Operation Mgmt v2

Chapter
No
Topics
1 Introduction to Operations Management
2 The Strategic Role and Objectives of Operations
3 Process Design, Layout and Capacity Management
4 The ‘Three Es’ of Operational Excellence
5 Cost Minimization and Quality Maximization
6 Performance Objectives of Operations Management
7 Linear Programming
8 Critical Path Analysis
9 Sales and Operations Planning
10 Quality Management

Introduction
Operations Management (OM) is the process in which resources/inputs are converted into
more useful products. Operations Management is about how organizations produce goods
and services.
It introduces the general model of operations management which is used to link together the
different topics in operations management and the different parts of the module.
What is important is that you realise that it combines two distinct ideas.
The first idea is that all types of business, organisation or enterprise, large or small, profit
making or not-for-profit, are processes.
The second idea is that, to make these process work, operations managers do things such as
devising strategy, designing processes, planning and controlling processes, and improving
them. So, Operations Managers in all types of operation have a common set of activities.
Your objectives
In this chapter you will learn about the following:
Understand what Operations Management is.
Describe the similarities between all operations.
Understand the difference between different operations.
List the major tasks Operations Managers do.
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1 Effective Operations Management
To study Operations Management, we can start by studying two real life organizations.
It is important for organisations to understand the market and keep customer needs in focus
to provide goods and services to customers.
The managers are concerned with managing the processes which transform a set of ‘inputs’
into ‘outputs’.
ACTIVITY 1
(10 MINS)
Considering Ikea and McDonald fast food, what do you think are the important differences
between the two company’s operations?
2 Operations Management is about processes
All operations produce goods and services by managing processes to change the state and
condition of something to produce outputs.
The transformation process model is used to describe the nature of operations.
Operations processes take in a set of input resources which are then used to transform
something or are transformed into outputs of goods and services. These outputs satisfy
customer needs.
ACTIVITY 2
(10 MINS)
What are the inputs, processes, and outputs of the following?
(i)
Airline
(ii) Department store
(iii) Police
(iv) Frozen food manufacturer
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DEFINITIONS
a.Operations Function : It is the arrangement of resources which are used in the
production and delivery of products and services.
b.Operations Managers : They are staff who are responsible for managing some
resources. In a hospital he may be called an administrative manager, and in a
supermarket a store manager.
c.Operations Management is the term that is used for the activities, decisions and
responsibilities of operations managers.
3 Importance of Operations Management
An effective operation can give four types of advantages to the business.
It can reduce the costs of producing products and services by being
efficient.
It can increase revenue by increasing customer satisfaction through good
quality and service.
It can reduce the amount of investment (sometimes called capital employed
that is necessary to produce the required type and quantity of products and
services by increasing the effective capacity of the operation and by being
innovative in how it uses its physical resources.
It can provide the basis for future innovation by building a solid base of
operations skills and knowledge within the business.
ACTIVITY 3
(30 MINS)
Your task is to study the case below and answer this question:- Why is there the overlap
between operations, marketing and product/service development at Acme Whistles?
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CASE STUDY - Acme Whistles
Acme Whistles can trace its history back to 1870 when Joseph Hudson, decided he had the
answer to the London Metropolitan Police's request for something to replace the wooden
rattles that they used to attract attention and sound the alarm.
So the world's first police whistle was born. Being the height of the British Empire many other
police forces adopted the same police whistle as the London Police, so Acme Whistles grew
to be the premier supplier of high class whistles for police forces around the world. Within a
year Hudson had moved from having no employees to having fifty.
The success of his company has continued from that point. 'In many ways', says Simon
Topman, owner and Managing Director of the company, 'the company is very much the same
as it was in Joseph's day. The machinery is more modern, of course, and we have a wider
variety of products, but many of our products are very similar in design to their predecessors.
For example, football referees seem to prefer the traditional snail-shaped whistle.
So, although we have dramatically improved the performance of the product, our customers
want it to look the same. Most importantly, we have also maintained the same manufacturing
tradition from those early days. For example, the original owner insisted on personally blowing
every single whistle before it left the factory. We still do the same, not by personally blowing
them, but by plugging each whistle into an airline and subjecting it to the equivalent of normal
lung pressure. This means that the same tradition of quality has endured.
The company's range of whistles has expanded to include sports whistles (they provide the
whistles for the soccer world cup), distress whistles, (silent) dog whistles, novelty whistles,
instrumental whistles (used by all of the world's top orchestras), and many more types.
Although the whistle may seem a somewhat old fashioned object, both it and the technology
behind it, are undergoing a resurgence. For example, although police use mobile radios
predominantly, these can be lost, damaged or stolen. A whistle, on the other hand, is simple
and robust as well as compact and therefore provides a useful back-up. Less expected
perhaps is the use of whistle technology in such high-tech applications as monitoring the air
flow into protective fire resistant suits. Any variation in air flow makes a whistle embedded in
the air pipe sound and provides an audible warning.
'We are always trying to improve our products', says Simon, 'it's a business of constant
innovation. Sometimes I think that after 130 years there is surely nothing more to do, but we
always find some new feature to incorporate. You cannot find a single decade since the
company was founded where we have not produced a novel and patentable innovation.
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'Managing the operations in a small company is, of course, very different to working in a large
one. Everyone has much broader jobs; we cannot afford the overheads of having specialist
people in specialized roles. But this relative informality has a lot of advantages. It means that
we can maintain our philosophy of quality amongst everybody in the company; and it means
that we can react very quickly)' when the market demands it. ' Nor is the company's relatively
small size any barrier to its ability to innovate.
'On the contrary', says Simon, 'there is something about the culture of the company that is
extremely important in fostering innovation. Because we are small we all know each other and
we all want to contribute something to the company. It is not uncommon for employees to
figure out new ideas for different types of whistle. If an idea looks promising, we will put a small
and informal team together to look at it further: It is not unusual for people who have been with
us only a few months to start wanting to make innovations. It's as though something happens
to them when they walk through the door of the factory that encourages their natural
inventiveness.
4 Operations management is concerned with managing processes
All operations conform to this general input-transformation-output model.
For a start, one is a manufacturing operation producing largely physical goods, and the other
is a service operation which produces changes in the physiological condition, feelings and
behaviour of patients.
The nature of the processes which each building contains will also be different. The motor
vehicle plant contains
• metal cutting and forming machinery
• assembly processes,
Whereas the hospital contains
• diagnostic,
• care
• therapeutic processes.
Perhaps the most important difference between the two operations, however, is the nature of
their inputs. Both have 'staff' and 'facilities' as inputs to the operation but they act upon very
different things.
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The motor vehicle plant uses its staff and facilities to transform raw materials to finished motor
vehicles, whereas the hospital transform the patients.
5 Inputs to a process
• materials
• information
• customers
The Process
Here, materials could be processed, however information and customers can be processed
as well.
Outputs from the process
Outputs could be either pure goods or services or a combination of both.
Operations Management system model
Operations Management is the management of processes or systems as shown in Figure 1.1
and Figure 1.2. It creates goods and/or provide services. The operations function involves the
conversion of inputs into outputs.
Figure 1.1
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Figure 1.2
6 Relationship Between “OM And Other Functions”
There are three primary functions (Figure 1.3), which exist in most of the organizations and
they are Operations, Marketing and Finance. These three cannot be mutually exclusive and
the functional overlap is unavoidable. The level of overlapping varies from one organisation to
another.
In addition to these three major functions of business organizations, the operation
management function has to interact with many supporting functions. The supporting functions
are research and development, product design, industrial engineering, maintenance,
personnel, accounting, costing, materials, etc. The level of interaction and presence of some
departments may be exchange of information on current and future decided based on the size
of the organization, product line and type of management.
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2 3
Finance
1
Production / Operations
4
Marketing
6
5
1. Accounting
2. Personnel
3. Research
4. Engineering
5. Purchase
6. distribution
SYSTEMS VIEW OF A BUSINESS
Figure 1.3
7 Differences between goods and services:
Services are usually intangible (for example, your purchase of a ride in an empty airline Seat
between two cities) as opposed to a tangible good.
Services are often produced and consumed simultaneously; there is no stored inventory. For
instance, the beauty salon produces a haircut that is "consumed" simultaneously, or the doctor
produces an operation that is "consumed" as it is produced. We have not yet figured out how
to inventory haircuts or appendectomies.
Services are often unique. Your mix of financial coverage, such as investments and insurance
policies, may not be the same as anyone else's, just as the medical procedure or a haircut
produced for you is not exactly like anyone else's.
Services have high customer interaction. Services are often difficult to standardize, automate,
and make as efficient as we would like because customer interaction demands uniqueness.
In fact, in many cases this uniqueness is what the customer is paying for; therefore, the
operations manager must ensure that the product is designed (i.e., customized) so that it can
be delivered in the required unique manner.
Services have inconsistent product definition. Product definition may be rigorous, as in the
case of an auto insurance policy, but inconsistent because policyholders change cars and
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mature. Services are often knowledge based, as in the case of educational, medical, and legal
services, and therefore hard to automate.
Services are frequently dispersed. Dispersion occurs because services are frequently brought
Into the client/customer via a local office, a retail outlet, or even a house call.
7 Operations processes have different characteristics
These include the following:
a. The volume of the output;
b. The variety of the output;
c. The variation in the demand of the output;
d. The degree of visibility which customers have of the production of the product
or service.
Volume – It is important here to distinguish between the actual volume (in this case the
number of customers served) that the restaurant has to cope with, and the maximum it could
cope with. This latter is called the capacity of the operation.
Capacity is easier to measure because it can be calculated by multiplying the number of seats
in the restaurant by the average number of customers per hour (calculated by timing the
customers) and by the number of hours the restaurant is open.
In other words, imagine there is a queue of people outside the restaurants, what is the
maximum number of customers that the restaurant could serve? Contrast this capacity figure
with the actual number of customers in a day that the restaurant serves. You could ask the
restaurant manager for this information or make an approximation from your own observations
at different times of day.
Variety – There are two important aspects to measuring variety for restaurants. The first is
the range of different foods that the restaurant serves. Just count the number of different items
on the menu to get an indication of this. The other factor to take into account is whether the
restaurant will ‘customize’ food to your own preference. For example, does it serve steak welldone,
medium and rare? Does it allow you to choose the fillings for your sandwiches? etc.
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Variation – Possibly the easiest way to measure variation is the ratio of peak demand in a
day or a week, to the lowest demand during that day or week. Again, you could try asking the
restaurant manager for this information or (if you have time) make observations throughout
the day or even the week. So, for example, if the restaurant was busy up to its full capacity for
part of the day but, at its lowest, was only ten per cent full, then the peak to trough ratio is
10:1.
Visibility – This is a relatively simple issue. Simply ask, “How much of the preparation of the
food do you witness?” It is unusual to see every aspect of food preparation, for example,
preparing the vegetables, slicing the bread, etc. But, you may see food being cooked and
assembled in some burger restaurants. The other way of looking at this issue is to ask yourself
whether the preparation of the food is being deliberately put ‘centre stage’ in the restaurant.
Some restaurants deliberately do this so as to entertain customers while they are waiting for
their food.
ACTIVITY 4
(30 MINS)
Your task is to study the case below and answer this question: What is the role of technology
in allowing Formule 1 to keep its costs low?
CASE STUDY - Formule 1
Hotels, by the nature of their services, are high-contact operations. They are staff intensive
and have to cope with a range of customers, each with a variety of needs and expectations.
So, how can a highly successful chain of affordable hotels avoid the crippling costs of high
customer contact?
Formule 1, a subsidiary of the French Accor group, manage to offer outstanding value by
adopting two principles not always associated with hotel operations - standardization and an
innovative use of technology.
Formule 1 hotels are usually located close to the roads, junctions and cities which makes them
visible and accessible to prospective customers. The hotels themselves are made from stateof-the-art
volumetric prefabrications. The prefabricated units are arranged in various
configurations to suit the characteristics of each individual site. All rooms are nine square
metres in area, and are designed to be attractive, functional, comfortable and soundproof.
Most important, they are designed to be easy to clean and maintain.
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All have the same fittings, including a double bed, an additional bunk- type bed, a wash basin,
a storage area, a working table with seat, a wardrobe and a television set.
The reception of a Formule 1 hotel is staffed only from 6.30 am to 10.00 am and from 5.00 pm
to 10.00 pm. Outside these times an automatic machine sells items to credit card users,
provides access to the hotel, dispenses a security code for the room and even prints a receipt.
Technology is also evident in the washrooms. Showers and toilets are automatically cleaned
after each use by using nozzles and heating elements to spray the room with a disinfectant
solution and dry it before it is used again.
To keep things even simpler, Formule 1 hotels do not include a restaurant as they are usually
located near existing restaurants. However, a continental breakfast is available, usually
between 6.30 am and 10.00 am, and of course on a ‘self-service’ basis!
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8 Three Levels of Operations Management
Operation managers are required to make a series of decisions in the production function as
in Tablet 1.1.
The decisions made by operation managers about the activities of production systems tend to
fall into three general categories, viz.,
1. Strategic decisions
2. Operating decisions
3. Control decisions
Tablet 1.1
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CHAPTER ROUNDUP
1. Production is the creation of goods and services.
2. Operations Management (OM) are activities that relate to the creation of goods and
services through the transformation of inputs to outputs.
3. All organizations perform three functions to create goods and services. Namely:
Marketing, which generates demand, Production/operations, which creates the
product, Finance/accounting, which tracks how well the organisation is doing, pays the
bills, and collects the money.
4. Operations Management process is the application of planning, organizing staffing,
leading, and controlling to achieve objectives.
5. Ten major OM decisions are required of operations managers:
Design pf goods and services
Managing quality
Process and capacity design
Location strategy
Layout strategy
Human resources, job design, and work measurement
Supply chain management
Inventory, material requirements planning, and JIT (Just-in-time)
Immediate and short-term scheduling
Maintenance
QUICK QUIZ
1. Why should one study operations management?
2. Outputs of operations may be classified as goods, raw materials and profits. True or
False?
3. One reason to study operations management is to learn how people organize
themselves for productive enterprise. True or False?
4. Lori produces "Final Exam Care Packages" for resale by her sorority. She is currently
working a total of 5 hours per day to produce 100 care packages. What is Lori's
productivity?
b) Lori thinks that by redesigning the package, she can increase her total productivity
to 133 care packages per day. What will be her new productivity?
c) What will be the percentage increase in productivity if Lori makes the change?
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ANSWERS TO QUICK QUIZ
1. We want to understand (1) how people organize themselves for productive enter-prise,
(2) how goods and services are produced, (3) what operations managers do, and (4)
this costly part of our economy and most enterprises.
2. False, raw materials are inputs.
3. True
4.
ANSWERS TO ACTIVITIES
1. Ikea : High volume, variety of service and Do –it – yourself, McDonald : Clean
environment, good service.
2. Airline, Department Store and are nearer to the intangible and Frozen Food
Manufacturer is a tangible product.
3. The simple answer to this question is the reason is size. This becomes especially true
when the boss of the company is also the owner. It is literally his own money that is
being spent when creating any new managerial roles.
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4. For Formule 1, technology is harnessed in the manufacture of the self-contained
bedroom units in the factory prior to assembly on the site. Because of the
standardization, conventional factory automation can be used to some extent. More
obviously, during the running of normal operations at the hotel, technology, in the form
of the automatic ‘booking in’ machine at the door, allows the hotel to remain ‘open’
even while it is unstaffed for much of the day. This saves labour. Similarly, labour is
saved by the use of automatic cleaning in the washrooms. his also
ensures that high standards of cleanliness are maintained throughout the day, even
when the
hotel is not staffed.
REFERENCES
Operations Management by Nigel Slack, Publisher, 6 th edition, 2010 , Prentice Hall
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Introduction
Any Operations function should understand its contribution to the organization. It is important
that we specify its role in business. We should also be able to assess the contribution of the
operation to a company’s strategic goals. At a more practical level, it is impossible to know
whether an operation is succeeding if the specific performance objectives against which its
success is measured are not clearly spelt out.
However there is a progression of operations excellence. We will understand this using Hayes
and Wheelwright’s nomenclature from Stage 1 to Stage 4.
There is a whole range of performance criteria which can be used to judge an operation and
which operations managers influence. Although cost is important and operations managers
have a major impact on cost, it is not the only thing that they influence.
• They influence the quality which delights or disappoints their customers,
• they influence the speed at which the operation responds to customers’ requests,
• they influence the way in which the business keeps its delivery promises,
• they impact on the way an operation can change with changing market
Your objectives
In this chapter you will learn about the following:
Understand what role the operations function should play to achieve strategic
success.
Understand the performance objectives of operations.
Understand the internal and external benefits which derive from excelling in each of
them.
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1 Effective Operations Management
By the role of the operations function we mean the part it plays within organization – the
reason that the function exists.
Operations should be the implementer of business strategy
Operations should be support to business strategy
Operations should be the driver of business
1.1 Implementing the business strategy
The most basic operations is to implement strategy. Most companies will have some
kind of strategy but it is the operation that puts it into practice.
You cannot after all, touch the strategy; you cannot even see it; all you can see is how
the operation behaves in practice.
1.2 Strategy and operations
Strategy is how the mission of a company is accomplished. It unites an
organization, provides consistency in decisions, and keeps the organization
moving in the right direction. Operations and supply chain management
play an important role in corporate strategy.
As shown in Figure 2.1, the strategic planning process involves a
hierarchy of decisions.
Figure 2.1 Strategic Planning
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1.3 Strategy formulation
Strategy formulation consists of five basic steps:
Defining a primary task
The primary task represents the purpose of a firm—what the firm is in the business of
doing
Assessing core competencies
Core competency is what a firm does better than anyone else, its distinctive
competence. A firm’s core competence can be exceptional service, higher quality,
faster delivery, or lower cost.
Determining order winners and order qualifiers
Order qualifiers are the characteristics of a product or service that qualify it to be
considered purchase by a customer. An order winner is the characteristic of a product
or service that wins orders in the marketplace—the final factor in the purchasing
decision. For example, when purchasing
Positioning the firm
Strategic positioning involves making choices—choosing one
or two important things on which to concentrate and doing them extremely well.
Deploying the strategy
Companies that compete on their chosen performance objectives as in section 5
2 Supporting business strategy
Another operation role is to support strategy. This goes beyond implementing strategy.
It means developing resources to provide the capabilities, which allow the organization
to improve and refine its strategic goals.
You must
• develop process flexible enough to make novel components,
• organize your staff to understand the new technologies,
• develop relationships with its suppliers which help then respond quickly when
supplying new parts.
The better the operation is at doing these things, the more support it is giving to the
company’s strategy. If the company had adopted a different business strategy, its
operations function would have needed to adopt different objectives.
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3 Driving business strategy
The third, and most difficult, role of operations is to drive strategy by giving it a unique
and long-term advantage.
For example, a specialist food service company supplies restaurants with frozen fish
and fish products. Over the years it has built up close relationships and with its
customers (chefs) as well as its suppliers around the world (fishing companies and fish
farms). In addition, it has its own small factory, which develops and produces a
continual stream of exciting new products.
4 Judging the operation’s contribution
The ability of any operation to play these roles within the organization can be judged by
considering the organization aims and goals of the operations function.
There is a progression of operations excellence. We will understand this using Hayes and
Wheelwright’s nomenclature from Stage 1 to Stage 4.
Stage 1 – Internal neutrality
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Stage 2 – External neutrality
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Stage 3 – Internally supportive
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Stage 4 – Externally supportive
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5 The Five performance objectives
5.1 Quality
Customers are not looking for high levels of customer service, but they are looking for
high value.
You would want to do things right; that is, you would not want to make mistakes, and
would want to satisfy your customers by providing error-free goods and services which
are ‘fit for their purpose’. This is giving a quality advantage to your company customers.
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Think of any company which competes especially on quality e.g. high quality hotels
and restaurants, luxury services such as high price hairdressers, etc. What do you
think quality here means? High conformance to quality is necessary for safety reasons
such as in hospital blood testing.
5.2 Speed
You would want to do things fast, minimizing the time between a customer asking for
goods and services and the customer receiving them in full, thus increasing the
availability of your goods and services and giving your customers a speed advantage.
Any accident, emergency or rescue service can be thought of here. Now I am sure that
the consequences of lack of speed are immediately obvious to you. Consider
transportation examples where different speeds are reflected in the cost of the service.
First and second class postage is an obvious example as are some of the over-night
courier services.
Likewise, the fast check-in service offered to business class passengers at airports
and the exceptionally fast service of Concorde (depending on whether it is flying when
you are reading this!) which offers a fast service at a very high price.
5.3 Dependability
You would want to do things on time, so as to keep the delivery promises u have made
to your customers. If the operation can do this, it is giving dependability advantage to
its customers.
Some of the best examples to understand this concept called dependability is where
there is a fixed ‘delivery’ time for the product or service. Theatrical performances are
an obvious example (or the preparation of lectures). Other examples include space
exploration projects which rely on launch dates during a narrow astronomical ‘window’.
5.4 Flexibility
You would want to be able to change what you do; that is, being able to vary or adapt
the operation’s activities to cope with unexpected circumstances or to give customers
individual treatment.
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Hence the range of goods and services, which you produce, has changed far enough
to deal with all customer possibilities. Either way, being able to change far enough and
fast enough to meet customer requirements gives a flexibility advantage to your
customers.
Most operations do not know who or what will ‘walk through the door’ next. The obvious
example would be a bespoke tailor who has to be sufficiently flexible to cope with
different shapes and sizes of customer and also (just as importantly) different aesthetic
tastes and temperaments.
A more serious example would be the oil exploration engineers who need to be
prepared to cope with whatever geological and environmental conditions they find
drilling for oil in the most inhospitable parts of the world. Accident and emergency
departments in hospitals must also be flexible. Unless they have a broad range of
knowledge which allows them to be flexible they cannot cope with the broad range of
conditions presented by their patients.
5.5 Cost
You would want to do things cheaply; that is, produce goods and services at a cost
which enables them to be priced appropriately for the market while still allowing for a
return to the organization; or in a not-for-profit organization, give good value to the
taxpayers or whoever is funding the operation. When the organization is managing to
do this, it is giving a cost advantage to its customers.
Lowering prices can increase demand for products or services, but it also reduces
profit margins if the product or service cannot be produced at lower cost. To compete
based on cost, operations managers must address labor, materials, scrap, overhead,
and other costs to design a system that lowers the cost per unit of the product or
service.
We use the example of the low cost retailers such as Aldi who have achieved some
success in parts of Europe by restricting the variety of goods they sell and services
they offer.
ACTIVITY 1
(5 MINS)
Brief explain ways in which quality can be improve profit.
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6 Case Study - Organically good quality
'Organic farming means taking care and getting all the details right. It is about quality from
start to finish. Not only the quality of the meat we produce but also quality of life and quality
of care for the countryside.'
Nick Fuge is the farm manager at Lower Hurst Farm located within the Peak District National
Park of the UK. He has day-today responsibility for the well-being of all the livestock and the
operation of the farm on strict organic principles. The 85 hectare farm has been producing
high quality beef for almost 20 years but changed to fully organic production in 1998.
Organic farming is a tough regime. No artificial fertilizers, genetically modified feedstuff or
growth promoting agents are used. All beef sold from the farm is home bred and can be traced
back to the animal from which it came. 'The quality of the herd is most important, ' says Nick
'as is animal care. Our customers trust us to ensure that the cattle are organically and
humanely reared, and slaughtered in a manner that minimizes any distress. If you want to
understand the difference between conventional and organic farming, look at the way we use
veterinary help.
Most conventional farmers use veterinarians like an emergency service to put things right
when there is a problem with an animal. The amount we pay for veterinary assistance is lower
because we try to avoid problems with the animals from the start. We use veterinaries as
consultants to help us in preventing problems in the first place. '
‘Cuts of meat are individually vacuum packed, weighed and then blast frozen. We worked
extensively with the Department of Food and Nutrition at Oxford Brookes University to devise
the best way to encapsulate the nutritional, textural and flavoursome characteristics of the
meat in its prime state. So, when you defrost and cook any of our products you will have the
same tasty and succulent eating qualities associated with the best fresh meat. '
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After freezing, the products are packed in boxes designed and labelled for storage in a home
freeze.
Customers order by phone or through the internet for next day delivery in a special 'mini deep
freeze' reusable container which maintains the meat in its frozen state. isn't just the quality of
our product which has made us a success, ' says Catherine, 'we give a personal and inclusive
level of service to our customers that makes them feel close to us and maintains trust in how
we produce and prepare the meat. The team of people we have here is also an important
aspect of our business. We are proud of our product and feel that it is vitally important to be
personally identified with it. ' .
ACTIVITY 2
(30 MINS)
Your task is to study the case below and answer these question:
1 What does Lower Hurst Farm have to get right to keep the quality of its products and its
services so high?
2 Why is Nick's point about veterinarian important and helps all types of operation?
Case Study- When speed means life or death
Of all the operations which have to respond quickly to customer demand, few have more need
of speed than the emergency services. In responding to road accidents especially, every
second is critical. The treatment you receive during the first hour after your accident (what is
called the 'golden hour') can determine whether you survive and fully recover or not.
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Making full use of the golden hour means speeding up three elements of the total time to
treatment - the time it takes for the emergency services to find out about the accident, the
time it takes them to travel to the scene of the accident, and the time it takes to get the casualty
to appropriate treatment.
Alerting the emergency services immediately to an accident is the idea behind Mercedes-
Benz's new TeleAid (Telematic Alarm Identification on Demand), offered initially to drivers of
their S-class cars in Germany. As soon as the vehicle's air bag is triggered, an onboard micro
computer reports through the mobile phone network to a control centre (drivers can also
trigger the system manually if not too badly hurt). The onboard satellite facility then allows the
vehicle to be precisely located, and the type of vehicle and owner identified (if special
medication is needed).
Getting to the accident quickly is the next hurdle. Often the fastest method is by helicopter.
When most rescues are only a couple of minutes' flying time back to the hospital speed can
really saves lives. However, it is not always possible to land a helicopter safely at night
(because of possible overhead wires and other hazards) so conventional ambulances will
always be needed, both to get paramedics quickly to accident victims and to speed them to
hospital.
One increasingly common method of ensuring that ambulances arrive quickly at the accident
site is to position them, not at hospitals, but close to where accidents are likely to occur.
Computer analysis of previous accident data helps to select the ambulance's waiting
position, and global positioning systems help controllers to mobilize the nearest unit. At all
times a key requirement for fast service is effective communication between all who are
involved in each stage of the emergency. Modern communications technology can play an
important role in this.
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ACTIVITY 3
(30 MINS)
Your task is to study the case below and answer these questions:
1 Draw a chart which illustrates the stages between an accident occurring and
full treatment being made available.
2 What are the key issues (both those mentioned above and any others you can think of)
which determine the time taken at each stage?
QUICK QUIZ
1. A prudent business leader has a financial perspective of strategy that drives
operational and marketing decisions. True or False
2. Waste is considered to be an output True or False
3. Which of the following is not a key factor of competitiveness?
A. price
B. product differentiation
C. flexibility
D. after-sale service
E. size of organization
4. What are the major factors product and service design strategy?
5. Unique attributes of firms that give them a competitive edge are called
______________.
A. Functional strategies
B. Balanced scorecards
C. Supply chains
D. Core competencies
E. Sustainable initiatives
ANSWERS TO QUIZ
1. False
2. True
3. E, competitiveness often has nothing to do with organization size.
4. Major factors in design strategy
Cost
Quality
Time-to-market
Customer satisfaction
Competitive advantage
5. D, core competencies can be translated into competitive advantage.
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ANSWERS TO ACTIVITIES
1. How improved quality increases profits
2. How Lower Hurst Farm keep the quality of its products
The operation must do everything it can to demonstrate that it is doing this
and build the trust of its customers. Second, there is a significant ‘quality of
service’ issue. Catherine points out that, customers like to have personal
communication with her when they are ordering their meat.
Nick's point about veterinarian important and helps all types of operation
Nick’s view is very close to the modern philosophy that, because the true cost
of breakdown in any part of an operation is far higher than most people
imagine because of the disruption it causes, it is usually best to try to put
some effort into preventing breakdowns happening in the first place.
3. Draw a chart which illustrates the stages between an accident occurring and full
treatment being made available.
We don’t have enough information to draw any definitive specific chart. But
one can choose a typical situation and speculate as to the likely stages
The key issues which determine the time taken at each stage
Information flow
Decision making
Skills availability
Journey times
Capacity management
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CHAPTER ROUNDUP
This chapter focuses on the concept that operations has a leading role in determining
the direction a company may take with reference to the requirements of the market
and the marketing function.
Strategy formulation involves defining the primary task, assessing core
competencies, determining order winner and order qualifiers, and positioning the firm
The operations will use certain performance objectives to achieve this.
Understanding and applying operations strategy aids the organization to develop
their competitive advantage using their core competency, both within the local as well
as the international environment.
REFERENCES
1. Operations Management by Nigel Slack, Publisher : Prentice Hall
2. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
3. Operations Management by Lee J. Krajewski, Publisher : Prentice Hall
4. Operations Management by Russell,& Benard W. Taylor, Creating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
2-13

