony Walkman Research

The Sony Walkman has evolved over the years resulting in products unconceivable 20 years ago

Create a short report detailing the current range of ‘Walkmans’, their features and what market they would appeal to

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PurchasingThis varies according to the size/nature

of the organisation:

Services - very little purchasing, ‘production’ depends on staff skills

Manufacturing - may have a purchasing department

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Purchasing DepartmentTeam of specialists with the aim to:

Purchase the best quality materials At the lowest cost With the correct quantities At the correct time

Purchasing Mix

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The Importance of PurchasingObjectives:

Quantity and quality that the firm requires Purchase at the most competitive prices Ensure speedy delivery Arrange delivery to a suitable point eg site

or gate Choose reliable suppliers and maintain

good relations with them

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Stages in Purchasing Process

Requisition

Negotiation

PlaceOrder

ChaseDeliveryClear

Invoice

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The Purchasing MixDecisions on quantity to purchase:

Stock of raw materials available Time between orders placed Amount of raw materials to meet output

demand Availability and cost of storage space

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The Purchasing MixChoice of Supplier:

Price: lowest? discounts? credit terms? Quantity: acceptable? continuity of

supply? Availability: sources? delivery systems?

confidence? Location: transport? insurance?

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McDonalds Purchasing McDonalds do not have contracts with any

of their suppliers

They can change suppliers without notice

Size of McDonalds makes them an attractive customer

Must meet very strict quality standards

QuickTime™ and a decompressor

are needed to see this picture.

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Centralised PurchasingOne department carries out purchasing

for the whole businessEconomies of Scale (lower

rates/market power)Quality and Standard materials setDistribution and Warehousing better

planned

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Decentralised PurchasingReduces the cost and burden of

administration If each store manager (in retail) takes

responsibility - needs of the store better catered for

Managers get additional responsibility - increasing motivation

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Nature of Stocks (1)Raw materials and components –

saves delays in production (from stores)

Work in Progress – partially completed

Finished Goods – changes in demand (from stock holdings)

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Nature of Stocks (2)A stock take will be performed at least

annually to record the amount/value of stock. This is a physical count.

Stock is listed as a current asset on the balance sheet.

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Costs of Holding Stock Stock improves business performance but:

too much means capital is unproductive too little means that there could be delays in

production

Opportunity cost Spoilage costs Administration/Finance costs Out-of-Stock costs

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Stock Levels Decisions on how much stock to hold depend on:

Demand – cover growth in sales and unexpected demand

Stockpile – eg Christmas (toys) Costs of Stock holding – if expensive less held

eg furniture retailers Working capital – if limited can’t purchase more

stock Type of stock – perishable eg bread/cakes, out-

of-date eg new models Lead time – time to place and receive new order External factors – fear of future shortages

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Stock Control Issuing stock Monitoring Stock levels Quantities of Stock held

Economic Stock Level Minimum Stock Level Re-order level Re-order Quantity

(see student notes)

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Stock Control Diagram

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Computerised Stock Control Most organisations use computer stock control systems Computer automatically orders more stock at the

reorder level May use barcodes (30 yrs old in 2007) or RFID tags Physical checks to ensure discrepancies accounted for:

Theft Natural wastage Deterioration

Management make decisions with regard to popular products and adjust stock levels as necessary (local tastes)

Information useful when dealing with large orders – judge delivery date possible

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Just-in-Time (JIT) Limits stock holding to almost zero Close relationship between manufacturer and

supplier (need reliability) Stock brought to factory only when needed In a JIT system stock holding costs paid for

by supplier: Capital tied up in stock Storage costs Stock loss/wastage

Nothing produced unless there are customers ready to buy

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Just-in-Time (JIT) - ExampleJust-in-Time was first developed in Japan by Toyota, the car manufacturer. In order to reduce the costs involved in holding stocks of materials and work-in-progress, Toyota devised a card ordering system known as Kanban.

Toyota devised a policy that no components would be made, or supplies ordered, unless the instruction appeared on a Kanban.

For example, if a worker fitted six steering wheels, a Kanban card would be sent to the production team to order another six steering wheels. These would arrive just-in-time before the worker ran out of steering wheels.

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Just-in-Time (JIT) - ExampleIn order for this to be successful. Toyota had to ensure that its suppliers understood the system and were able to supply on demand. When it opened its UK plant it trained its suppliers in operations and quality procedures to make sure that they delivered the exact product at the right time.