Introduction
In Operations Management, the design activity is much broader than a universally
recognized definition of ‘design’. All operations managers are designers. When they
purchase or rearrange the position of a machine, or when they change the way of working
within an operations process, it is a design decision because it affects the physical shape
and nature of their processes.
The 'general approaches' to managing processes are called process types. Different terms
can be used to identify process types in manufacturing and service industries.
In manufacturing, these process types are (in order of increasing volume and decreasing
variety) are:
project processes
jobbing processes
batch processes
mass processes
continuous processes.
The layout of an operation is concerned with the physical location of its transforming
resources. It decides where to put all the facilities, machines, equipment and staff in the
operation.
Layout is often the first thing most of us would first notice on entering an operation because
it governs its appearance. It also determines the way in which transformed resources
the materials,
information
customers
flow through the operation. Relatively small changes in the position of a machine in a factory,
or goods in a supermarket, or changing rooms in a sports centre can affect the flow through
the operation.
3-1

This, in turn, can affect the costs and general effectiveness of the operation. Refer to the
power point slide for this lesson which shows the facilities layout activity in the overall model
of design in operations.
When looking at capacity, operations managers need to look at both resource inputs and
product outputs. The reason is that, for planning purposes, real (or effective) capacity
depends on what is to be produced. For example, a firm that makes multiple products
inevitably can produce more of one kind than of another with a given level of resource
inputs.
Your objectives
In this chapter you will learn about the following:
Understand why design is important in Operations Management.
Understand the objectives the design activity should have.
Understand how processes are designed.
Understand the ‘process types'
Understand the basic layout types used in operations.
Able to describe the type of layout an operation should choose.
Understand what the layout design is trying to achieve.
Understand how each basic layout type is designed in detail.
Understand how long it will take to bring new capacity on stream.
Understand how does this match with the time that it takes to develop a new product.
Understand how to manage resources in sync with strategic capacity management
1 Process types in manufacturing
1.1 Project processes
Figure 3.1 Types of Process
Project processes deal with discrete, usually highly customized products.
Often the timescale of making the product or service is relatively long, as
is the interval between the completion of each product or service.
So low volume and high variety are characteristics of project processes.
3-2

The activities involved in making the product can be ill-defined and
uncertain, sometimes changing during the production process itself.
Examples of project processes include
a. shipbuilding,
b. most construction companies,
c. movie production companies,
d. building the Mass Rapid Transport
e. installing a computer system.
The essence of project processes is that each has a well-defined start and
finish, the time interval between starting different jobs and the transforming
resources which make the product.
The process map for project processes will almost certainly be complex. The
figure below shows various manufacturing process types.
1.2 Jobbing processes
Jobbing processes also deal with very high variety and low volumes. Whereas in
processes each product has resources devoted more or less exclusively to it, for in
job processes each product has to share the operation's resources with many other
resources of the operation will process a series of products but, although all the
processes will require the same kind of attention, each will differ in its exact needs.
Jobbing processes produce more and usually smaller items than project processes
but, like project processes, the degree of repetition is low. Many jobs will usually be
'one-offs'.
Again, any process map for a jobbing process could be relatively complex for similar
reasons to project processes. However, jobbing processes usually produce
physically smaller products and, although sometimes involving considerable skill,
such processes often involve fewer unpredictable circumstances.
Therefore, their process maps are usually less complex than those for project
processes.
1.3 Batch processes
Batch processes can often look like jobbing processes, but batch does not have quite
the degree of variety associated with jobbing.
As the name implies, each time batch processes produce a product they produce
more than one. So each part of the operation has periods when it is repeating itself,
at least while the 'batch' is being processed.
Consider a garment manufacturing process. Batches of the various parts that make
up the garments move through the work stations, each of which has specialized
machinery.
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1.4 Mass processes
Mass processes are those which produce goods in high volume but variety is narrow,
that is, in terms of the fundamentals of the product design.
A mobile plant, for example, might produce several thousand variants of car if the
option of engine size, colour, extra equipment, etc. is taken into account.
The activities in the automobile plant, like all mass operated plants are essentially
repetitive and largely predictable.
1.5 Continuous processes
Continuous processes are one step beyond mass processes insomuch as they
operate at even higher volume and often have even lower variety. They also usually
operate for far longer periods of time.
Sometimes they are literally continuous in that their products are inseparable, being
produced in an endless flow. They may even be continuous in that the operation
must supply the products without a break.
Continuous processes are often associated with relatively inflexible, capital-intensive
technologies with highly predictable flow.
There are often few elements of discretion in this type of process and although
products may be stored during the process, the predominant characteristic of most
continuous processes is of smooth flow from one part of the process to another.
Inspections are likely to form an important part of the design in operations
management.
2 Purpose of Design
Design is the activity which shapes the physical form and purpose of both product and
services and the processes which produce them. .
The overall purpose of the design activity is to meet the needs of customers.
2.1 What objectives should the design activity have?
The design activity can be viewed as a transformation process in the same way as other
operations. It can therefore be judged in terms of:
its quality,
speed,
dependability,
flexibility
cost.
3-4

Product or service design and process design are coordinated in some way.
The design activity must also take into account some environmental issues. These
include
examination of the source and suitability of materials,
the sources and quantity of energy consumed,
the amount and type of waste material,
the life of the product itself, and the end-of-life state of the product.
3 How are processes designed?
Processes are designed initially by breaking them down into their individual activities.
Often common symbols are used to represent types of activity. The sequence of
activities in a process is then indicated by the sequence of symbols representing the
activity. This is called 'process mapping'.
Alternative process designs can be compared using process maps.
4 What are 'process types'?
Process types are general approaches to managing the transformation process. They
depend on the volume and variety of an operation's output.
In manufacturing, these process types are (in order of increasing volume and decreasing
variety) project, jobbing, batch, mass and continuous processes.
In service operations, although there is less consensus on the terminology, the terms
often used (again in order of increasing volume and decreasing variety) are professional
services, service shops and mass services.
5 Case Study – Verenigde Bloemenveiling Aalsmeer (VBA) (United Flower
Auctions), Aalsmeer, Holland
VBA is the largest flower auction operation in the world. It comprises two main parts. The
first is the sellers' area known as the 'auction section' where flowers are received, held in
cooled storage areas and auctioned.
The second is the 'buyers' section' where around 300 buyers, exporters and wholesalers
rent space to pre pare flowers for shipment. Trucks leave Aalsmeer every working day with
destinations (including airports) throughout Europe.
On a typical day there are about 10,000 people working at the centre (1800 of whom work
directly for VBA), together handling 17 million cut flowers and two million plants. This large
and complex operation is held together by its information processing technology.
Flowers are extremely perishable, so dealing with them in such large quantities makes the
speed, accuracy and dependability of the operation critical. During the evening and
overnight, flowers are brought into the operation in standard containers which are
subsequently handled in standard wheeled cages (there are over 124,000 of these 'trolleys'
in circulation.
Each lot of flowers is assigned a reference number, a quality inspection is made by VBA
staff, and a description is entered on the 'delivery forms' attached to each trolley. The trolleys
3-5

are Standard 'trolleys' wait then held in cold storage until they are collected for the auctioning
process the following morning areas.
For each buyer, the VBA computer prints an invoice for all the purchases made, which must
be settled daily by bank letter of credit or by cash drawn at one of the four banks adjacent to
the cashier's office.
The high levels of computerization and automation of material flow allow VBA to operate with
very low costs (about 5 per cent of turnover), at high speed and dependability. Each of the
13 clocks handles about 1000 transactions per hour. Almost all business takes place
between 7.00 am and 10.00 am so that fresh flowers can be in the shops as early as
possible -by lunchtime in Holland, by early afternoon in London, Paris and Berlin, and by
early morning the next day in New York.
ACTIVITY 1
(30 MINS)
Your task is to study the case below and answer these question:
1 Which of the five operations performance objectives (quality, speed, dependability,
flexibility and cost) are the most important to build into the design of VBA's process, and
why?
2 How does process technology help this operation to achieve its objectives?
3 Sketch the flow of flowers in the VBA operation. What do you think are the critical points
in this flow?
6 Case Study 2 - Retail banking
Retail banking has become a much more competitive business in most markets. Basic
banking products, such as current accounts and credit cards, are also now provided by
many different financial service companies, insurers and even supermarkets. This has led to
a significant insurers, and even supermarkets. This has lead to a significant increase in
competition between the providers of such services. Increasingly, these companies are
having to design operations processes that provide a significantly enhanced service,
preferably at lower cost.
This is why simulation, once the preserve of expensive and high-tech operational research
departments, is rapidly becoming a significant aid to process design in banking operations. It
is particularly suited to use in environments where the operational design is complex and
therefore expensive to ‘try out’ for real and also where there is a significant degree of
randomness, such as the arrival patterns of customers or the varying designers to ask ‘whatif’
questions for a new design. Alternative designs can be explored at relatively low-cost and
low-risk.
The advantage of simulation became clear to Lloyds TSB, one of the UK’s most prominent
financial services groups, when they used it to help design a new Operational Service
3-6

Centre. A new centralized operation was created by merging a number of smaller centers.
Process design decisions included the number and skills of the people needed to staff the
process, activities, how teams should be organized, and so on. The company knew that all
these variables were important in determining how the new process would operate, but
some variables were likely to have a much more dramatic impact than others. The key
question was, which ones?
The computer simulation used by the bank exposed the likely impact of each of these
variables in a way that was almost impossible to demonstrate by any other method. In
addition, once the model of the new operation had been built, a whole range of processing
scenarios could be tried out and their impact assessed in terms of cost, service level and
utilization. ‘Modelling our new operations, particularly with dynamic simulation, has helped us
visualize and test a range of design choices, in a way that we never could before, ‘says John
Tyler of Lloyds TSB, ‘In particular, it has helped us to deploy process design strategies that
have significantly improved the level of service that we provide to our customers.
It also gave us a degree of operational transparency before we actually built the new
operation. Simulation has been very useful in allowing us to anticipate and reduce
operational risk whilst improving our service level to customers.
ACTIVITY 2
(30 MINS)
Your task is to study the case below and answer these question:
1 List the range of variables that you might want to simulate in an operation that
processes a car insurance business.
2 How would you justify spending large amounts of money on building a computer
simulation model for a new car assembly plant?
7 Select the basic layout
After the process type has been selected, the basic layout type needs to be selected.
The basic layout type is the general form of the arrangement of the facilities in the operation.
Most practical layouts are derived from only four basic layout types:
fixed-position layout
process layout
cell layout
product layout.
One process type does not necessarily imply one particular basic layout. Each process type
could adopt a different basic layout type.
3-7

ACTIVITY 3
(10 MINS)
It has been suggested that operations managers cannot avoid involvement with process
technologies that they need to be able to manage them on a day to day basis. They also need
to articulate how process technology can improve operational effectiveness.
Discuss this point of view, illustrating your answer with examples where appropriate.
DEFINITIONS
a. Process : a group of related tasks with specific inputs and outputs.
b. Process planning: the conversion of designs into workable instructions for
manufacture, along with associated decisions on component purchase or fabrication,
and process and equipment selection.
c. Process plans: a set of documents that detail manufacturing or service delivery
specifications.
d. Process strategy: an organization’s overall approach for physically producing goods
and services.
e. Project: the one-of-a-kind production of a product to customer order that requires a
long time to complete and a large investment of funds and resources.
7.1 The basic layout types
a. Fixed-position layout
Fixed-position layout is in some ways a contradiction in terms, since the
transformed resources do not move between the transforming resources. Instead
of materials, information or customers flowing through an operation, the recipient
of the processing is stationary and the equipment, machinery, plant and people
who do the processing move as necessary.
This could be because the product or the recipient of the service is too large to be
moved conveniently, or it might be too delicate to move, or perhaps it could
object to being moved; for example:
A construction site is typical of a fixed-position layout in that there is a limited
amount of space, which must allocated to the various transforming resources.
The main problem in designing this layout will be to allocate areas of the site to
the various contractors so that:
they have adequate space for their needs;
they can receive and store their deliveries of materials;
all contractors can have access to the part of the project on which they
are working , without interfering with each other's movements;
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the total movement of contractors and their vehicles and materials is
minimized far as possible.
In practice, the effectiveness of a fixed-position layout such as this will be tied up
with the scheduling of access to the site and the reliability of deliveries. On most
sites there is not room to allocate permanent space to every contractor who will,
at some time need access.
Only the larger, more important or longer-term contractors are likely warrant
permanent space. Other contractors will take up space on a temporary basis.
This leaves the layout vulnerable to any disruptions to the planning and control of
project.
b. Process layout
Process layout is so called because the needs and convenience of the
transforming resources, which constitute the processes, dominate the layout
decision.
In process layout, similar processes (or processes with similar needs) are located
together. This may be because it is convenient to group them together, or that the
utilization or transforming resources is improved.
It means that when products, information or customers flow through the
operation, they will take a route from activity to activity according to their needs.
Different products or customers will have different needs and therefore take
different routes. Usually this makes the flow pattern in the operation is very
complex.
c. Cell layout
A cell layout is one where the transformed resources entering the operation are
pre-selected to move to one part of the operation (or cell) in which all the
transforming resources, to meet their immediate processing needs, are located.
The cell itself may be arranged in either a process or product layout. After being
processed in the cell, the transformed resources may go on to another cell.
In effect, cell layout is an attempt to bring some order to the complexity of flow
which characterizes process layout.
d. Product layout
Product layout involves locating the transforming resources entirely for the
convenience of the transformed resources. Each product, piece of information or
customer follows a prearranged route in which the sequence of activities that are
required matches the sequence in which the processes have been located.
The transformed resources flow along a 'line' of processes. This is why this type
of layout is sometimes called flow or line layout.
3-9

Flow is clear, predictable and therefore relatively easy to control. Usually it is the
standardized requirements of the product or service which lead to operations
choosing product layouts.
e. Mixed Layouts
Many operations either design themselves hybrid layouts which combine
elements of some or all of the basic layout types, or use the 'pure' basic layout
types in different parts of the operation.
For example, a hospital would normally be arranged on process-layout principleseach
department representing a particular type of process (the X-ray department,
the surgical theatres, the blood-processing laboratory, and so on).
Yet within each department, quite different layouts are used. The X-ray
department is probably arranged in a process layout, the surgical theatres in a
fixed-position layout, and the blood processing laboratory in a product layout.
8 What makes a good layout?
Before considering the various methods used in the detailed design of layouts, it is useful to
consider the objective of the activity. To a certain extent the objectives will depend on
circumstances, but there are some general objectives which are relevant to all operations:
Inherent safety -. All processes which might constitute a danger to either staff or
customers should not be accessible to the unauthorized. Fire exits should be clearly
marked with uninhibited access. Pathways should be clearly defined and not
cluttered.
Length of flow - The flow of materials, information or customers should be channelled
by the layout so as to be appropriate for the objectives of the operation. In many
operations this means minimizing the distance traveled by transformed resources.
However, this is not always the case, as we saw in the supermarket, for example
Clarity of flow - All flow of materials and customers should be well signposted , clear
and evident to staff and customers alike. For example, manufacturing operations
unusually have clearly marked gangways. Service operations often rely on
signposted, such as in hospitals which often have different colour lines painted on the
floor indicate the routes to various departments.
Staff conditions – Staff should be located away from noisy or unpleasant parts
operation. The layout should provide for a well-ventilated, well-lit and, where
possible, pleasant working environment.
Management coordination - Supervision and communication should be assisted
location of staff and communication devices
Accessibility – All machines, plant or equipment should be accessible to a degree is
sufficient for proper cleaning and maintenance.
3-10

Use of space – All layouts should achieve an appropriate use of the total space a, in
the operation (including height as well as floor space). This usually means minimizing
the space used for a particular purpose, but sometimes can mean achieving an
impression of spacious luxury, as in the entrance lobby of a high-class hotel.
Long-term flexibility – Layouts need to be changed periodically as the needs of the
operation change. A good layout will have been devised with the possible future of
the operation in mind. For example, if demand is likely to increase for a product or
service, has the layout been designed to accommodate any future expansion?
9 Detailed design in product layout
Although the requirements of the product or service dominate product layout design, there
are still many detailed design decisions to be taken. The nature of the design decision also
changes a little. Rather than 'where to place what', product layout is concerned more with
'what to place where'.
Locations are frequently decided upon and then work tasks are allocated to each location.
For example, it may have been decided that four stations are needed to make computer
cases. The decision is then which of the tasks that go into making the cases should be
allocated to each of the four stations. This decision is called the line-balancing decision.
Other product layout decisions are as follows:
What cycle time is needed?
How many stages are needed?
How should the task-time variation be dealt with?
How should the layout be balanced?
How should the stages be arranged?
10 Capacity Management in Operations
When looking at capacity, operations managers need to look at both resource inputs and
product outputs. The reason is that, for planning purposes, real (or effective) capacity
depends cii what is to he produced. For example, a firm that makes multiple products
inevitably can produce more of one kind than of another with a given level of resource
inputs. Thus, while the managers of an automobile factory may state that their facility has
10,000 labour hours available per year. they are also thinking that these labour hours can he
used to make either 50,000 two-door models or 40,000 four-door models (or some mix of the
two and tour-door models). This reflects their knowledge of what their current technology
and labour force inputs can produce and the product Mix that is to be demanded front these
resources.
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ACTIVITY 4
(10 MINS)
Evaluate the contemporary operations themes in detail with relevant examples.
DEFINITIONS
a. Aggregate planning: the process of determining the quantity and timing of production
over an intermediate time frame.
b. Level production: an aggregate planning strategy that produces units at a constant
rate and uses inventory to absorb variations in demand.
c. Chase demand: an aggregate planning strategy that schedules production to match
demand and absorbs variations in demand by adjusting the size of the workforce.
10 Strategies for managing demand
Aggregate planning can also involve proactive demand management. Strategies for
managing demand include:
Shifting demand into other time periods with incentives, sales promotions, and
advertising campaigns;
Offering products or services with countercyclical demand patterns; and
Partnering with suppliers to reduce information distortion along the supply chain.
11 Strategies for adjusting capacity
If demand for a company’s products or services is stable over time, then the resources
necessary to meet demand are acquired and maintained over the time horizon of the plan,
and minor variations in demand are handled with overtime or under time. Aggregate
planning becomes more of a challenge when demand fluctuates over the planning horizon.
For example, seasonal demand patterns can be met by:
Producing at a constant rate and using inventory to absorb fluctuations in demand
(level
production)
Hiring and firing workers to match demand (chase demand)
Maintaining resources for high-demand levels
Increasing or decreasing working hours (overtime and undertime)
Subcontracting work to other firms
Using part-time workers
Providing the service or product at a later time period (backordering)
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12 Level Position and Chase Demand
The level production strategy, shown in Figure 3.2a, sets production at a fixed rate
(usually to meet average demand) and uses inventory to absorb variations in
demand. During periods of low demand, overproduction is stored as inventory, to be
depleted in periods of high demand. The cost of this strategy is the cost of holding
inventory, including the cost of obsolete or perishable items that may have to be
discarded.
The chase demand strategy, shown in Figure 3.2b, matches the production plan to
the demand pattern and absorbs variations in demand by hiring and firing workers.
During periods of low demand, production is cut back and workers are laid off. During
periods of high demand, production is increased and additional workers are hired.
The cost of this strategy is the cost of hiring and firing workers. This approach would
not work for industries in which worker skills are scarce or competition for labour is
intense, but it can be quite cost-effective during periods of high unemployment or for
industries with low-skilled workers.
Figure 3.2 Level production Vs Case demand
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ACTIVITY 5
(30 MINS)
Your task is to study the case below and answer these question (a) and (b) by:
Hand calculation
Excel spreadsheet
13 Quantitative Techniques for aggregate planning
One aggregate planning strategy is not always preferable to another. The most effective
strategy depends on the demand distribution, competitive position, and cost structure of a
firm or product line. Several quantitative techniques are available to help with the aggregate
planning decision. In the sections that follow, we discuss pure and mixed strategies.
3-14

QUICK QUIZ
1. Highly decoupled services have no line of visibility, since the customer cannot see
much of the operation. True or False?
2. Process designs vary by:
A. potential volume of production
B. investment in technology
C. type of job
D. a and b
3. Which of the following perspectives applies to individual performance?
A. Systems thinking
B. Resource-based view
C. Environmental analysis
D. All of the above
4. As a Operations Manager, how would you improve the reliability of the process
you are handling.
5. Why do operations fail and how can failure be measured?
6. Explain the main process types found in manufacturing and service organisations.
ANSWERS TO QUICK QUIZ
1. False
2. D
3. D
4. Process Reliability Improvement
a. Component design
b. Production/assembly techniques
c. Testing
d. Redundancy/backups
e. Preventive maintenance procedures
f. User education
g. System design
5. A brief discussion of the nature of failure the reasons why systems fail could be
given, i.e., because of failures in design, people, equipment, suppliers or customers
The importance of measuring failure in terms of failure rate (including bathtub curve),
mean time between failures, reliability and availability could then be discussed.
6. Main process types found in manufacturing and service organisations.
a. To explain the five generic process types are project, jobbing, batch, mass
(line) and continuous. A summary of the characteristics of each type should
be given along with specific examples. Similarly, the characteristics of the four
process types found in service organisations should be described i.e
professional, mass, service shops and service factories.
b. To provide an overview of process types in both manufacturing and services
with limited examples.
c. To discuss how service providers can be differentiated according to labour
intensity and customisation.
d. To discuss how process types vary with respect to repeatability and
standardisation, flexibility and planning/control complexity, lead time and
inventory, technology and capital investment.
e. To provide detailed array of examples linking either manufacturing or services
and organisational objectives.
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ANSWERS TO ACTIVITIES
Activity 1:
1. Which of the five operations performance objectives (quality, speed, dependability,
flexibility and cost) are the most important to build into the design of VBA's process,
and why?
Quality -The company itself would place quality very much at the top of the list
and flexibility towards the bottom. Quality – VBA’s service is based on the
trust which it has established both with growers and buyers. This involves an
implicit guarantee of the quality and freshness of the flowers.
Cost – Cost is an important objective primarily to the company itself. The
whole company’s operations are based on high volume. It is, after all, the
largest operation of its type in the world. Also, the company have invested in
the information technology and materials handling technology which
standardizes the service, thus reducing costs further. However, cost is also
important to the buyers. If the operation were not efficient, then the buyers
may find it cheaper to buy directly from the growers. The transaction costs of
VBA must be sufficiently low to prevent this happening.
Dependability – In this case, dependability means that a range and quantity of
flowers are available for buyers to purchase if they wish and also, that the
company are able to guarantee to the growers that flowers will be available
for sale at the time promised. Lack of dependability in terms of interruption to
the supply of flowers would destroy the trust of both buyers and growers.
Speed – Speed is only important up to a point. Obviously, the flowers cannot
be kept within the total supply chain for too long, otherwise it would reduce
their ‘shelf life’ when they eventually reached the shop.
Flexibility – The flexibility of this operation is not high. If it was, they could not
achieve the economies of scale and efficiencies of standardization.
2. How does process technology help this operation to achieve its objectives?
In two main ways. First, the information technology acts as an interface
between the buyers and the operation itself. So, while sitting in the auction
hall, buyers can indicate (to a fraction of a second) when the price is at a level
where they wish to purchase. They are able to do this because, information
about the flowers has already been conveyed to them electronically and the
purchase is able to be recorded because the information system detects their
bid and immediately allocates those flowers to their account. This efficient
process substitutes for the verbal exchanges and communications which
normally take place at an auction. The second way in which technology helps
the process is, by transporting the flowers from the loading bays through the
warehouse to the auction hall and eventually, to the trucks which will ship
them to their destination. This technology uses standardized trolleys for ease
of handling and, again, is integrated with the information technology in order
to keep track of which flowers are where.
3. Sketch the flow of flowers in the VBA operation. What do you think are the critical
points in this flow?
In fact, there is not sufficient information in the case to draw a definitive flow
chart. That is not the point of the question. This question is best used to get
students to debate what the flow might be and distinguish between the nature
of the activities at different stages. So, some stages will be critical. For
example, the check-in recording of the flowers as they enter the warehouse
and are loaded onto the trolleys is the basis for inspection, acceptance and
3-16

the documentation of the characteristics of the flowers. It is a point at which,
failure would have a profound impact on the integrity of the whole system.
Activity 2:
1. List the range of variables that you might want to simulate in an operation that
processes a car insurance business.
Variables would include the following:
Number and size of individual call centres
Different degrees of ability to switch calls between call centres in response to
demand variation
Average level of demand
Different demand patterns
Different degrees of unpredictability (short term) of demand
Average call time
Distribution of call times around the average
Change in average and distribution of call times
Level and variation in absenteeism amongst call centre staff
Likelihood of disruption to incoming calls
Ability of operators to satisfactorily answer customer queries
Different levels of staff IT support (to help them answer customer queries)
2. How would you justify spending a large amount of money on building a computer
simulation model for a new car assembly plant?
Any justification would have to be based on the computer simulation’s ability to:
Explore options for the design of the assembly plant
Highlight potential design flaws that could reduce the efficiency and
effectiveness of the plant
Predict the assembly plant’s response to variation in demand and/or the
activities it is asked to perform
The justification must demonstrate that the money spent on the simulation
itself will be less than the money saved by improving the design of the plant
plus the money saved by the plant being able to change its way of operating
in the future.
Activity 3
A starting point could be to give a definition and overview of process technology explaining
what it is and how it relates to operations management. The three most significant types of
process technology need to be explained in some detail i.e. a) materials processing
technology e.g. computer numerically controlled machine tools, robotics, automatic guided
vehicles, flexible manufacturing systems and computer integrated manufacturing. b)
information processing technology processing technology e.g. centralised and de-centralised
(including LANS), telecoms and information technology (including www), management
information system of various kinds. c) customer processing technology, e.g. involving
customer interactions and interactions via an intermediary. A discussion of implementation
and evaluation of technology strategies in organisation are required.
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Activity 4
1. Services and manufacturing merging.
2. Customer directed operations
3. Lean activities
4. Integration of operations with other functions
5. Environmental concerns and sustainability
6, Supply Chain Management initiatives
7. Globalization of operations.
Activity 5
By Hand calculation:
3-18

By Excel spreadsheet
CHAPTER ROUNDUP
The idea of process types and the various designs helps to reinforce the distinction
between the different types of processes used in the field of operations management,
both for products and services.
Operation managers use process design and strategy to encourage the development
of efficient equipment and processes.
They design their equipment and processes to have capabilities that will satisfy the
customers.
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The different concepts and diagrams on the layout and flow is critical for any
organization to use it's resources effectively and efficiently, with the objective of
eliminating waste.
Layouts make a substantial difference in operating efficiency. For this reason layout
decisions is sometimes considered something of an art.
Aggregate planning is critical for companies with seasonal demand patterns and for
services. Variations in demand can be met by adjusting capacity or managing
demand.
REFERENCES
1. Operations Management by Nigel Slack, Publisher : Prentice Hall
2. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
3. Operations Management by Russell,& Benard W. Taylor, Crating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
4. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill
3-20

Introduction
What makes a good process? When a process operates, how do you determine whether it is
successful or not? Processes seem simple, yet seem to cause so many problems and the
very word 'process' can strike fear into the hearts of many people.
If you are leading any type of process improvement program, you have probably felt at times
like your efforts were yielding less-than-expected results. It is no wonder: the list of possible
hurdles to overcome – restrictive organizational structure, politics, stagnant organizational
culture, power trips – goes on and on.
Continuous Improvement is the on-going effort to improve products, services and processes
by making small, incremental improvements within a business. It is based on the belief that
these incremental changes will add up to major improvements over time and it is as much
about tactics (i.e. specific improvements) as it is about changing the culture of the
organization to focus on opportunities for improvement rather than problems.
At the other extreme, there is the Business Process Reengineering which advocates starting
from a clean slate with a quantum leaps. Whatever techniques/methods is used it relative
the pulse of an organisation.
Your objectives
In this chapter you will learn about the following:
Understand the 3 Es of operational excellence
Understand the importance of the 3 Es
Understand the techniques/methods to achieve the 3 Es
Understand how to achieve the 3 Es in the business context
4-1

1 What is the 3 Es
Businesses have a tendency to focus on one or other of the three E’s as shown in Figure 4.1
:
Figure 4.1
DEFINITIONS
a. Economy – doing things as cheaply as possible, avoiding spending more than is
necessary
b. Efficiency – doing things as smoothly as possible, eliminating processes and
activities that do not lead closer to the finished product.
c. Effectiveness – doing things as well as possible, making sure that the end result is a
close match to what the customer actually wants.
Excessive economy can cause problems in production/delivery, as components fail more
frequently, thus reducing efficiency. Or producing a product that is just too low quality for
what customers want. Too much focus on efficiency can leave a company paying over the
odds for the best parts or services. Or removing processes that customers actually value,
leaving them less satisfied. And if the attention is exclusively on effectiveness, then costs
can quickly get out of control and activities that don’t add real value will creep in.
Economy plus efficiency tends to create a low-cost strategy, where the cost of sale is driven
low to allow competition on price alone. Economy plus effectiveness will drive a budget
strategy – with customers getting most of what they want at a price that seems very good
value. And efficiency plus effectiveness will tend towards a premium strategy, giving the
customer a smooth delivery of what they want, but at a price.
You will often hear these three E’s described as a kind of hierarchy, with Effectiveness being
at the top of the tree. However, they each have a part to play in building a successful
business, and it is the combination of all three that brings the final E … Excellence itself.
4-2

2 The importance of the 3 Es
Consider the impact of processes that are not enjoyable on the business results. The most
obvious negative impact is that if the work is boring or painful, your people will not be happy,
which is the thin end of the wedge that drives straight into the other result areas. Feelings
are highly infectious, and if you were an operations management, your people are unhappy,
they will spread their misery to your customers, which will, shortly afterwards, ripple on to
depress your business results. You will even lose out in social responsibility, as unhappy
people will be less inclined to be good citizens (especially on your behalf).
No one E is an island. We can create processes that are Efficient at the expense of
Effectiveness and vice versa. Similarly, we can have fun processes that are neither very
Effective nor Efficient. The challenge, then, is to find the balance that leads to optimal scores
in all of your Results sections. This will be the point of maximum synergy, where Efficiency
gains remove the boring parts, giving people a more interesting challenge, where
Effectiveness leads to satisfied customers which feeds back to employee satisfaction, and
where Enjoyable processes lead to happy people who work sincerely towards improving the
other two Es.
If your people are really your greatest assets, then design the pleasure of working for you
into your processes. Add challenge, respect, care. And even fun. And you will be rewarded
by results that move upwards in all areas.
Using techniques /methods as described below, for example; while not every company can
achieve results at this level, lean production does provide a wide range of benefits, including:
Reduced inventory
Improved quality
Lower costs
Reduced space requirements
Improved financial performance
Reduced cost
Improved quality
Enhanced staff moral
3 Techniques/methods to achieve the 3 Es
3. 1 Lean/ Just in Time
Lean systems are sometimes referred to as just-in-time (JIT) systems owing to their
highly coordinated activities and delivery of goods that occur just as they are needed.
The lean approach was pioneered by Toyota’s founder, Taiichi Ohno, and Shigeo Shingo as
a much faster and less costly way of producing automobiles. Following its success, today the
lean approach is being applied in a wide range of manufacturing and service operations.
Lean systems are sometimes referred to as just-in-time (JIT) systems owing to their
highly coordinated activities and delivery of goods that occur just as they are needed. The
lean approach was pioneered by Toyota’s founder, Taiichi Ohno, and Shigeo Shingo as a
much faster and less costly way of producing automobiles. Following its success, today the
lean approach is being applied in a wide range of manufacturing and service operations.
Lean is a production practice with the key tenet of preserving value with less work.
Operations that fail to create value for the end customer are deemed “wasteful.” Eliminating
waste and superfluous processes reduces production time and costs.
4-3