In some cases the suppliers had their factories next door to the Toyota plant to ensure that they could operate with the JIT production system. To secure long term contracts with Toyota, suppliers had to deliver, at short notice, small quantities of high-quality goods.

The suppliers had to be completely reliable and would have to pay the costs of lost production if they could not deliver, or if they delivered faulty materials.

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Storage of Stock (Centralised) Advantages

Security Specialist Staff

Supervise Agreed Procedures Cheaper Efficient Distribution

Disadvantages

Time Wasting Cost of Specialist

Staff Cost of Dedicated

Storage Area

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Storage of Stock (Decentralised) Advantages

Stock at Hand Order as Required

(Depends on Production)

Fast Turnover of Small Quantities of Stock

Disadvantages

Less Control Theft Loss

Space in Production Area Required

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Storage of Stock (Kanban) Advantages

Exactly Meets Production Requirements

Savings on Purchase/Storage

Production Delays Prevented

Close Links with Suppliers

Disadvantages

Dependency on Suppliers

Suppliers must be Willing to Participate

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Methods of ProductionYou need to know:

Job Production Batch Production Flow Production

and advantages and disadvantages of each

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Job ProductionA single product is custom-made to a

customer’s own specifications

Examples: Boat Building Bridge Building Wedding Cakes/Dresses

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Job Production

Advantages

“One-off” orders accommodated

High price Specifications can

be changed Motivated

workforce

Disadvantages

High labour costs Wide variety of

equipment needed Each job will require

individual design (time)

Lead times lengthy

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Batch ProductionThe production of a group of similar

products. No item in a group goes to the next stage until all are ready.

Examples: Tinned Foods Bakery Houses in an Estate

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Batch ProductionAdvantages

Flexible production Partly finished goods

can be stockpiled and completed later

Reduced need for highly skilled staff

Machinery can be standardised

Disadvantages

Higher costs per unit (small batches)

Needs careful planning

High stock levels Less motivated staff Delays in

changing/cleaning equipment

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Flow Production Production items move continuously from

one operation to the next. Products are produced to a standard specification.

Examples: Cars Computers White goods eg washing machines

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Flow ProductionAdvantages

Economies of Scale Automated production

lines save time and money – 24/7

Large quantities produced

Reduced stockholding eg JIT

Quality systems can be built in/standard products

Disadvantages

Large investement required

Mass consumption required

If one part of the system fails – shutdown

Lack of worker motivation - repetitive

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Choice of Production Method Nature of the Product - eg bridge, sewers (job);

cereal farming (batch) Size of Market - eg fast moving consumer goods

such as soap/canned drinks have a large market (flow)

Stage of Business Development - eg when starting up (job or batch) may then move to flow as sales increase

Technology - new materials/machinery eg computers and robotics in car manufacturer - also different models on same production line

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Labour vs Capital Intensive Nature of the Product - eg everyday high

demand mass produced, large quantities of machinery (newspapers)

Relative Prices - if labour costs are rising might use more capital

Size of Firm - as firm grows scale of production increases employing more capital

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Marginal Output Productivity rises as each additional worker is

added to a production process

The marginal output is the increase in production by adding the extra worker

As more workers are added eventually marginal output will fall as workers can no longer specialise this is called the Law of Diminishing Returns

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What is Quality? Physical appearance (style) Reliability and Durability (lifespan) Special features (eg play MP3 CDs?) Suitability (what the customer requires) Availability of spare parts Ease of repair (service centres) After care service (prompt delivery?) Image of manufacturer (brand name?) Reputation of the product

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Quality Control Historic concept assuming a degree of

waste - 25% Quality checks take place at the end of the

manufacturing process Often goods need destroyed or re-worked Psychological implications - assumes

failure by denying the assumption that things can be done right

Friday Car Syndrome

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Quality Assurance Assumes that wastage caused by Quality

Control can be prevented Quality checked at every stage of the

process instead of just at the end Reduces waste to levels as low as 5% In a highly competitive market:

Increased profits Reduced costs Increased customer satisfaction

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Quality Standards (1) Quality is often defined as conformity with a

standard: Fit for purpose, Appearance, Safety, Availability,

Value for money, Ease of use, After sales, Reputation, Customer service

British Standards Institute on Quality Assurance: “an all embracing concept involving all stages and

all people in the production process”