The seven wastes listed by Japanese founders Toyota are transport, inventory, motion,
waiting, overproduction, over-processing and defects. The tools for implementation include
value stream mapping, kanban pull systems and poka-yoke (mistake proofing).
Lean’s mantra of “doing things better” leads many companies to view it from a cultural
standpoint. Think of it like recycling – for it to work, it has to be more than an arbitrary
process, and actually be engrained in society. For Lean to be successful, it has to permeate
the business silos and receive universal backing amongst senior management and
employees.
The kanban system is actually very similar to the reorder point system. The difference is in
application. The reorder point system attempts to create a permanent ordering policy,
whereas the kanban system encourages the continual reduction of inventory. We can see
how that occurs by examining the formula for determining the number of kanbans needed to
control the production of a particular item.
Why would you use it?
Lean’s strength is its fast implementation. Immediate benefits relate to productivity, error
reduction, and customer lead times. Long-term benefits include improvements to financial
performance, customer satisfaction, and staff morale.
The three principles of Lean leadership and thinking – challenge oneself to meet goals,
kaizen (continuous improvement) and genchi genbutsu (going to the source - the “factory
floor” – to make informed decisions) are well respected.
Process-orientated industries with clearly defined value chains – particularly those with
manufacturing or supply-chain elements -are the most receptive to Lean methodology.
These include automotive, industrial engineering and pharmaceutical industries.
Lean and Six Sigma are often used in conjunction with one another in value chain
improvement. Six Sigma process mapping does not distinguish between information flow
and product material flow, because they all come under the process umbrella. The Lean
discipline of value stream mapping leads many exponents to miss how information
processing by departments can hinder the order to delivery cycle. Combining techniques
makes it easier to measure and execute on lead times.
4-4

Who created it?
Lean was based on the 1980s Toyota Production System, and covered all facets of the
manufacturing business, from quality assurance to human resources.
The concept of Lean emerged over time, as Toyota engineers developed solutions to
overcome problems that beset the company as it grew from humble beginnings into a global
superpower. In this respect, Lean is an organic, flexible system.
What’s the future?
Lean’s relatively simple methodology and ability to attack a very transparent evil – waste –
make it an integral part of manufacturing and service industries. It is a far less abstract than
BPM, for instance.
Lean’s future may rest on the translation of its methodology from the manufacturing floor to
more unconventional settings. 5S standardised work stations may have a future in research
and development labs, but not the everyday office.
According to Gartner’s “Hype Cycle” of new technologies, Lean and Six Sigma are past the
peak of inflated expectations and the trough of disillusionment, and depending on the
company, are climbing the slope of enlightenment or traversing the plateau of productivity.
Whether it’s as a philosophy, a fixed state (being Lean), a methodology (performing Lean) or
a cultural transformation (becoming Lean), it has a veritable future.
ACTIVITY 1
(15 MINS)
Julie Hurling works in a cosmetic factory filling, capping, and labeling bottles. She is asked to
process an average of 150 bottles per hour through her work cell. If one kanban is attached
to every container, a container holds 25 bottles, it takes 30 minutes to receive new bottles
from the previous workstation, and the factory uses a safety stock factor of 10%, how many
kanbans are needed for the bottling process?
3. 2 Six Sigma
Six Sigma is a set of tools and strategies to limit defects and variability in business
processes, with the overarching goal of process improvement.
Its two project methodologies – DMAIC (define, measure, analyse, improve, control) and
DMADV (define, measure, analyse, design, verify) are based on Deming’s Plan-Do-Check-
Act cycle.
Six Sigma’s implementation rests on a dedicated improvement team divided into hierarchies
based on a “belt” accreditation system. The team leverages advanced statistical techniques
such as Pareto charts and root cause analysis to reach quantified value targets.
Why would you use it?
Six Sigma is a multifaceted methodology. To the statistical engineer in manufacturing, it
might simply be a production quality metric, but to a customer service employee or CEO, it
may embody the corporate culture.
Broadly speaking, it’s a quality improvement methodology that provides a framework for a
company to train its employees in key performance areas, shape strategy, align its services
with customer needs, and to measure and improve the effectiveness of business processes.
Fundamental to the latter is the identification of KPIs, and a focus on process quality
variation.
4-5

Who created it?
It was first outlined by Motorola in 1985 as a statistical modeling of manufacturing
processes. A “sigma rating” relates to the percentage of defect-free products. A sigma rating
of 4.5 (3.4 defects per 1 million) was initially touted as a realistic benchmark, with 6 sigma
representing the holy grail.
Six Sigma was popularised by then CEO of General Electric Jack Welch in 1995, and by
1998 he claimed that it had led to $750 million in cost savings. By the late 1990s, two thirds
of Fortune 500 companies had incorporated Six Sigma projects, and by 2000, the discipline
had spawned its own training and consultancy programs.
What’s the future?
Six Sigma’s traditional stomping ground – manufacturing – seems to be looking beyond
quality control to foster an innovation culture. But for industries such as financial services,
which demand a unique customer focus and struggle with a glut of data, Six Sigma
represents the perfect partner.
Criticism of Six Sigma centres around its lack of originality beyond traditional quality
improvement methods, implementation time (a minimum of 3 months), potential to stifle
innovation, and the 1.5 sigma shift.
However, the proliferation of training courses, support organisations, and the fact that the
average Six Sigma Black Belt commands a salary of $90,000 all point to its longevity. The
skills to identify and quantify variation are strongly valued. As long as companies continue to
see a positive ROI from Six Sigma projects, it will survive.
ACTIVITY 2
(15 MINS)
Explore how would you use lean and six sigma methodologies to contribute towards
operational excellence of your organisation?
3. 3 Business Process Management
BPM is a management approach that looks at an enterprise holistically as a set of business
processes. Contrary to popular belief, the software associated with BPM is only a means to
an end – a tool to understand, engineer and analyse processes. BPM leverages a five step
design model – design, model, execute, monitor and optimise. Six Sigma may be used to
improve processes, before BPM looks to automate and manage them.
Why would you use it?
Most enterprises are divided into departments with idiosyncratic functions. The customer has
a different perception of the enterprise, understanding it through the business processes
through which he or she interacts. For example, a customer applying for a loan views the
company as a loan provider, not as a group of departments such as sales, underwriting,
legal and compliance, I.T. etc. Customers demand transparency and a seamless, cohesive
experience. BPM looks at mitigating the effects of “siloization” by helping organisations
manage complex, cross-departmental processes, and synchronizing them with customer
demands. It’s the methodology to link improvement and process design efforts directly to the
management system and organisational strategy.
4-6

Although it’s somewhat of an abstract term, BPM initiatives – in one guise or another - have
been adopted by financials services, telecoms, healthcare and military sectors.
Who created it?
Some experts trace BPM back to 1993, when consultants Michael Hammer and James
Champy published a seminal book on business process reengineering.
This is disputed by champions of Smith and Fingar’s book: Business Process Management,
The Third Wave, who denounce BPR for its shirking of execution. Execution is facilitated by
the business process management suite. If the precise origins of BPM are somewhat hazy,
it’s safe to say that the 2000 dot-com boom created a flourishing vendor market where
integration focused platforms merged with pure-play BPM.
What’s the future?
The exponential growth of BPM vendors (Appian was north of 50 million in revenue last
year) points to a rosy future for an approach credited with helping companies emerge from
the recession with their processes still intact.
BPM as a group of factory-style sequential workflows may be outdated, but BPM as a
dynamic model that incorporates business and process intelligence, and tools such as
predictive analytics, is very much alive. Going forward, mobile, social, predictive and cloud
BPM appear to be the hottest trends
ACTIVITY 3
(15 MINS)
What is the most “critical factor” in making an improvement initiative successful?
3.4 Activity Based Costing
What is “Activity Based Costing” and how does its use support “operational excellence”?
Activity base costing (ABC) is a requisite for operational excellence. Most importantly,
activity based costing helps you allocate overhead to each product more effectively, instead
of using ratios based on a percent of direct labour dollars, pounds per labour hour, or line
hours. With ABC, the primary cost driver for each expense group (cost centre) is identified,
and then product specific percentages are derived for each cost driver. For example, rental
expense is allocated to each product based on the percentage of floor space that product
occupies. Engineering or sales wages and benefits are allocated to each product or service
based on the amount of time each engineer or sales person reports spending on a given
product. Human resource costs might be allocated to each product based on the number of
labour hours worked per product.
The key is that the cost driver type varies with each cost centre – no single set of multipliers
is used to allocate all overhead costs. Using activity based costing helps more clearly define
a product’s or service's true profit margin, instead of allowing one product or service to carry
an excessive amount of another product’s overhead burden. For example, I have seen one
candy bar type essentially die on the vine because it was carrying an excessive amount of
sanitation labour costs. Because sanitation costs were allocated based on line hours of
operation (both products ran for the same amount of time each week) instead of on the
sanitation hours that were actually needed to clean the line (the other product was very
messy, and required twice as many people to clean it), the 'easy to clean' product’s profit
4-7

margin was understated, and in turn, management was hesitant to try to grow that brand.
Additionally, the profit margin for the messy product was overstated.
Activity based costing also helps an organization focus more on transaction costs instead of
merely managing to a budgeted number. In an operationally excellent organization, the goal
should be to consistently drive down the cost per transaction (i.e. the cost per pound or the
cost per customer served) in EACH process area, not just overall. ABC helps nonproduction
groups in particular, because it helps clarify the primary reason they exist. For
example, what is the human resource cost per person hired or per employee? How has this
number changed over time?
4 How to acheive the 3 Es in the business context
One huge obstacle for achieving process excellence is working in traditional, functional
specialist siloes. There are key factors for bringing those functional siloes together to
advance process excellence.
An example is point is IT companies providing software-consulting services in Scandinavia.
IT companies are cradles of functional siloes. People are actually eager to work in siloes and
promote their own niche expertise (for example Scala programming skills, Enterprise
architecture, project management, etc.). But how many times those IT companies fail to
produce a software that actually helps the customer to solve a business problem and make
their lives easier? Based on some researches, only one time out of five. Let’s look into these
tips and come back to this real-life example at the summary.
4. 1 Three Key Factors to Achieve Process Excellence
#1 Customer Centric Process Culture
Changing the organisational culture to be both customer centric and process oriented
is very important, because that way the organisation will start to align itself
automatically towards process excellence. Customer centricity gives the processes
the reason to exist and process orientation makes sure that the organisation is
providing added value to customer as efficient way as possible. But you can’t really
imprint this on the organisation and therefore you need to grow it as part of the
organisational culture.
Your organization needs a culture, where focus is on mastering processes from a
customer-oriented process perspective – Build in competitive advantage in delivering
value to customers. If your organisation has a genuine focus on the customer – the
customer will become everyone’s business, no matter what functional silo the person
represents in an organization. Even people in “internal roles” should be doing
something that enables others to serve customers. Always seek customer
satisfaction and value through fulfilling their identified, true needs through business
processes. Make your employees to understand that customers will always want
something, but even more important is to know what they really need.
#2 Shared goals and metrics
Shared goals for the whole organisation and key measures for gauging business
performance, gathering the necessary data and analysing it using key variables is
very important. You get what you measure for, but keep in mind that turnover, growth
percentage and other faceless, corporate measures do not touch the hearts of
people and therefore won’t lead to results either. Instead, build your balanced
scorecard from customer-oriented perspective and make sure everyone sees and
understands those results in the same way. Even HR and financial department
4-8

people need to be connected to customer outcomes through what they do. With
every KPI that you have ask “How does this help my customer to succeed?” That will
help you to think internal matters of an organization from customer-oriented
perspective. If something does not contribute to providing great customer
experiences in a profitable way, get rid of it.
When using metrics, remember that extrapolating from the past doesn’t work. You
cannot predict the future from what has happened yesterday. The reason is very
simple: the world and the customer changes all the time. The history won’t tell you
what will be the next thing the customers get interested of. Those companies who
extrapolate from the past won’t innovate something new and inspiring for their
customers. They will be only a blend-improved version of what already was.
Therefore, use the metrics to guide the behaviour of people to the right direction,
ensuring success in future.
#3 Removing organisational barriers
It is very beneficial to remove organisational barriers through creating boundaryless
collaboration culture – Break down organizational barriers to improve teamwork
throughout the organization. It might be best to have truly process-oriented structure
in your organization, so that everyone gets what he or she need to do to provide
profitable customer experiences. Do not support old-fashioned silos that prevent
people from collaborating.
Also train and coach management to be proactive– Set goals for providing customer
experiences, review them frequently, establish clear priorities and focus on problem
prevention rather than resolutions after the fact. Have your people anticipate
problems before they even occur. Cost of fixing a cause of problem is lower when
detected earlier. Have people working in teams towards shared goals, without
artificial siloes preventing genuine collaboration.
Support a drive for perfection, combined with a tolerance for failure – You must be
willing to try new ideas and approaches that have some risk of failure in order to
make changes leading to perfection. Just make sure that you learn from your
mistakes that you will make on the way. If you cannot extract a teaching from a
failure, you better stop trying. No failure is a failure, if you learn something from it; it is
just a way not to do that thing (like Edison concluded while trying to create a light
bulb). And that is only possible when everyone is working together in an organisation
regardless of their position, title, department, gender, age or anything else. Those
people, who do not contribute to shared goals, need to look for other place to work,
because there is no place for free riders in boundaryless organisation.
5 Factors that Make a Continuous Improvement Program Successful
Continuous Improvement is the on-going effort to improve products, services and processes
by making small, incremental improvements within a business. It is based on the belief that
these incremental changes will add up to major improvements over time and it is as much
about tactics (i.e. specific improvements) as it is about changing the culture of the
organization to focus on opportunities for improvement rather than problems.
Here are four factors that are essential to successful continuous improvement programs:
1. Leadership that walks the talk
The support of an organization’s leadership team is usually cited as the number one factor
for the success of a continuous improvement initiative. Leaders must exhibit behaviours that
not only demonstrate support for the initiative but also the behaviours that they wish all
employees to emulate. This ultimately comes down to guidance and the support within the
4-9

organisation to make the change. If there is not adequate support for a continuous
improvement program to be implemented, then the team charged with implementing it will be
operating on what will be, in effect, a series of isolated efforts.
2. A focus on “fire prevention” rather than “fire fighting”
No individual, team or company can implement change if they don’t have the time or mental
capacity to do so. The trouble is that often it is often the very problems that need fixing that
are creating a series of “fires” that constantly distract managers from solving the root cause
of their problems. Everyone is constantly having to work harder, rather than smarter. Worse,
some company cultures celebrate and reward those employees and managers who put out
the most fires, which removes incentive to prevent the fires in the first place.
3. Constancy of purpose
In Dr. W. Edwards Deming’s “14 points” he called for the “constancy of purpose for continual
improvement of products and service to society.” This unrelenting, unwavering focus on
improvement is critical to maintaining and sustaining process improvements in the long term.
Changes need to maintain momentum to ensure the changes are not forgotten and don’t
grind to a halt through fatigue or resistance. Successful continuous improvement programs
understand that improvement is not merely a management initiative – a so-called “flavour of
the month” – but a long-term practice that needs to permeate everything an organization
does.
4. Shift to long term mind-set
Managers are often focused on whether they’re going to meet their monthly or quarterly
targets and it can be very difficult to prioritize improvements that will only make an impact
over the longer term. As a result, continuous improvement is as much about mind-set as it is
about actions. The company needs to start looking at the long-term impact of the work it is
doing and understand that a quarterly dip in performance can be tolerated if it means that in
the long term, the company is in a better position - both financially and in terms of the
company’s ability to deliver outstanding products and services to its customers.
ACTIVITY 4
(30 MINS)
Realising it is not possible to effectively using all the 3 Es of operational excellence, explore
the building blocks of competitive advantages in a restaurant of your choice.
QUICK QUIZZ
1. Performing the task right and considering the relationship between inputs and
outputs are
A. effectiveness.
B. goal attainment.
C. efficiency.
D. management characteristics.
2. Actually doing the right task is known in management as which of the following?
A. effectiveness
B. strategic management
C. efficiency
D. management characteristics
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3. What is the difference between efficiency and effectiveness?
4. Can the 3 Es of operational excellence be achieved all together? Yes or No
5. Is culture an issue when implementing the 3 Es of operational excellence? Yes or No
ANSWERS TO QUICK QUIZZ
1. C
2. A
3. Efficiency—doing the thing correctly; accomplishing the goal with the least amount of
resources.
Effectiveness—doing the right task; goal attainment.
4. No
5. Yes
ANSWERS TO ACTIVITIES
1.
2. Stated simply, the goal of any lean initiative should be to minimize waste while
maximizing customer value. In an operationally excellent organization, lean practices
are applied to all key processes, not just those of a operations nature. Additionally,
value is defined from the perspective of both the external and internal customer in a
measurable manner – it is not just what management thinks the customer wants.
Lean tools are just that - a set of tools that can be used on a regular basis to help you
pursue operational and process excellence.
According to Womack and Jones, there are seven types of process waste – rework,
overproduction, excess inventories, non-value added process steps, excess people
movement, excess material transportation, waiting, and non-value added goods of
services. Common examples of process waste incidents in organizations include
accidents, rework, downtime, material waste, absenteeism, equipment damage,
product damage, customer complaints, and lost customers. A variety of lean tools
are used to reduce and minimize these common causes of waste across the
organization’s value stream (from supplier to end customer).
Six sigma at its core is simply a measure of process variation. In an operational or
process excellence world, process variation is both known and minimized as much
as possible through the use of effective waste stream identification, root cause
analysis, and project driven systems change. Kaizen and six sigma teams are used
to support the daily continuous improvement efforts of each process owner, but they
are not seen as the sole drivers of the operational excellence initiative. Too many
companies are currently making this mistake - they are striving towards operational
or process excellence as a goal, but they are (1) relying primarily on their kaizen or
six sigma teams to drive their process improvement efforts and (2) in turn failing to
attain high levels of employee engagement in the pursuit of process excellence.
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3. This is a tough question, because I am torn between two possible answers. An
improvement initiative will not succeed if time is not allocated towards it, and that
time, if allocated, is used effectively. That said, an organization can allocate this time
on paper (in a strategic plan, job description, or expense budget for example), but fail
to require EACH of its leaders to demonstrate the degree to which they are
personally using this time to improve the key processes they are responsible for. If I
could only change one thing, I would change what I expect from each of my leaders,
because most people will find a way to reach a goal if that goal is clearly stated,
along with significant consequences for failing to achieve that goal.
4. Building blocks ideas recommended
Figure 4.2
As in Figure 4.2, the restaurant will need to provide food service more efficiently and
effectively than its competitors if it is going to survive. The restaurant will need to achieve
superior efficiency, quality, innovation, and responsiveness to customers.
Middle managers can increase efficiency by finding suppliers who have competitive
prices and who are flexible in their ordering processes. Management can also increase
efficiency by effectively training kitchen staff and wait staff to perform at a high level.
Quality in food and service will also help ensure the success of the restaurant. Wait staff
should be encouraged to be friendly and professional, while kitchen staff should be
encouraged to use high quality ingredients and methods for preparing food. The
restaurant must be kept clean and attractive to provide a pleasant dining experience.
In addition to providing quality food and service, employees should be empowered to be
creative; to develop better ways of doing things. Weekly or biweekly staff meetings
should make use of employee suggestions for promoting new menu items or increasing
customer feedback.
Responsiveness to customers is vital to service organizations such as restaurants. The
success of the restaurant depends on the staff to provide quality food and service at
reasonable cost. Employees should be empowered to do whatever it takes to satisfy
customers and make their dining experiences pleasant
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REFERENCES
1. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
2. Operations Management by Russell,& Benard W. Taylor, Crating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
3. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill
4-13

Introduction
In today’s competitive world corporates and businesses are struggling to maintain profits and
healthy bottom lines .Cost of production, fuel, raw material and human resources is rising
each year .These developments has prompted people to look for Cost reduction Ideas
&methods. Those who have opted for focused cost reduction strategies have survived those
who could not managed have perished.
In recent economic down turn it becomes more important to make cost reduction program a
major initiative in industry .Companies are finding it difficult to retain people and are laying
off people which is unprecedented in recent history of industrial recession .Companies
have to develop its own cost reduction program for savings without cutting jobs .
This chapter will discuss the complex subject of the impact of tension between cost
minimization and quality maximization in organisations. Beside the recent cost reduction and
quality improvement strategies, hidden elements of people issues, short term verses long
term endeavours and the failures of organisations out of complacency due to leaning on past
glories will be discussed.
Your objectives
In this chapter you will learn about the following:
Understand the elements of cost and price
Understand how to reduce cost in organisations
Understand the elements of quality and its cost
Understand how to improve quality in organisations
Understand the conflicting issues of implementation of cost reduction and quality
improvement strategies simultaneously
1 Elements of cost and price
Some form of price or cost analysis should be performed in connection with every
procurement action, regardless of whether the organization is a vendor or a sub recipient.
The form and degree of analysis, however, are dependent on the particular subcontract or
purchase, and the pricing situation. Determination of price reasonableness through price or
cost analysis is required even though the procurement is source directed by the contracting
officer of the sponsoring agency.
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1.1 Cost Elements for Product
Material Cost
These are Principal raw material used in production for final product with help of direct
labour and factory overhead . Further classified into Direct and Indirect
Labour cost
The physical and mental effort to convert raw material into final finished product.
Further classified into Direct and Indirect labour cost .
Factory Over head
It covers all indirect material , indirect labour and all other indirect manufacturing
cost which cannot be specified directly for production of the finished product.
In Relationship with Volume
Fixed Cost
Fixed cost are those cost which are associated with inputs which do not vary with
changes
in volume of output or activity within specified range of activity for a given budget
period .
For example factory rents , insurance cost for factory , salaries for senior executives ,
lease payments
Variable Cost
Cost that tends to vary in total in direct proportion or in a one -to -one relationship to
change in production activity , sales activity or some other measures of volumes are
referred to as variable cost for examples material cost , fuel cost direct labour cost.
Ability to trace
Direct Cost
These are costs that are traceable conveniently and wholly by management to specific
items/area .For examples material cost and
direct labour cost
Indirect Cost
These are common to many items and cannot be traced to any one item/area on the
basis of allocation techniques .For example indirect manufacturing cost are allocated
as part of factory overhead .
As Per Functional Area
Manufacturing Cost
Cost incurred while producing finished product which includes material, labor and
factory
overhead cost
Marketing cost
Cost incurred in promoting /advertisement and other services related to sales
Administrative Cost
It includes cost incurred while directing, controlling and operating factory operations
salaries are included in admin cost
Financing Cost
These cost relates to fund required for running factory operations such as interest on
loans from bank and cost of credit to the customers.
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1.2 The Difference between Price and Cost
One should be aware of the difference between price and cost as depicted in Figure
5.1 and Figure 5.2
Figure 5.1
Figure 5.2
1.3 Total Cost Of Ownership – TCO (Figure 5.3)
The purchase price of an asset plus the costs of operation. When choosing among
alternatives in a purchasing decision, buyers should look not just at an item's shortterm
price, which is its purchase price, but also at its long-term price, which is its total
cost of ownership. The item with the lower total cost of ownership will be the better
value in the long run. For example, the total cost of ownership of a car is not just the
purchase price, but also the expenses incurred through its use, such as repairs,
insurance and fuel. A used car that appears to be a great bargain might actually have a
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total cost of ownership that is higher than that of a new car, if the used car requires
numerous repairs while the new car has a three-year warranty.
Figure 5.3
1.4 Traditional system cost vs Strategic system cost
The recent trend is now on the Strategic System cost rather than the traditional system
cost as shown in Figure 5.4
Figure 5.4
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1.5 Limitations in management accounting and conventional cost accounting
As there are limitations of both management accounting and conventional practices,
Strategic Cost Management surfaced as the current recent trend (Figure 5.5)
SCM’s composition
2 Techniques Of Cost Reduction
Figure 5.5
The following are the widely used techniques of cost reduction:
2.1 Just-In-Time (JIT) System
The main aim of JIT is to produce the required items, at the required quality and
quantity, at the precise time they are required. JIT purchasing requires for the items
where too much carrying costs associated with holding high inventory levels.
purchasing system reduces the investment in inventories because of frequent order of
small quantities.
2.2 Target Costing
Target costing refers to the design of product, and the processes used to produce it, so
that ultimately the product can be manufactured at a cost that will enable the firm to
make profit when the product is sold at an estimated market-driven price. This
estimated price is called target price.
2.3.Activity Based Management(ABM)
Activity based management is the use of activity based costing to improve operations
and to eliminate non-value added cost. The main goal of ABM is to identify and
eliminate non-value added activities and costs.
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2.4 Life Cycle Costing
Life cycle costing estimates and accumulates costs over a product's entire life cycle in
order to determine whether the profits earned during the manufacturing phase will
cover the costs incurred during the pre-and-post manufacturing stage.
2.5 Kaizen Costing
Kaizen costing is the process of cost reduction during the manufacturing phase of an
existing product. The Japanese word 'Kaizen' refers to continual and gradual
improvement through small activities, rather than large or radical improvement through
innovation or large investment technology.
2.6 Business Process-re-engineering
Re-engineering is a complete redesign of process with an emphasis on finding creative
new ways to accomplish an objective. The aim of business process re-engineering is to
improve the key business process in an organization by focusing on simplification, cost
reduction, improved quality and enhanced customer satisfaction.
2.7 Total Quality Management (TQM)
Under the TQM approach, all business functions are involved in a process of
continuous quality improvement.
2.8. Value chain
Value chain analysis is a means of achieving higher customer satisfaction and
managing costs more effectively. The value chain is the linked set of value creating
activities all the way from basic raw materials' sources, component suppliers, to the
ultimate end-use product or service delivered to the customer.
2.9 Bench Marketing
Bench marketing is a continual search for the most effective method of accomplishing a
task by comparing the existing methods and performance levels with those of other
organizations or other sub-units within the same organization.
2.10 Management Audits
Management audits, also known as performance audits, can be used to facilitate cost
reduction in both profit and non-profit organizations. Management audits are intended
to help management to do a better job by identifying waste and inefficiency and
recommending a corrective action.
3 Strategies Of Cost Reduction
Cost reduction strategies can be classified as in Figure 5.6
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Figure 5.6
DEFINITIONS
Cost Savings: A cost reduction that can be specifically identified and will be made to a
budget or program, resulting from implementing a specific alternative in lieu of continuing the
present system.
Cost avoidance: Financial or economic benefits that result from an initiative but do not permit
a monetary reduction to a funded activity or budget.
Cost containment: The process of maintaining organizational costs within a specified budget;
restraining expenditures to meet organizational or project financial targets.
Value enhancement: Value which affects the whole-life costs or whole-life income and its
required functionality.
4 Quality Elements for Product
A business organization produces goods and services to meet its customers’ needs.
Customers want value and quality has become a major factor in the value of products and
service. Customers know that certain companies produce better-quality products than
others, and they buy accordingly. That means a firm must consider how the consumer
defines quality. Quality should be aimed at the needs of the consumer, present and future.
From this perspective, product and service quality is determined by what the customer wants
and is willing to pay for. Since customers have different product needs, they will have
different quality expectations. This results in a commonly used definition of quality as a
service’s or product’s fitness for its intended use, or fitness
4. 1 Dimensions of quality for manufactured products
The dimensions of quality for manufactured products a consumer looks for
include the following
i. Performance: The basic operating characteristics of a product; for example,
how well a car handles or its gas mileage.
ii. Features: The “extra” items added to the basic features, such as a stereo CD or
a leather interior in a car.
iii. Reliability: The probability that a product will operate properly within an
expected time frame; that is, a TV will work without repair for about seven
years.
iv. Conformance: The degree to which a product meets pre established standards.
v. Durability: How long the product lasts; its life span before replacement. A pair of
L.L. Bean boots, with care, might be expected to last a lifetime.
vi. Serviceability: The ease of getting repairs, the speed of repairs, and the
courtesy and competence of the repair person.
vii. Aesthetics: How a product looks, feels, sounds, smells, or tastes.
viii. Safety: Assurance that the customer will not suffer injury or harm from a
product; an especially important consideration for automobiles.
ix. Other perceptions: Subjective perceptions based on brand name, advertising,
and the like.
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4.2 Dimensions of quality for services
i. Time and timeliness: How long must a customer wait for service, and is it
completed on time? For example, is an overnight package delivered overnight?
ii. Completeness: Is everything the customer asked for provided? For example, is
a mail order from a catalogue company complete when delivered?
iii. Courtesy: How are customers treated by employees? For example, are
catalogue phone operators at L.L. Bean nice and are their voices pleasant?
iv. Consistency: Is the same level of service provided to each customer each time?
Is your newspaper delivered on time every morning?
v. Accessibility and convenience: How easy is it to obtain the service? For
example, when you call L.L. Bean does the service representative answer
quickly?
vi. Accuracy: Is the service performed right every time? Is your bank or credit card
statement correct every month?
vii. Responsiveness: How well does the company react to unusual situations, which
can happen frequently in a service company? For example, how well is a
telephone operator at L.L. Bean able to respond to a customer’s questions
about a catalogue item not fully described in the catalogue?
5 The Cost Of Quality
According to legendary quality guru Armand Feigenbaum, “quality costs are the foundation
for quality systems economics.” Quality costs have traditionally served as the basis for
evaluating investments in quality programs. The costs of quality are those incurred to
achieve good quality and to satisfy the customer, as well as costs incurred when quality fails
to satisfy the customer. Thus, quality costs fall into two categories: the cost of achieving
good quality, also known as the cost of quality assurance, and the cost associated with poorquality
products, also referred to as the cost of not conforming to specifications.
5.1 The cost of achieving good quality
The costs of a quality management program are prevention costs and appraisal costs.
Prevention costs are the costs of trying to prevent poor-quality products from reaching
the customer. Prevention reflects the quality philosophy of “do it right the first time,” the
goal of a quality management program. Examples of prevention costs include:
Quality planning costs: The costs of developing and implementing the quality
management program.
Product-design costs: The costs of designing products with quality characteristics.
Process costs: The costs expended to make sure the productive process conforms to
quality specifications.
Training costs: The costs of developing and putting on quality training programs for
employees and management.
Information costs: The costs of acquiring and maintaining (typically on computers) data
related to quality, and the development and analysis of reports on quality performance.
Appraisal costs are the costs of measuring, testing, and analyzing materials, parts,
products, and the productive process to ensure that product-quality specifications are
being met. Examples of appraisal costs include: Inspection and testing: The costs of
testing and inspecting materials, parts, and the product at various stages and at the
end of the process.
Test equipment costs: The costs of maintaining equipment used in testing the quality
characteristics of products.
Operator costs: The costs of the time spent by operators to gather data for testing
product quality, to make equipment adjustments to maintain quality, and to stop work to
assess quality.
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Appraisal costs tend to be higher in a service organization than in a manufacturing
company and, therefore, are a greater proportion of total quality costs. Quality in
services is related primarily to the interaction between an employee and a customer,
which makes the cost of appraising quality more difficult. Quality appraisal in a
manufacturing operation can take place almost exclusively in house; appraisal of
service quality usually requires customer interviews, surveys, questionnaires, and the
like.
5.2 The cost of poor quality
The cost of poor quality (COPQ) is the difference between what it actually costs to
produce a product or deliver a service and what it would cost if there were no defects.
Most companies find that defects, rework and other unnecessary activities related to
quality problems significantly inflate costs; estimates range as high as 20 to 30% of
total revenues. This is generally the largest quality cost category in a company,
frequently accounting for 70 to 90% of total quality costs. This is also where the
greatest cost improvement is possible.
The cost of poor quality can be categorized as internal failure costs or external failure
costs.
Internal failure costs are incurred when poor-quality products are discovered before
they are delivered to the customer. Examples of internal failure costs include:
Scrap costs: The costs of poor-quality products that must be discarded, including labor,
material, and indirect costs.
Rework costs: The costs of fixing defective products to conform to quality
specifications.
Process failure costs: The costs of determining why the production process is
producing poor quality products.
Process downtime costs: The costs of shutting down the productive process to fix the
problem.
Price-downgrading costs: The costs of discounting poor-quality products—that is,
selling products as “seconds.”
External failure costs are incurred after the customer has received a poor-quality
product and are primarily related to customer service. Examples of external failure
costs include.
Customer complaint costs: The costs of investigating and satisfactorily responding to a
customer complaint resulting from a poor-quality product.
ACTIVITY 1
(20 MINS)
In the set scenario, the six operational divisions have a total budget as shown below. The
company is becoming very quality conscious and has asked the Operations Managers of
each of the divisions to submit a one-line financial statement to the Director of operations
showing the percentage of POC (Price of Conformance) and the percentage of PONC (Price
of Non-Conformance) for their divisions last year. These POC and PONC percentages are
shown in the table below.
The Director already knows from the company accountant the overall total budget spent by
each division. This is also shown in the table below.
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Total Budget($M)
POC
PONC
% %
Sales and Marketing 30 10 10
Manufacturing and Assembly 250 10 15
Logistics and Distribution 20 10 5
Research and Development 60 25 15
Customer Services 50 35 50
Corporate Services 10 10 5
$420M 100% 100%
a) Describe briefly what is meant by TCOP
b) Show the basic equation which defines the relationship between;
POC, PONC, COQ (Cost of Quality), COP (Cost of Product)
and TCOP (Total Cost of Product).
c) Produce a table which shows the total quality financial profiles
for each of the 6 (six) divisions in the format shown below:-
TCOP ($M) COP ($M) POC ($M) PONC ($M)
Sales and Marketing 30
Manufacturing and Assembly 250
Logistics and Distribution 20
Research and Development 60
Customer Services 50
Corporate Services 10
$420M $ M $ M $ M
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6 Techniques Of Quality Improvement - Continuous Quality Improvement
Continuous Quality Improvement (CQI) is a quality management strategy? If one looks at
this process as a necessary evil as opposed to a valuable tool, they may not be seeing the
big picture in how a properly run study is not difficult to run and not a waste of time.
Moreover, the results can improve the work environment for management, staff and patients.
CQI is more than a simple quality management strategy. It is an entire management
philosophy. A management philosophy that departs sharply from philosophies of the past.
Traditional management philosophies are built upon a bureaucratic “command and control”
model. CQI is a management philosophy based upon a nonbureaucratic “educate and
support” model. This change in management philosophy is the most difficult aspect of CQI.
CQI is a mechanism that identifies and resolves problems that cause quality defects. It
provides small incremental improvements in quality over a period of years. Generally, one
does not get results overnight. CQI is not a quick fix for a failing business. The typical
implementation time for CQI is 5-7 years. There are two components to CQI: philosophy and
tools. Use of the tools will result in improved quality even if one does not adopt the CQI
philosophy. CQI “activities” can occur without changing to a CQI “environment.” However,
embracing the entire concept and utilizing both the philosophy and the tools obtain the
greatest success. We will begin the discussion with an overview of quality. Particular
emphasis will be placed on service quality.
The following are useful concepts in relation to the CQI philosophy.
6. 1 Benchmarking
This is a quality management strategy of rating business practices against the world’s
best companies. Traditional management strategies compare competitive company to
competitive company. Benchmarking compares the business to the world’s best,
regardless of the industry, product, or service.
6. 2 Just In Time (JIT)
Delivery of services, products, parts, equipment, etc. at just the moment they are
needed. JIT reduces the need for large inventories and storage. It decreases waiting
(and therefore unproductive) time. In the hospital environment, JIT means having staff
available when they are needed instead of constantly available. It may be traditional to
staff “X” number of people for a department or shift. But JIT requires an evaluation of
when the peak work periods are and adjustment of staff to accommodate the peak
periods.
6.3 Poka-Yoke
Making the service, product, or process mistake-proof is an example of pokayoke. If
there is a right way to do something, make it impossible to do it another way. Pokayoke
means to make the process as idiot proof as possible. Try to conceive of every possible
human error that could occur and safeguard against it. (Medical gas cylinder
connecting systems are an example of poka-yoke.)
6.4 Robust Design
Design the process so it withstands the random fluctuations that decrease quality. No
matter how well everything works there will always be fluctuations in the process.
Design the process to “flex” enough so fluctuations do not decrease the overall quality.
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For example, an RC department should be designed so if an RCP calls in sick, the
quality of patient care is not affected. The department should be designed to
accommodate this random fluctuation.
6.5 Organizational capital
Organizational capital is the training, education, experience, and intelligence of its
employees. This capital is as valuable as traditional forms of capital. It can and should
be utilized. Organizational capital can very quickly be converted to traditional capital if
management utilizes it properly.
6.6 Creative Destruction
Many of the traditional concepts of management and how to do business are obsolete
for today’s marketplace. Organizations must change and change dramatically to
survive. Change should not occur just for the sake of change. It is absurd to change
something that the organization does well just to change it. (If it works well, don’t fix it.)
One must identify the good and the bad in the organization and destroy the latter.
Creative destruction is a “smart” bomb type of destruction process. Only destroy that
which is counterproductive to quality.
6.7 Made-To-Order Components
This is a departure from one of the basic concepts of industrial-age thinking:
interchangeable parts. Made-to-order components are the ultimate in customization. In
this type of operation, a slight deviation in one component is compensated for by the
other components. For example, if one part of a product is “off” a millimetre, the other
components are made “off” the same amount. The end product fits together and
functions properly instead of being defective due to one component.
6.8 Flex-Firm
Flex-firms allow individual departments to adopt a structural model that best suits their
primary activities instead of forcing a standard model on every department. Hospitals
are generally bureaucratic structures and departments within hospitals follow this
organizational model. Bureaucracy is just one of many organizational models.
6.9 Innovation Imperative
In today’s marketplace, a company must have new products or services to stay viable.
No company can corner the market and stay there without constant innovation.
Stagnation or “resting on your laurels” will not lead to success. Innovation,
experimentation and creativity are actively encouraged to remain competitive.
Innovation is imperative for today’s business.
6.10 CHAOS
Chaos theory deals with randomness and complexity. This theory can assist in the
understanding of complex and dynamic processes such as, running a hospital. Most
sciences look at a given “state” of matter. They derive information from very strict
control of the variables of what they are studying. The science of chaos accepts the
fact there are an infinite number of variables. It concentrates its attention on the
science of process rather than of state. Chaos studies becoming rather than being.
This type of thought-process is at the core of CQI. An elementary knowledge of chaos
theory can be very useful. Knowledge of “emergent” behaviour is also extremely useful.
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6.11 Shadow Management
A management structure that takes over during a crisis is shadow management. During
a crisis, decisions must be made rapidly. There is little time for extensive discussion or
to form a committee/task force to study the problem. Certain actions need to be
implemented immediately. There should be an organizational mechanism in place that
can take such action during a crisis. When the crisis is over, this management returns
to the shadows. The organization should be able to operate in two modes, one for
normal operations and one for crisis situations. Shadow management becomes
operative in the latter. CQI does not lend itself well to crisis management. CQI can help
prevent the crisis through careful planning, but it is not a quick response system.
Shadow management may be necessary for a crisis.
6.12 Ad-Hocracy
An organization run by project teams or task forces. Teams and task forces are formed
to achieve the current goals of the company. They are given the authority to achieve
those goals. When the task is completed, they are disbanded or reduced to
maintenance. The team or task force working on a more current project replaces them.
This provides a more democratic distribution of power due to the changing nature of the
task forces.
6.13 Analysis Paralysis
CQI can provide a tremendous amount of data on an organization. This can be
overwhelming and lead to no action. So much time can be spent discussing and
diagramming problems nothing gets done. This is analysis paralysis.
6.14 Intelligent Error
Errors that only hindsight could have prevented. A correct thought process and
decision was made prior to the action producing the error. The organization accepts the
fact that risks must be taken for innovation to occur. This attitude will result in intelligent
errors. In contrast, an organization that penalizes such errors will have few innovations.
7 Other Alternative – House of Quality
Every successful company has always used data and information to help in its planning
processes. In planning a new product, engineers have always examined the manufacturing
and performance history of the current product. They look at field test data, comparing their
product to that of their competitor’s product. They examine any customer satisfaction
information that might happen to be available. Unfortunately, much of this information is
often incomplete. It is frequently examined as individual data, without comparison to other
data that may support or contradict it. By contrast, Quality Function Deployment (QFD) uses
a matrix format to capture a number of issues that are vital to the planning process. The
House of Quality Matrix is the most recognized and widely used form of this method. It
translates customer requirements, based on marketing research and benchmarking
data, into an appropriate number of engineering targets to be met by a new product design.
Basically, it is the nerve center and the engine that drives the entire QFD process. According
to Hauser and Clausing, it is “a kind of conceptual map that provides the means for inter
functional planning and communication.”
There are many different forms of the House of Quality, but its ability to be adapted to the
requirements of a particular problem make it a very strong and reliable system to use. Its
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general format is made up of six major components. These include customer requirements,
technical requirements, a planning matrix, an interrelationship matrix, a technical correlation
matrix, and a technical priorities/benchmarks and targets section.
Figure 5.7 House of Quality
ACTIVITY 2
(10 MINS)
Explain how improving quality can lead to reduced costs.
8 Conflicting issues of implementation of cost reduction and quality improvement
strategies simultaneously
Often lower the operating cost will interrupt the quality improvement scheme. As such the
consideration of the new techniques so called Strategic Cost Management (SCM) would
hopefully resolve this tension.
SCM gives a clear understanding of the firm’s cost structure in search of sustainable
competitive advantage. SCM is the managerial use of cost information explicitly directed at
one or more of the four stages (strategy formulation, communicating the strategy,
implementing and controlling) of strategic management.
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Overall recognition of the cost relationships among the activities in the value chain, and the
process of managing those cost relationships to a firm's advantage. This takes the
organisation in totality.
SCM is the best solution due to:
Cost analysis in terms of overall value chain of which the firm is a part
Strongly external focus
The design of cost management systems changes dramatically depending on the
basic strategic positioning of the firm
o Cost leadership or
o Product differentiation
Cost is a function of strategic choice about the structure of how to compete and
managerial skill in executing the strategic choices
o Structural cost drivers and
o Executional cost drivers
Strategic cost management (Figure 5.5) is a blend of :
Value chain analysis (how we organize our thinking about cost management?)
Strategic positioning analysis (what role does cost management play in the firm?)
Cost driver analysis
Tools in SCM as in Figure 5.8
Figure 5.8
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ACTIVITY 3
(20 MINS)
Draw a fish-bone chart detailing reasons why an airline customer might be dissatisfied.
ACTIVITY 4
(20 MINS)
In the perspective of the tension of cost reduction and improved quality, what roles do
operations managers play in addressing the major aspects of service quality?
QUICK QUIZZ
1. The Balanced Scorecard is a useful tool for helping managers translate their strategy
into action in the following areas:
A. Sustainability; Flexibility; Efficiency; Technology
B. Customers; Financial; Internal Business Processes; Learning and Growth
C. The Environment; The Community; Suppliers; Other Stakeholders
D. Strategy; Tactics; Productivity; Profitability
2. Quality function deployment is a methodology to:
A. compare what the customer wants and what you can do
B. compare what the customer wants with your product’s specifications
C. compare importance weights of your competitors
D. compare functions with features
3. How can a university control the quality of its output (that is, its graduates)?
4. What are 10 determinants of service quality?
5. Name several products that do not require high quality.
ANSWERS TO QUICK QUZZ
1. B
2. A
3. A university can seek to control the quality of its graduates by:
Setting specific goals for its overall accomplishments
Employing quality faculty
Setting appropriate standards (prerequisites, GPA, required credit hours, etc.)
Employing appropriate evaluation devices (quizzes, examinations, term
papers, etc.)
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4. According to Berry, Zeithaml, and Parasuraman, the 10 determinants of service
quality are:
Reliability
Responsiveness
Competence
Access
Courtesy
Communication
Credibility
Security
Understanding/knowing the customer
Tangibles
5. If one adopts a definition of quality based upon “satisfying stated or implied needs,” it
is difficult to imagine any product that would not be required to be of high quality.
ANSWERS TO ACTIVITIES
1
a) TCOP is total cost of product. TCOP = COP (Cost of Product) + COQ (Cost of
Quality); COQ includes (POC & PONC)
b) TCOP = COP + COQ; COQ = (POC + PONC)
c) As table below:
TCOP
($M)
POC ($M)
PONC
($M)
COQ
($M)
COP($M)
Sales and Marketing 30 3.0 3 6.0 24.0
Manufacturing and
Assembly 250 25.0 37.5 62.5 187.5
Logistics and Distribution 20 2.0 1 3.0 17.0
Research and
Development 60 15.0 9 24.0 36.0
Customer Services 50 17.5 25 42.5 7.5
Corporate Services 10 1.0 0.5 1.5 8.5
$420.0 $63.5 $76.0 $139.5 $280.5
2 Higher quality leads to greater demand, to greater market share, to greater economies of
scale. Additionally, higher quality leads to less scrap, rework, and warranty cost, hence
to less input required for same output.
5-17