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Quality Standards (2) BSI Kitemark - eg safety goggles, independently

tested to a specific standard BS5750 / ISO9000 - mark of quality worldwide

CE mark an EU award - eg armbands, won’t deflate and need supervision warning

ABTA Wool Mark - pure new wool, Wool Marketing Board IIP - Investors in People - provide training and

development of staff Warranties - manufacturer will undertake work

arising out of a defect ‘free of charge’

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UK - Toilet TestOperations folder on server …

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Japanese - Toilet TestOperations folder on server …

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ISO 9000 Can help business to:

Examine and improve systems, methods and procedures to lower costs

Motivate staff to gets things right first time Assure that orders are delivered on time Highlight product or design problems - identifying

improvements Record and investigate all quality failure and customer

complaints Give a clear signal to customer - “we take quality

seriously” Produce a documented system for recording and

satisfying the training needs of staff in terms of quality

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ISO 9001a set of procedures that cover all key processes in the business;

monitoring processes to ensure they are effective;

keeping adequate records;

checking output for defects, with appropriate and corrective action where necessary;

regularly reviewing individual processes and the quality system itself for effectiveness; and

facilitating continual improvement

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Total Quality Management (1) Culture shift:

‘we know what quality is’ ‘You tell us what you want and that will be our

definition of quality’ TQM assumes quality to your client or

customer, even if that is the next worker in the assembly line - your work should be of the highest standard and quality

Costly to establish TQM Wastage can be reduced to around 3%

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Total Quality Management (2) TQM requires:

A whole-company focus on quality A commitment from each individual in the

company Consultation with every employee at every level

of the organisation in setting standards A focus on teamwork Viewing TQM as a long term concept The creation of a plan for quality Training for employees Constant checking and review of performance Constant checking for improvement

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Total Quality Management (3) Four (4) key elements need managed:

The definition of quality at each stage of production - lies with customer

The commitment of all - mission statement, handbook, responsibilities, procedures, quality audits, quality circles, benchmarking etc

System in which quality can be assured - checking, monitoring, documentation, appraisals, targets etc

A measure of the ability to meet quality requirements - quantitatively or qualitatively

(see student notes for more detail)

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Benchmarking A process of Quality Assurance Compare your performance with the market

leaders (efficient producers) Customers Industrialists Business Analysts Journalists

Could be resistance to obtaining information

May continue to benchmark when you become the market leader

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Quality Circles Groups of employees who meet regularly to

identify, discuss and resolve problems in the production process Shop floor workers know production problems

best Workers will be motivated by involvement in

problem solving process

Team will then present ideas and solutions to management

First established in Japanese car industry

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Payment Systems (1)Used to:

Motivate Reward; and Control Labour

A variety of Payment Systems have been designed to achieve this.

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Payment Systems (2)Time-Rate Payment SystemsOvertimePiece-Rate Payment SystemsPiece rate plus Fixed ElementCommission PaymentsFringe BenefitsBonuses

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Payment Systems (3) Incentives to ProfessionalsContract EmploymentProfit-Sharing Schemes

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Payment Systems (4)Employers objectives:

Motivation Cost Prestige

Employees objectives: Purchasing Power Recognition and Fairness How Payments Are made Up

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Distribution and DeliveryWarehouse Planning:

Design and Layout – ground level, readily accessible and stock rotated

Mechanical Handling – specialist equipment (inc pallets)

Transportation – owned or hired, owing is expensive but complete control, careful route planning (see BBC Box)

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Transportation

Road – 80% of goods transported, specialist vehicles, door-to-door delivery

Rail – shortage of lorry drivers, restrictions on driving time, road congestion, haulage to final destination

Air – Prestwick highest freight in Scotland, expensive, quick delivery

Sea – Forth Estuary, petrol/minerals/coal, lengthy delivery times

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SchedulingProduction Plans will show where the

Factors of Production are needed at any point in time.

The aim being to eliminate idle time

May use a Gantt Chart

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Efficiency of Production A work study shows how tasks are currently

done with a view to improvement:

Select the task to be analyses Record how it is currently done Examine the information collected Develop a better method of doing the task Install the new method Maintain the new method

Method Study

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Efficiency of Production A work study shows how tasks are currently

done with a view to improvement:

Establishing how long tasks should take so that standard times can be identified

Actual times then judged on the standard

Work Measurement

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CongratulationsYou have completed

Operations

in

Higher Business Management