3
4 The design and delivery of service can make a difference on the tangible
components of service, containing the determinants of service quality in the
process design, managing expectations, and having alternate plans for exceptions
and taking a long term approach.
CHAPTER ROUND UP
Total Cost of Ownership is the purchase price of an asset plus the costs of operation.
Quality, is a term that means different things to different people. We define quality as
"the totality of features and characteristics of a product or service that bears on its
ability to satisfy stated or implied needs." Defining quality expectations is critical to
effective and efficient operations.
CQI is a management philosophy that departs sharply from management
philosophies of the past. Management philosophies of the past are based upon a
bureaucratic “command and control” model. In this model, specialized workers
perform repetitive tasks at specific levels within the organization.
The House of Quality functions as a living document and a source of ready reference
for related products and future upgrades. While it is a great communication tool at
each step in the process, the matrices are the means and not the end. Its purpose is
to serve as a vehicle for dialogue to strengthen vertical and horizontal
communications.
5-18

SCM gives a clear understanding of the firm’s cost structure in search of sustainable
competitive advantage and be effective use to circumvent the tension of cost and
quality endeavours.
REFERENCES
1. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
2. Operations Management by Russell,& Benard W. Taylor, Crating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
3. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill
4. Total cost of ownership :
http://www.investopedia.com/terms/t/totalcostofownership.asp#ixzz3ehM1E8NC
Follow us: @Investopedia on Twitter
5-19

Introduction
For a company to be considered world class, it must recognize that the ability to compete in
the marketplace depends on developing an operations strategy aligned with the mission of
serving the customer. This chapter describes a company's competitiveness and its relative
position to other firms in both local and global markets. The competitive dimensions of
operations are cost, product quality and reliability, delivery speed, delivery reliability, coping
with demand change, flexibility, and new product introduction speed. Central to the concept
of operations strategy is the notion of operations focus and trade-offs.
The interface between marketing and operations is necessary to provide a business with an
understanding of its markets from both perspectives. Operations strategy must be linked
vertically to the customer and horizontally to other parts of the enterprise. Chapter six
describes the steps for prioritizing competitive dimensions. Operations strategy is also
considered in service firms. An example of Southwest Airlines profiles the fitting of
operational activities to overall strategy, while the example of Wal-Mart profiles ways to
attack the market by using operations. Finally, productivity measures are presented including
partial measures, multifactor measures, and total measures of productivity. These measures
provide benchmarks to indicate how well the company is doing and are used to measure
improvement.
Your objectives
In this chapter you will learn about the following:
Understand the operations function
Understand strategy and operations
Understand how to achieve competitive advantage through operations
Understand strategy development and implementation of OM
Understand application and evaluation of performance objectives of OM in
organisations.
1 What Is Operations Strategy?
Operations strategy is concerned with setting broad policies and plans for using the
resources of a firm to best support its long-term competitive strategy. A firm's operations
strategy is comprehensive through its integration with corporate strategy. The strategy
involves a long-term process that must foster inevitable change. An operations strategy
involves decisions that relate to the design of a process and the infrastructure needed to
6-1

support the process. Process design includes the selection of appropriate technology, siting
the process over time, the role of inventory in the process, and locating the process. The
infrastructure decisions involve the logic associated with the planning and control systems,
quality assurance and control approaches, work payment structures, and organization of the
operations function.
1.1 Operations Competitive Dimensions
Given the choices customers face today, how do they decide which product or service
to buy? Different customers are attracted by different attributes. Some customers are
interested primarily in the cost of a product or service and. correspondingly some
companies attempt to position themselves to offer the lowest prices. The major
competitive dimensions that firm the competitive position of a firm include the following:
Cost or Price: “Make the product or deliver the service cheap”.
Quality: “Make a great product or deliver a great service”.
Delivery Speed: “Make the product or deliver the service quickly”.
Delivery Reliability: “Deliver it when promised”.
Coping with change in Demand: “Change its volume”.
Flexibility and New- Product introduction speed: “Change it”.
1.2 The Notion of Trade-Offs
Central to the concept of operations strategy is the notion of operations focus and
trade-oils. The underlying logic is that an operation cannot excel simultaneously on all
competitive dimensions. Consequently management has to decide which parameters of
performance are critical to the firm’s success and then concentrate the resources of the
firm on these particular characteristics.
1.3 Order Winners and Qualifiers
An interface between marketing and operations is necessary to provide a business with
an understanding of its markets from both perspectives. Terry Hill, a professor at
Oxford University, has coined the order winner and order qualifier to describe
marketing –oriented dimensions that are key to competitive success. An order winner is
a criterion that differentiates the products or services of one firm from another.
Depending on the situation, the order-winning criterion may be the cost of the product
(price), product quality and reliability, or any of the other dimensions developed earlier
An order qualifier is a screening criterion that permits a firm's products to even be
considered as possible candidates for purchase. Professor Hill states that a firm must
requalify the order qualifiers every day it is in business.
ACTIVITY 1
(10 MINS)
How has Franz Colruyt achieved low-cost leadership? List three specific examples and
describe each briefly.
6-2

2 Strategic Fit - Fitting Operational Activities to Strategy
All of the activities that make up of a firm’s operation relate to one another. Making these
activities efficient means minimizing their total cost. On the other hand, making them
effective means making the combined set of activities support the firm’s strategy.
2.1 A Framework for Operations Strategy in Manufacturing
Operations strategy cannot he designed in a vacuum. It must he linked vertically to the
customer and horizontally to other pails of the enterprise. Figure 6.1 shows these
linkages among customer needs, their performance priorities and requirements for
manufacturing operations, and the operations and related enterprise resource
capabilities to satisfy those needs. Overlying this frame-work is senior management's
strategic vision al the firm. The vision identifies, in general terms, the target market, the
firm’s product line, and its core enterprise and operations capabilities.
The choice of a target market can be difficult but it must he made. Indeed, it may lead
to turning away business - ruling out a customer segment that would simply be
unprofitable or too hard to serve given the firm's capabilities. An example here is
clothing manufacturers not making half-sizes in their dress lines. Core capabilities (or
competencies) are the skills that differentiate the service or manufacturing firm from its
competitors
6-3

Figure 6.1
ACTIVITY 2
(10 MINS)
Nike is the world's largest athletic brand. Its innovative and broad product line helps drive
sales, however a large majority of those sales are in the footwear business. Most of Nike's
goods are produced overseas in low-cost factories and then imported to the final market.
Nike currently has many of the top U.S. athletes under contract (Michael Jordon, Tiger
Woods, Dwayne Wade) but international sales are still small in emerging markets. However,
many competitors have attempted to copy Nike's business model (high-value branded
products manufactured at low-cost), including Adidas and Reebok, while many retailers have
attempted to pass on the low-cost pressure of retail consumers. Perform a SWOT analysis
for Nike.
6-4

3 Achieving competitive advantage through operations
Firms achieve missions in three conceptual ways:
Differentiation
Cost leadership
Response
This means operations managers are called on to deliver goods and services that are:
Better, or at least different
Cheaper
More response
Each of the three strategies provides an opportunity for operations managers to achieve
competitive advantage. Competitive advantage implies the creation of a system that has a
unique advantage over competitors. The idea is to create customer value in an efficient and
sustainable way. Pure forms of these strategies may exist, but operations managers will
more likely be called on to implement some combination of them. Let us briefly look at how
managers achieve competitive advantage via differentiation, low cost, and response.
3.2 Competing on differentiation
Safeskin Corporation is number one in latex exam gloves because it has differentiated
itself and its products. It did so by producing gloves that were to prevent allergic
reactions about which doctors were complaining. When other glove makers caught up,
Safeskin developed hypoallergenic gloves. Then it added texture to its gloves. Then it
developed a synthetic disposable glove for those allergic to latex—always staying
ahead of the competition. Safeskin's strategy is to develop a reputation for designing
and producing reliable state- of-the-art gloves, thereby differentiating itself.
3.3 Competing on Cost
Southwest Airlines has been a consistent money maker while other U.S. airlines have
lost billions. Southwest has done this by fulfilling a need for low-cost and short-hopflights.
Its operations strategy has included use of secondary airports and terminals,
first-come, first-served seating, few fare options, smaller crews flying more hours,
snacks-only or no-meal flights, and no downtown ticket offices.
3.3 Competing on Response
The third strategy option is response. Response is often thought of as flexible
response, but it also refers to reliable and quick response. Indeed, we define response
as including the entire range of values related to timely product development and
delivery, as well as reliable scheduling and flexible performance.
Flexible response may be thought of as the ability to match changes in a marketplace
where design innovations and volumes fluctuate substantially.
Hewlett-Packard is an exceptional example of a tint that has demonstrated flexibility in
both design and volume changes in the volatile world of personal computers. HP’s
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products often have a life cycle of months, and volume and cost changes during that
brief life cycle are dramatic. However, HP has been successful at institutionalizing the
ability to change products and volume to respond to dramatic changes in product
design and costs--thus building a sustainable competitive advantage.
4 Strategy Development And Implementation Of OM
A SWOT analysis is a formal review of the internal Strengths and Weakness and the
external Opportunity and Threats. Beginning with SWOT analyses, organizations position
themselves, through their strategy to have a competitive advantage. A firm may have
excellent design skills or great talent at identifying outstanding locations. However, it may
recognize limitations of its manufacturing process or in finding good suppliers. The idea is to
maximize opportunities and minimize threat in the environment while maximizing the
advantages of the organization's strengths and minimizing the weaknesses. Any
preconceived ideas about mission are then revaluated to ensure they are consistent with the
SWOT analysis. Subsequently, it for achieving the mission is developed. This strategy is
continually evaluated against the value provided customers and competitive realities. The
process is shown in Figure 6.2. From this process, key success factors are identified.
Figure 6.2 Strategy Development
DEFINITIONS
Mission: The purpose or rational for an organization’s existence.
Strategy: How an organisation expects to achieve its missions and goals.
Key success factors: Activities or factors that are to achieving competitive advantage
Core competencies: A set of skills, talents, and activities in which a firm is particularly strong.
Activity map: A graphical link of competitive advantages, critical success factors (CSFs), and
supporting activities.
6-6

ACTIVITY 3
(10 MINS)
How must an operations strategy integrate with marketing and accounting?
5 Key Success Factors and Core Competencies
Because no firm does everything exceptionally well, a successful strategy requires
determining the firm's ethical success factors and core competencies. Key success factors
(KSFs) are those activities that are necessary for a firm to achieve its goals. Key success
factors can be so significant that a firm must get them right to survive in the industry. A KSF
for McDonald's, for example, is layout. Without a play area, an effective drive-in and an
efficient kitchen, McDonald's cannot be successful. KSFs are often necessary, but not
sufficient for competitive advantage. On the other hand, core competencies are the set of
unique skills, talents, and capabilities that a firm does at a world class standard. They allow
a firm to set itself apart and develop a competitive advantage. Organizations that prosper
identify their core competencies and nurture them. White McDonald's KSFs may include
layout, its core competency may be consistency and quality. Honda Motors's core
competence is gas- powered engines - engines for automobiles, motorcycles, lawn mowers,
generators, snow blowers, and more. The idea is to build KSFs and core competencies that
provide a competitive advantage and support a successful strategy and mission. A core
competence may be a subset of KSFs or a combination of KSFs. The operations manager
begins this inquiry by asking:
"What tasks must be done particularly well for a given strategy to succeed?'
"Which activities will help the OM function provide a competitive advantage?"
'Which elements contain the highest likelihood of failure, and which require additional
Only by identifying and strengthening key success factors and core competencies can an
organization achieve sustainable competitive advantage.
In this text we focus on the 10 OM decisions that typically include the KSFs. Potential KSPs
for marketing. Finance and operations are shown in Figure 6.3. The 10 OM decisions we
develop in this text provide an excellent initial checklist for determining KSFs and identifying
core competencies within the operations function. For instance, the 10 decisions related
KSFs, and core competencies can allow a firm to differentiate its product or service. That
differentiation may be via a core competence of innovation and new products, where the
KSFs are product design and speed to market, as is the case for 3M and Rubbermaid.
Similarly, differentiation may be via quality, where the core competence is institutionalizing
quality, as at Toyota. Differentiation may also be via maintenance, where the KSFs are
product reliability and after-sale service, as is the case at IBM and Canon.
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Figure: 6.3 Implement Strategy by Identifying and Executing Key Success Factors
That Support Core Competences
Whatever the KSFs and core competences, they must be supported by the related activities.
One approach to identifying the activities is an activity map, which links competitive
advantage, KSF's and supporting activities. For example, Figure 6.4 shows how Southwest
Airlines, whose core competence is operations, built a set of integrated activities to support
its low-cost competitive advantage. Notice how the KSFs support operations and in turn arc
supported by other activities. The activities fit together and reinforce each other. And the
better they fit and reinforce each other the more sustainable the competitive advantage.
ACTIVITY 4
(10 MINS)
There are three primary ways to achieve competitive advantage.
Provide an example, not included in the text, of each. Support your choices.
6-8

Figure 6.4: Activity Mapping of Southwest Airline’s Low-Cost Competitive Advantage
ACTIVITY 5
(30 MINS)
Your task is to study the case below and answer the questions below:
1. What is the operations strategy of Ryanair, and how does it help to achieve low
costs?
2. How does Flextronics’ operations strategy help the company to satisfy its customers?
3. What specific operations competencies must Flextronics have in order to make a
success of its strategy?
6-9

Case Study - Two operations strategies: Flextronics and Ryanair
The two most important attributes of any operations strategy are first that it aligns operations
activities with the strategy of the whole organization, and second that it gives clear guidance.
Here are two examples of very different businesses and very different strategies which
nonetheless meet both criteria.
Ryanair is today Europe's largest low-cost airline (LCAs) and whatever else can be said
about its strategy, it does not suffer from any lack of clarity. It has grown by offering low-cost
basic services and has devised an operations strategy which is in line with its market
position. The efficiency of the airline's operations supports its low-cost market position.
Turnaround time at airports is kept to a minimum. This is achieved partly because there are
no meals to be loaded onto the aircraft and partly through improved employee productivity.
All the aircraft in the fleet are identical, giving savings through standardization of parts,
maintenance and servicing. It also means large orders to a single aircraft supplier and
therefore the opportunity to negotiate prices down. Also, because the company often uses
secondary airports landing and service fees are much lower. Finally, the cost of selling its
services is reduced where possible.
Ryanair has developed its own low-cost Internet booking service. In addition, the day-to-day
experiences of the company's operations managers can also modify and refine these
strategic decisions. For example, Ryanair changed its baggage handling contractors at
Stansted airport in the UK after problems with misdirecting customers' luggage. The
company's policy on customer service is also clear. We patterned Ryanair after Southwest
Airlines, the most consistently profitable airline in the US says Michael O'Leary, Ryanair's
Chief Executive. 'Southwest founder Herb Kelleher created a formula for success that works
by flying only one type of airplane - the 737, using smaller airports, providing no-frills service
on-board, selling tickets directly In customers and offering passengers the lowest fares in the
market. We have adapted his model for our marketplace and are now setting the low-fare
standard for Europe. Our customer service,’ says O'Leary, his about the most well defined in
the world. We guarantee to give you the lowest air fare. You get a safe flight. You get a
normally on-time flight. That's the package. We don't, and won't, give you anything more.
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Are we going to say sorry for our lack of customer service? Absolutely not. if a plane is
cancelled, will we put you up in a hotel overnight? Absolutely not, if a plane is delayed, will
we give you a voucher fora restaurant? Absolutely not’.
Flextronics is a global company based in Singapore that lies behind such well-known brand
names as Nokia and Dell, which are increasingly using electronic manufacturing services
(EMS) companies, such as Flextronics, which specialize in providing the outsourced design,
engineering, manufacturing and logistics operations for the big brand names. It is amongst
the biggest of those EMS suppliers that offer the broadest worldwide capabilities, from
design to end-to-end vertically integrated global supply chain services. Flextronics'
operations strategy must balance their customers' need for low costs (electronic goods are
often sold in a fiercely competitive market) with their need for responsive and flexible service
(electronics markets can also be volatile). The company achieves this in number of ways.
First, it has an extensive network of design, manufacturing and logistics facilities in the
world's major electronics markets, giving them significant scale and the flexibility to move
activities to the most appropriate location to serve customers. Second. Flextronics offers
vertical integration capabilities that simplify global product development and supply
processes moving a product from its initial design through volume production, test.
distribution and into post-sales service, responsively and efficiently. Finally. Flextronics has
developed integrated industrial parks to exploit fully the advantages of their global, largescale.
high-volume capabilities. Positioned in low-cost regions, yet close to all major world
markets. Flextronics industrial parks can significantly reduce the cost of production.
Locations include Gdansk in Poland. Hungary, Guadalajara in Mexico. Sorocaba in Brazil.
Chennai in India and Shanghai in China, Flextronics own suppliers are encouraged to locate
within these parks, from which products can be produced on-site and shipped directly from
the industrial park to customers, greatly reducing freight costs of incoming components and
outgoing products. Products not produced on-site can be obtained from Flextronics’ network
of regional manufacturing facilities located near the industrial parks. Using this strategy,
Flextronics says it can provide cost-effective delivery of finished products within 1-2 days of
orders.
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6 Application And Evaluation Of Performance Objectives Of OM In Organisations.
6. 1 Evaluation of performance objectives of operations management within
Toyota
Introduction
Toyota was founded in 1937 by Kiichiro Toyoda in 1937 and is headquartered in Aichi,
Nagoya and in Tokyo.
Slowly Toyota Motor Corporation became the largest and the most successful
automobile manufacturer in Japan. Today It is the world’s largest automobile
manufacturer overtaking Chrysler and Ford and neck to neck with General Motors. As
per Fortune Magazine, Toyota is the world’s 5th largest publicly traded company. As a
comparison. General Motors is 9th largest!
In 2009. Toyotas employee base numbered upwards of 350,000 across the world.
Quite large as compared to the second largest General Motors, with its employee base
of 250,000.
Amongst of the bouquet of its offering. Toyota offers, cars, pickups, minivans, and
SUV5 along with industrial automobiles such as forklifts and heavy trucks. Its brands
such as Camry. Corolla, 4Runner, Land Cruiser, Sienna, the luxury Lexus line, the
Scion brand, and a full-sized pickup truck, the V.8 Tundra are virtually household
names.
Toyota also holds a majority holding stake in Daihatsu Motors, and minority
shareholdings in Fuji Heavy Industries Isuzu Motors, as well as Yamaha Motors.
Toyota Motor Corporation today has 522 subsidiaries.
Toyota also offers consumer financial services through Toyota Financial Services and
also creates robots. Toyota Industries and Finance divisions form the bulk of the
Toyota Group, one of the largest conglomerates in the world.
Toyota became big thanks to its awareness of the increased competition in recent
times. Toyotas ability to offer quality products to its brand loyal consumers has been
the cornerstone of its success.
Toyota has developed many strategies to ensure not only this goal is reached once, but
it reached over and over again. In pursuit of this ambition, Toyota has created excellent
quality and management systems
"Quality is a "predictable degree of uniformity and dependability, at low cost and suited
to the marker.
6.2 Identification of performance operations objectives of Toyota and
effectiveness of operations in meeting strategic objectives
One of the performance operations objectives of Toyota is to produce quality vehicles
acceptable all over the world. A Toyota culture has been developed where the senior
executives set specific quality outcome of a vehicle and direct their report directors to
implement and the outcome will be used in their bonuses determination. The reports
received will then be used by the vice presidents of Toyota to develop plans, set targets
6-12

and implementation. The executives will care of nothing as long as set results are
achieved. The developed plan will then be used by operational managers to produce
the vehicles.
The quality of a vehicle is not simply the conformation to the laid down specifications
but it includes other parameters. These include basic performance facts such as
whether the vehicle can perform its primary function, any extra features that is fitted,
how well the vehicle will be used without technical failures, the life span of the vehicle
before being written off, the ability to service, the beauty and comfort as well as
customer perception of its quality). The sum of all these indicators being of good
standards will give a suggestion of a good quality product from Toyota. Thus we can
confirm that this performance objective on quality will enable the company achieve the
strategic objective of producing quality vehicles.
Second performance operations objective of Toyota is on cost of producing a vehicle.
Toyota uses cost benefit analysis in production operation. The managers will analyze
the cost of using a line of production and if it meets the company requirements, the
option is used. However if it does not meet the cost requirements, the option would be
dropped and other options are considered iteratively. This process continues until the
cost effective way of producing certain product is achieved. Thus the strategic objective
of Toyota of producing low priced vehicles is achieved through this performance
operation objective. Therefore it is the responsibility of Toyota managers to ensure that
all their production processes is within the cost budget and failure will mean that they
will continue pursuing alternatives to the point of meeting set cost limits.
Speed is another operation performance objective that encompasses the time taken
from production to delivery of a Toyota product to a customer. The shorter the time
taken indicates high speed performance at the company. The speed will refer to the
duration it takes for obtain quotation, the time taken for a customer to receive the
product, the number of times at which deliveries can be made to customers, the time
taken in production and the duration of developing a new product for the market. The
overall speed will ensure that a lot of deliveries as well as high production. This is very
important in ensuring that the strategic objective of increased volume of production and
sales is achieved by the company.
The fourth operation performance objective is the dependability. This refers to the
ability to stick to set out schedule of operation. This is to mean that a product will be
developed within a standard required procedure without deviation to ensure its quality
is maintained as well as speed. The dependability will also include the delivery
objective on whether the Toyota product is delivered in required quality and on time
while keeping the price low. This performance objective will support the overall
strategic objective increasing customer confidence on Toyota products.
The other performance objective of Toyota is flexibility. This will come in form of range
and response flexibility. The range flexibility is a situation where Toyota is able to meet
a diversified range of requirements in a product. The response flexibility of a company
is its ability to change as soon as possible in situations which demand so. There have
been additional flexibility requirements that go well in ensuring strategic objectives of
the company are achieved. These include the ability to deal with raw materials of
different qualities, output of diverse quality, changed products, altered delivery times,
different production quantity, diverse production blend and ability to adjust to different
input mix in production. These are usually the unforeseen situations that a company
6-13

may undergo. Therefore a company being flexible enough will adjust accordingly in any
scenario. This is an important performance objective of Toyota that ensures that all its
strategic objectives are achieved.
QUICK QUIZZ
1. Operations managers, who usually use quantitative approaches, are not really
concerned with ethical decision-making. True or False
2. Many operations management decisions can be described as tradeoffs.True or False
3. Operations Management activities will be less important in the future because many
firms are becoming service-oriented operations rather than goods producing
operations. True or False
4. Which of the following is a recent trend in business?
A. pollution control
B. total quality management
C. supply chain management
D. competition from foreign manufacturers
E. technological change
5. Dealing with the fact that certain aspects of any management situation are more
important than others is called:
A. analysis of trade offs
B. sensitivity analysis
C. recognition of priorities
D. analysis of variance
E. decision table analysis
6. Provide an example of an organization that achieves competitive advantage through
experience differentiation.
7. What is SWOT analysis? List its four elements and describe its purpose.
8. What is the difference between a firm's mission and its strategy?
9. What is the difference between goods and services in terms of their location
selection?
10. Define core competencies.
6-14

ANSWERS TO QUICK QUIZZ
1. False
2. True
3. False
4. C
5. C
6. Disney and Hard Rock Café are good examples. Competing on experience
differentiation implies providing uniqueness to your service offering through
immersion of the consumer into the service, with visual or sound elements to turn the
service into an experience.
7. The four elements of SWOT are strengths, weaknesses, opportunities, and threats.
Its purpose is to maximize opportunities and minimize threats in the environment,
while maximizing the advantages of the organization's strengths and minimizing the
weaknesses.
8. A firm's mission is its purpose or rationale for an organization's existence, whereas a
firm's strategy is how it expects to achieve its mission and goals.
9. Manufacturers of goods may need to be located close to raw materials, or labour
force. Services, on the other hand, typically are located close to the customer.
10. A set of skills, talents, and activities that a firm does particularly well.
ANSWERS TO ACTIVITIES
1. Among these are no shopping bags, dim lighting, no voice mail, conversion of older
buildings, Spartan offices.
2. Strengths- Innovative products, athletes under contract. Weakness- Much of revenue
is from footwear, eroding market share could cost Nike its profitability. Opportunities-
Sales can be increased in emerging markets using well-known athletes, broad
product line can be expanded into high profit sectors (jewelry, sunglasses, golf, etc)
Threats- International business makes Nike vulnerable to currency changes, low-cost
pressure from retailers can decrease profit per item, competition could erode existing
market share. Athletes’ personal lives could weaken Nike's reputation.
3. The integration of OM with marketing and accounting is pervasive. You might want to
cite examples such as developing new products. (Marketing must help with the
design, the forecast and target costs; accounting must ensure adequate cash for
development and the necessary capital equipment.) Similarly, new technology or new
processes emanating from operations must meet the approval of marketing and the
capital constraints imposed by the accounting department.
4. The text focuses on three conceptual strategies—cost leadership, differentiation and
response. Cost leadership by Wal-Mart—via low overhead, vicious cost reduction in
the supply chain; Differentiation, certainly any premium product—all fine dining
restaurants, up-scale autos—Lexus, etc.; Response, your local pizza delivery
service, FedEx, etc.
5. 5,1 What is the operations strategy of Ryanair, and how does it help to achieve low
costs?
Ryanair, the low cost airline is an example of an operation that has placed itself at an
extreme trade-off position by sacrificing service functionality for low cost. They also
credit Southwest Airlines as the original, and still the best of these focused airlines.
Southwest Airlines is the only airline that has been consistently profitable every year
for over thirty years. It is also now one of the largest airlines in the world by value.
6-15

Yet, back in 1971, it was upstart three-jet airline operating out of Dallas. Texas (still
its headquarters). The strategy of the company has been consistent since it was
founded, to get its passengers to their destinations when they want to get there, on
time, at the lowest possible fares and make sure that they have a good time doing it
Its success in achieving this is down to clever management, a relaxed and employeecentred
corporate style and, what was then a unique way of organizing its operations.
For over thirty years it has introduced a series of cost saving innovations. Unlike
most airlines it provided simple snacks (originally only peanuts) instead of full meals.
This not only reduced costs but also reduced turn round time at airports. Because
there are no meals there is less mess to clear up and also less time is needed to
prepare the galley and load up the aircraft with supplies. Passengers were sold
tickets without a seat allocation (simpler and faster) and expected to seat themselves
(faster). Originally, boarding passes were plastic and reusable and the company was
one of the first to use electronic tickets. It was also early in its adoption of the internet
to sell tickets directly to passengers. Although most airlines at the time used a range
of different aircraft for different purposes. Southwest has consistently stuck with
Boeing 737s since it started. This significantly reduces maintenance costs, reduces
the number of spare parts needed and makes it easier for pilots to fly any aircraft
Southwest's employee involvement practices are designed to empower employees to
take responsibility for maintaining high efficiency and high quaky of service with profit
sharing plans for almost all employees and innovative stock options plans for its
pilots. The result has been what some claim to be the most productive work force in
the airline industry.
5.2 How does Flextronics' operations strategy help the company to satisfy its
customers?
The first paint to note is that the market for electronic manufacturing services is
extremely competitive. Volumes are high but margins are wafer thin. Therefore, any
company that is to compete in this market must be sufficiently flexible to take on
whatever its brand name customers require it to do, as well as provide fast
responsive service and (above all) low costs. If Flextronics operations can do all
these things then, it will satisfy its customers and win more business. Unfortunately,
product flexibility, fast response and low costs are often seen as being conflicting
objectives. There are clear trade-offs between all three. Flextronics' operations
strategy is essentially about how to (at least partially) overcome these trade-offs. This
short case deals particularly with trade-off between fast response and low costs.
Flextronics has chosen to tackle this through its location strategy. Its industrial parks
are set up in relatively low cost locations that are as close as possible to its
customers' sites. Very often though, the problem with locating in low cost areas is
that, because communications are poor, the delivery of products to customers, and
the delivery of supplies from suppliers, may not be as responsive as they should
ideally be. This is where the industrial parks strategy comes in. By developing these
sites and the associated infrastructure, suppliers can locate along side the
Flextronics plants. This allows the company to keep its costs down while still being
relatively responsive.
5.3 What specific operations competencies must Flextronics have in order to make a
success of its strategy?
Being able to develop industrial parks is a skill more commonly associated with
construction companies and real estate developers than electronics manufacturers.
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Yet, because of its strategy, these are competencies that must have been developed
by Flextronics. Hence, to make its strategy work, Flextronics must be skilled at most
of the following:
Identifying suitable sites for industrial parks.
Quickly and efficiently acquiring the land.
Quickly building facilities to a high standard.
Starting up production without too many learning curve inefficiencies.
Persuading suppliers to locate in the park
Helping suppliers to ramp-up their own operations efficiently and effectively.
Integrating the activities of their own and their suppliers' processes to respond
effectively to customers' orders.
CHAPTER ROUNDUP
Operations provide an increase in both the challenges and opportunities for
operations managers.
Although the task is challenging, operations managers can still improve productivity.
They can build and manage OM functions that contribute in a significant way to
competitiveness.
Organizations can identify their strengths and weaknesses, then develop effective
missions and strategies that account for these strengths and weaknesses and
complement the opportunities and threats in the environment.
If this procedure is performed well, the organization can have competitive advantage
through some combination of product differentiation, low cost, and response.
Organisations must realise that there are trade-off decision to be made as resources
are limited.
In The case of Toyota cited, a continued research should be done on an ongoing
process to ensure that flexibility of the company is achieved at all times.
REFERENCES
1. Operations Management by Nigel Slack, Publisher : Prentice Hall
2. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
3. Operations Management by Lee J. Krajewski, Publisher : Prentice Hall
4. Operations Management by Russell,& Benard W. Taylor, Creating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
6-17

Introduction
Linear programming is a powerful quantitative tool used by operations managers and other
managers to obtain optimal solutions to problems that involve restrictions or limitations, such
as budgets and available materials, labour, and machine time.
These problems are referred to as constrained optimization problems. There are numerous
examples of linear programming applications to such problems, including:
Determining optimal schedules for airlines for planes, pilots, and ground personnel.
Determining optimal blends of animal feed mixes.
Identifying the best set of worker–job assignments.
Developing optimal production schedules.
Developing shipping plans that will minimize shipping costs.
Identifying the optimal mix of products in a factory.
Performing production and service planning
Establishing locations for emergency equipment and personnel that will minimize
response time.
Linear programming (LP) techniques consist of a sequence of steps that will lead to an
optimal solution to linear-constrained problems, if an optimum exists. There are a number of
different linear programming techniques; some are special-purpose (i.e., used to find
solutions for specific types of problems) and others are more general in scope. This chapter
covers the two general-purpose solution techniques: graphical linear programming and
computer solutions. Graphical linear programming provides a visual portrayal of many of the
important concepts of linear programming. However, it is limited to problems with only two
variables. In practice, computers are used to obtain solutions for problems, some of which
involve a large number of variables.
Your objectives
In this chapter you will learn about the following:
Understand basic mathematics to build a base for business/operations analysis.
Understand how to transform business/operations problems to mathematical
equations.
Understand the basic concept of Linear Programming (LP) and its limitations
Understand the 3 stages; namely: Formulation, Solutions, and Sensitivity Analysis to
make decisions to solve business/operations problems.
Understand the approach to analyse business/operations problems using LP.
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Understand how to use software packages to solve LP problems.
1 Linear Inequities
An equation defines a relationship where two expressions are equal to each other.
An inequality defines a relationship where one expression is greater than or less than
another.
1.1 Solving Inequities
A linear inequality can be solved in a way similar to that used to solve equations.
An equation solves to give a value of a variable.
An inequality solves to give a value of a variable at the boundary of the inequality.
A value could be one side of this variable but not the other.
Rules of manipulating inequalities
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1.2 Solving the following equation:
2x + y = 7
3x + 5y = 21
Answer: x = 2, y = 3
Working:
Answer: x = 11, y = 4
Working:
ACTIVITY 1
(5 MINS)
Solving the following equation:
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2 Boundaries and feasibility regions - business/operations problems to mathematical
equations.
The statement that x + 2y ≤ 50 means that x + 2y = 50 is possible. If this is plotted
the line represents a boundary of what is possible (feasible).
The line is plotted by establishing the coordinates of the points where the line
cuts the axes.
Figure 7.1 Diagram of a coordinate plane
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Any combinations of x and y are possible as long as no more than 50 hours are used. These
combinations could be on the line AB or they could be under the line AB. They must of
course be above the x axis and to the right of the y axis as we cannot make negative vases
and bowls. The area bounded by AOB is described as a feasibility region.
DEFINITIONS
Objective function: Mathematical statement of profit (or cost, etc.) for a given solution.
Decision variables: Amounts of either inputs or outputs.
Constraints: Limitations that restrict the available alternatives.
Feasible solution space: The set of all feasible combinations of decision variables as defined
by the constraints.
Parameters: Numerical constants.
Sensitivity analysis: Assessing the impact of potential changes to the numerical values of an
LP model.
3 Basic concept of Linear Programming (LP)
Linear programming models are mathematical representations of constrained optimization
problems. These models have certain characteristics in common. Knowledge of
these characteristics enables us to recognize problems that can be solved using linear
programming. In addition, it also can help us formulate LP models. The characteristics
can be grouped into two categories: components and assumptions. First, let’s consider the
components.
Four components provide the structure of a linear programming model:
1. Objective function.
2. Decision variables.
3. Constraints.
4. Parameters.
Linear programming algorithms require that a single goal or objective, such as the
maximization of profits, be specified. The two general types of objectives are maximization
and minimization. A maximization objective might involve profits, revenues, efficiency,
or rate of return. Conversely, a minimization objective might involve cost, time,
distance travelled, or scrap. The objective function is a mathematical expression that can
used to determine the total profit (or cost, etc., depending on the objective) for a given
solution.
Decision variables represent choices available to the decision maker in terms of amounts
either inputs or outputs. For example, some problems require choosing a combination of
inputs to minimize total costs, while others require selecting a combination of outputs to
maximize profits or revenues.
Constraints are limitations that restrict the alternatives available to decision makers. The
three types of constraints are less than or equal to (≤), greater than or equal to ( ≥), and simply
equal to ( = ). A ≤ constraint implies an upper limit on the amount of some scarce resource
g., machine hours, labor hours, materials) available for use. A ≥ constraint specifies a
minimum that must be achieved in the final solution (e.g., must contain at least 10 percent
real fruit juice, must get at least 30 MPG on the highway). The = constraint is more restrictive
in the sense that it specifies exactly what a decision variable should equal (e.g., make 200
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units of product A). A linear programming model can consist of one or more constraints. The
constraints of a given problem define the set of all feasible combinations of decision variables;
this set is referred to as the feasible solution space. Linear programming algorithms
are designed to search the feasible solution space for the combination of decision variables
that will yield an optimum in terms of the objective function.
An LP model consists of a mathematical statement of the objective and a mathematical
statement of each constraint. These statements consist of symbols (e.g., x 1, x 2 ) that represent
the decision variables and numerical values, called parameters. The parameters are fixed
values; the model is solved given those values.
4 Formulation - Overall Approach
Step 1: Define variables.
Step 2: Construct inequalities to represent the constraints.
Step 3: Plot the constraints on a graph
Step 4: Identify the feasible region. This is an area that represents the
combinations of x and y that are possible in the light of the constraints.
Step 5: Construct an objective function.
Step 6: Identify the values of x and y that lead to the optimum value of the
objective function. This might be a maximum or minimum value depending on the
objective. There are different methods available of finding this combination of
values of x and y.
The constraints in a linear programming problem can be drawn as straight lines
on a graph, provided that there are just two variables in the problem (x and y).
One axis of the graph represents values for one of the variables, and the other
axis represents values for the second variable.
The straight line for each constraint is the boundary edge of the constraint - its
outer limit in the case of maximum amounts (and inner limit, in the case of
minimum value constraints).
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The constraint is drawn as a straight line. Two points are needed to draw a
straight line on a graph. The easiest approach to finding the points is to set x to
zero and calculate a value for y and then set y to zero and calculate a value for x.
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4.1 Feasible Region
The feasible area for a solution to the problem is shown as the shaded area ABCD.
Combinations of values for x and within this area can be achieved within the limits of the
constraints. Combinations of values of x and outside this area are not possible, given the
constraints that exist.
To solve the linear programming problem, we now need to identify the feasible
combination of values for x and y (the combination of x and y within the feasible area)
that maximises lie objective function.
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4.2 Maximising (or minimising) the objective function
The combination of values for x and y that maximises the objective function will
be a pair of values that lies somewhere along the outer edge of the feasible area.
The solution is a combination of values for x and y that lies at one of the 'corners'
of the outer edge of the feasible area. In the graph above, the solution to the
problem will be the values of x and y at A, B or C. The optimal solution cannot be
at D as the objective function is maximisation and values of x and/or y are higher
than those at D for each of the other points.
The optimal combination of values of x and y can be found using corner point theorem.
4.3 Corner point theorem
The optimum solution lies at a corner of the feasible region. The approach
involves calculating the value of x and y at each point and then substituting those
values into the objective function to identify the optimum solution.
In the previous example, the solution has to be at points A, B, C or D.
Calculate the values of x and y at each of these points, using simultaneous
equations if necessary to calculate the x and y values. Having established the
values of x and y at each of the points, calculate the value of the objective
function for each.
The solution is the combination of values for x and y at the point where the total
contribution is highest.
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4.4 isocost line
The isocost line can be used to simplify 3 equation lines complications using graph. It
moved down in a minimization problem until it no longer intersects with any constraint
equation. The last point in the feasible region that the line touches is the optimal
corner point.
ACTIVITY 2
(15 MINS)
A manager must decide on the mix of products to produce for the coming week. Product A
requires three minutes per unit for molding, two minutes per unit for painting, and one minute
per unit for packing. Product B requires two minutes per unit for molding, four minutes per
unit for painting, and three minutes per unit for packing. There will be 600 minutes available
for molding, 600 minutes for painting, and 420 minutes for packing. Both products have
profits of $1.50 per unit.
(A) What combination of A and B will maximize profit?
(B) What is the maximum possible profit?
(C) How much of each resource will be unused for your solution?
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5 The Solution
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6 Sensitivity Analysis
Sensitivity analysis is a means of assessing the impact of potential changes to the parameters
(the numerical values) of an LP model. Such changes may occur due to forces beyond a
manager’s control; or a manager may be contemplating making the changes, say, to increase
profits or reduce costs.
There are three types of potential changes:
1. Objective function coefficients.
2. Right-hand values of constraints.
3. Constraint coefficients.
We will consider the first two of these here.
6.1 Objective Function Coefficient Changes
A change in the value of an objective function coefficient can cause a change in the
optimal solution of a problem. In a graphical solution, this would mean a change to
another corner point of the feasible solution space. However, not every change in the
value of an objective function coefficient will lead to a changed solution; generally there
is a range of values for which the optimal values of the decision variables will not change.
For example, in the microcomputer problem, if the profit on type 1 computers increased
from $60 per unit to, say, $65 per unit, the optimal solution would still be to produce nine
units of type 1 and four units of type 2 computers. Similarly, if the profit per unit on type
1 computers decreased from $60 to, say, $58, producing nine of type 1 and four of type
2 would still be optimal. These sorts of changes are not uncommon; they may be the
result of such things as price changes in raw materials, price discounts, cost reductions
in production, and so on. Obviously, when a change does occur in the value of an
objective function coefficient, it can be helpful for a manager to know if that change will
affect the optimal values of the decision variables. The manager can quickly determine
this by referring to that coefficient’s range of optimality, which is the range in possible
values of that objective function coefficient over which the optimal values of the decision
variables will not change. Before we see how to determine the range, consider the
implication of the range. The range of optimality for the type 1 coefficient in the
microcomputer problem is 50 to 100. That means that as long as the coefficient’s value
is in that range, the optimal values will be 9 units of type 1 and 4 units of type 2.
Conversely, if a change extends beyond the range of optimality, the solution will change.
Similarly, suppose, instead, the coefficient (unit profit) of type 2 computers was to
change. Its range of optimality is 30 to 60. As long as the change doesn’t take it outside
of this range, nine and four will still be the optimal values. Note, however, even for
changes that are within the range of optimality, the optimal value of the objective function
will change. If the type 1 coefficient increased from $60 to $61, and nine units of type 1
is still optimum, profit would increase by $9: nine units times $1 per unit. Thus, for a
change that is within the range of optimality, a revised value of the objective function
must be determined .Now let’s see how we can determine the range of optimality using
computer output.
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6. 2 Changes in the Right-Hand-Side (RHS)
Value of a Constraint
In considering right-hand-side (RHS) changes, it is important to know if a particular
constraint is binding on a solution. A constraint is binding if substituting the values of the
decision variables of that solution into the left-hand side of the constraint results in a
value that is equal to the RHS value. In other words, that constraint stops the objective
function from achieving a better value (e.g., a greater profit or a lower cost). Each
constraint has a corresponding shadow price, which is a marginal value that indicates
the amount by which the value of the objective function would change if there were a
one-unit change in the RHS value of that constraint. If a constraint is nonbinding, its
shadow price is zero, meaning that increasing or decreasing its RHS value by one unit
will have no impact on the value of the objective function. Nonbinding constraints have
either slack (if the constraint is ≤) or surplus (if the constraint is ≥). Suppose a constraint
has 10 units of slack in the optimal solution, which means 10 units that are unused. If we
were to increase or decrease the constraint’s RHS value by one unit, the only effect
would be to increase or decrease its slack by one unit. But
there is no profit associated with slack, so the value of the objective function wouldn’t
change.
On the other hand, if the change is to the RHS value of a binding constraint, then the
optimal value of the objective function would change. Any change in a binding constraint
will cause the optimal values of the decision variables to change, and hence, cause the
value of the objective function to change. For example, in the microcomputer problem
the inspection constraint is a binding constraint; it has a shadow price of 10. That means
if there was one hour less of inspection time, total profit would decrease by $10, or if
there was one more hour of inspection time available, total profit would increase by $10.
In general, multiplying the amount of change in the RHS value of a constraint by the
constraint’s shadow price will indicate the change’s impact on the optimal value of the
objective function. However, this is only true over a limited range called the range of
feasibility. In this range, the value of the shadow price remains constant. Hence, as long
as a change in the RHS value of a constraint is within its range of feasibility, the shadow
price will remain the same, and one can readily determine the impact on the objective
function.
7 Approach to analyse business/operations problems using LP
The objective of a linear programming problem is to maximise or minimise the value of
something.
7. 1 Business objectives
The usual assumption is that a business has the objective of maximising profits.
Profit is the difference between revenue and costs and chapter 1 explained the difference
between fixed and variable costs. Decision making models focus on only those elements
that change as a result of a decision so usually decision making is concerned with
maximising the difference between revenue and variable costs the idea being that fixed
costs are not affected by the decision.
The difference between revenue and variable costs is called contribution. We talk of
making a contribution to cover fixed costs and after that has happened, a contribution to
profit. This idea is not so important to this exam, as you will be told what to maximise,
7-13

ut you will come across this much more in later papers. For the time being try to
remember that businesses try to maximise profit by maximising contribution.
An objective function expresses the objective, such as total contribution, as a formula.
7.2 Business/operations examples using 3 lines equations
A Chocolate manufacturer produces 2 kinds of chocolate bar, X and Y, which are made
in 3 stages: blending, baking and packaging. The time in minutes, require for each box
of chocolate is as follows:
The blending and packaging equipment is available for 15 machine hours and the baking
equipment is available for 30 machine hours. The contribution on each box of X is $1
and each box of Y is $2. The machine time may be used for either X or Y at all time it is
available. All production may be sold.
a) State the constraints which describe the production contribution.
b) Graph these constraints.
c) How many tables and chairs should be processed to maximize the contribution.
Solution:
a) Constraints
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)
ACTIVITY 3
(30 MINS)
A costume jeweller makes necklaces and bracelets. Necklaces have a profit margin of $32
and bracelets $24. Necklaces take 2 hours for stonecutting, 7 hours for setting and 6 hours
for polishing. Bracelets take 5 hours for stonecutting, 7 hours for setting and 3 hours for
polishing. The jeweller has 40 hours for stonecutting, 70 hours for selling and 48 hours for
polishing.
Process Necklace (x) Bracket (y) Hour (hr)
Stone cutting 2 5 40
Setting 7 7 70
Polishing 6 3 48
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State the equation which describes the production coordination.
Draw a graph of these equations.
By calculation, find the profit-maximising output mix. Comment on the maximum contribution
and include any comment about this analysis.
(A) What combination of A and B will maximize profit?
(B) What is the maximum possible profit?
(C) How much of each resource will be unused for your solution?
8 Using software packages to solve LP problems
Excel Solver
Maze Furniture makes chairs and tables that have to be processed through two machines Ml1
and M2. The time in hours required make one table and chair are given below:
Total of 200 hours are available on Machine M1 and 400 hours on M2. Contribution from the
sale of a chair is$ 30 and from a table is $40. Determine the optimal mix of tables and chairs
so as to maximise the contribution.
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QUICK QUIZZ
1. LP problems must have a single goal or objective specified. True or False
2. Constraints limit the alternatives available to a decision-maker, removing constraints
adds viable alternative solutions. True or False
3. Which of the following is not a property of all linear programming problems?
A. The presence of restrictions
B. Optimization of some objectives
C. A computer program
D. Alternate courses of action to choose from
4. In the labour planning formulation, how would you write the constraint that there are
only 10 full-time tellers (labeled as T) available?
A. T + 10 > 0
B. T > 10
C. T ≤10
D. All of the above are correct ways
5. Determining the most efficient allocation of resources to the production of goods, etc.,
is characteristic of the LP problem type known as______________.
A. labour planning
B. production scheduling
C. assignment
D. none of the above
6. The term sensitivity analysis is most closely associated with______________.
A. maximax
B. maximin
C. decision-making under risk
D. minimax regret
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7. List at least four applications of linear programming problems.
8. What is a "corner point"? Explain why solutions to linear programming problems focus
on corner points.
9. Define the feasible region of a graphical LP problem. What is a feasible solution?
10. 10 Compare how the corner-point and isoprofit line methods work for solving graphical
problems.
ANSWERS TO QUICK QUIZZ
1. True
2. True
3. C
4. C
5. B
6. C
7. These include school bus scheduling, police patrol allocation, scheduling bank tellers,
selecting product mix, picking blends to minimize cost, minimizing shipping cost,
developing production schedules, and allocating space.
8. LP theory states that the optimum lies on a corner. All three solution techniques make
use of the “corner point” feature.
9. The feasible region is the area bounded by the set of problem constraints. A feasible
solution is any combination of x, y coordinates (or x1, x2 coordinates) that is in or on
the feasible region.
10. The corner point method examines the profit at every corner point, whereas the
isoprofit line method draws a series of parallel profit lines until one line finally touches
the last tip (corner point) of the feasible region. That last point touched is the optimal
solution, so other corner points need not be tested.
ANSWERS TO ACTIVITIES
1
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2
(A) A = 150, B = 175
(B) $1.50(150) + $1.50(75) = $337.50
(C) Molding and painting: 0; packing 45 minutes
3
A. Equations
2x + 5y ≤ 40
7x + 7y ≤ 70
6x + 3y ≤ 48
B. By drawing graph
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C. By Calculation
2x + 5y = 40 - (1) X 7, 14x + 35y = 280 (1)*
7x + 7y = 70 - (2) X 5, 35x + 35y = 350 (2)*
(1)* - (2)*; we have: -21x = -70, therefore x = 3.33.
Substitute in 2x + 5y = 40, we have: 2(3.33) + 5y = 40, therefore y = 6.67
If z = x($) + y($), we have: 3.33(32) + 6.67(24) = $266.64
7x + 7y = 70 - (2) X 3 = 21x + 21y = 210 (2)*
6x + 3y = 48 - (3) X 7 = 42x + 21y = 336 (3)*
(2)* - (3)*; we have: -21x = -126, therefore x = 6.
Substitute in 7x + 7y = 70, we have: 7(6) + 7y = 70, therefore y = 4
If z = x($) + y($), we have: 6(32) + 4(24) = $288
Maximum Profit = $288.
CHAPTER ROUNDUP
Linear programming is a powerful tool used for constrained optimization situations.
Components of LP problems include an objective function, decision variable,
constraints and numerical values (parameters) of the objective function and
constraints.
LP has proven to be especially useful when trying to make the most effective use of
an organization's resources.
The first step in dealing with LP models is problem formulation, which involves
identifying and creating an objective function and constraints. The second step is to
solve the problem. If there are only two decision variables, the problem can he solved
graphically, using the corner-point method or the isoprofit/iso-cost line method. With
either approach, we first identify the feasible region, then find the corner point yielding
the greatest profit or least cost.
The size of real-life problems and the burden of manual solution make computer
solutions the practical way to solve real-life problems.
Even so, much insight can be gained through the study of simple, two-variable
problems and graphical solutions.
Optimizing techniques such as linear programming help business organizations make
the best use of limited resources such as materials, time, and energy to maximize
profits or to minimize costs.
7-20

REFERENCES
1. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
2. Operations Management by Russell,& Benard W. Taylor, Creating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
3. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill
4. Operations Management - Stevenson, William J. 11th edition, McGraw Hill
7-21

INTRODUCTION
Operational schedules are established to keep the flow of products or services through the
supply chain on time. However, not all operational activities are repetitive; some are unique,
occurring only once within a specified time frame. Such unique, one-time activities are
referred to as projects.
In this chapter we focus on project management using CPM and PERT network scheduling
techniques that are popular because they provide a graph or visual representation of the
interrelationship and sequence of individual project activities. However, prior to our
presentation of the CPM/PERT technique, we will discuss the primary elements of the
project management process—planning, scheduling, and control.
The general management process is concerned with the planning, organization, and control
of an ongoing process or activity such as the production of a product or delivery of a service.
Project management is different in that it requires a commitment of resources and people to
an important undertaking that is not repetitive and involves a relatively short period of time,
after which the management effort is dissolved. A project has a unique purpose, it is
temporary, and it draws resources from various areas in the organization; as a result, it is
subject to more uncertainty than the normal management process.
Thus, the features and characteristics of the project management process tend to be unique.
Your objectives
In this chapter you will learn about the following:
Understand project planning
Understand project scheduling
Understand project control
Understand CPM/PERT analysis
Understand how to use OM Tools to solve CPM/PERT problems
8-1

1 Project Planning
Projects can he defined as a series of related tasks directed toward a major output. In some
firms a project organization is developed to make sure existing programs continue to run
smoothly on a day-to-day basis while new projects are successfully completed.
For companies with multiple large projects, such as a construction firm, a project
organization is an effective way of assigning the people and physical resources needed. It is
a temporary organization structure designed to achieve results by using specialists from
throughout the firm. NASA and manv other organizations use the project approach. You may
recall Project Gemini and Project Apollo. These terms were used to describe teams that
NASA organized to reach space exploration objectives.
The project organization works best when:
Work can he defined with a specific goal and deadline.
The job is unique or somewhat unfamiliar to the existing organization.
The work contains complex interrelated tasks requiring specialized skills.
The project is temporary but critical to the organization.
The project cuts across organizational lines.
1.1 Elements Of A Project Plan
Project plans generally include the following basic elements.
Objectives—a detailed statement of what the project is to accomplish and how it will
achieve the company’s goals and meet the strategic plan; and an estimate of when it
needs to be completed, the cost and the return.
Project scope—a discussion of how to approach the project, the technological and
resource feasibility, the major tasks involved, and a preliminary schedule; includes a
justification of the project and what constitutes project success.
Contract requirements—a general structure of managerial, reporting, and
performance responsibilities, including a detailed list of staff, suppliers,
subcontractors, managerial requirements and agreements, reporting requirements,
and a projected organizational structure.
Schedules—a list of all major events, tasks, and sub schedules, from which a master
schedule is developed.
Resources—the overall project budget for all resource requirements and procedures
for budgetary control.
Personnel—identification and recruitment of personnel required for the project team,
including special skills and training.
Control—procedures for monitoring and evaluating progress and performance including
schedules and cost.
Risk and problem analysis—anticipating and assessing uncertainties, problems and potential
difficulties that might increase the risk of project delays and/or failure and threaten project
success.
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2 Project Schedule
Project scheduling involves sequencing and allotting time to all project activities. At this
stage, managers decide how long each activity will take and compute how many people and
materials will be needed at each stage of production. Managers also chart separate
schedules for personnel needs by type of skill (management, engineering, or pouring
concrete,, for example). Charts also can be developed for scheduling materials.
One popular project scheduling approach is the Gantt chart. Gantt charts are low-cost
means of helping managers make sure that (1) activities are planned, (2) order of
performance is documented, (3) activity time estimates are recorded, and (4) overall project
time is developed. As Figure 8.1 shows, Gantt charts are easy to understand. Horizontal
bars are drawn for each project activity along a time line.
Figure 8.1 Gantt Chart
Gantt chart for a bank’s plan to establish a new direct marketing department. To prepare the
chart, the vice president in charge of the project had to first identify the major activities that
would be required. Next, time estimates for each activity were made, and the sequence of
activities was determined. Once completed, the chart indicated which activities were to
occur, their planned duration, and when they were to occur. Then, as the project progressed,
the manager was able to see which activities were on schedule and which were behind
schedule.
However, Gantt charts fail to reveal certain relationships among activities that can be crucial
to effective project management. For instance, if one of the early activities in a project
suffers a delay, it would be important for the manager to be able to easily determine which
later activities would result in a delay. Conversely, some activities may safely be delayed
without affecting the overall project schedule. The Gantt chart does not directly reveal this.
On more complex projects, it is often used in conjunction with a network diagram, defined in
the following section, for scheduling purposes.
8-3

DEFINITION
Activity: A time-consuming job or task that is a key subpart of the total project
Activity-on-Arc (AOA): A network in which the activities are represented by arcs
Activity-on-Node (AON): A network in which the activities are represented by nodes
Forward Pass: A procedure that moves from the beginning of a network to the end of the
network. It is used in determining earliest activity start times and earliest finish times
Backward Pass: A procedure that moves from the end of the network to the beginning of the
network. It is used in determining the latest finish and start times
Earliest Finish Time (EF): The earliest time that an activity can be finished without violation
of precedence requirements
Earliest Start Time (ES): The earliest time that an activity can start without violation of
precedence requirements
Latest Finish Time (LF): The latest time that an activity can be finished without delaying the
entire project
Latest Start Time (LS): The latest time that an activity can be started without delaying the
entire project
Immediate Predecessor: An activity that must be completed before another activity can be
started
3 Project Control
The control of projects, like the control of any management system, involves close
monitoring of resources, costs, quality, and budgets. Control also means using a feedback
loop to revise the project plan and having the ability to shift resources to where they are
needed most. Computerized PERT/CPM reports and charts are widely available today on
personal computers. Some of the more popular of these programs are Prirnavera (by
Primavera Systems, Inc.), MacProject (by Apple Computer Corp.), Percrnastcr (by
Westminster Software, Inc.). VisiSchedule (by Paladin Software Corp.), Time Line (by
Symantcc Corp.) and Microsoft Project (by Microsoft Corp.These programs produce a broad
variety of reports, including (1) detailed cost breakdowns for each task, (2) total program
labor curves, (3) cost distribution tables, (4) functional cost and hour summaries, (5) raw
material and expenditure forecasts, (6) variance reports, (7) time analysis reports, and (8)
work status reports.
3 Concept of Critical Path
A primary objective of the CPM/PERT analysis is to determine the minimum time
required for completion of the entire project. This minimum time is equal to the longest
time path, or sequence of connected nodes (activities) through the network, that leads
from the Start node to the Finish node. The longest time path is also referred to as the
critical path.
The concept of critical path can be illustrated by the sidewalk construction example,
shown again in Figure 8.2. The estimated activity time durations are shown above each
network activity.
8-4

Figure 8.2 Project Network Path
Since activity á (preparation of concrete) is completed at the end of 2 hours, and
concurrent activity a (construction of forms) is not completed until at the end of 5 hours,
then the earliest start time for activity b (pouring of concrete) cannot be 2 hours, as this
earliest start time is dependent on both its predecessor activities, a and á; having been
completed. Thus, activity b's earliest start time is end of 5 th hour, which is equal to the
later of the completion times for the two activities á and a terminating at activity
node b.
Since the completion time of activity b is 1 hour, it will only be completed at end of 6th
hour, and the project will be completed at time 6 hour.
The project is not considered complete until activity b is finished. Since activity b is the
only activity leading to the end of the project, it obviously belongs to the critical path for
determining the overall project completion time. However, in the network there are two
paths that are candidates for the critical path: path [Start] -> á -> b ->, [End] and path
[Start] -> a -> b -> [End]. The path from [Start] -> a -> b has been determined to be the
longest time duration path. Thus, the project critical path is [Start] -> a -> b- > [End],
which yields a minimum possible overall project completion time of 6 hours. Activities a
and b are defined as critical activities, which determine overall project duration. Also, a
delay in the start of a critical activity will bring about a corresponding delay in the
completion of the project.
In summary, the critical path defines the longest time path, or a chain of critical activities
that connect the start and end nodes of the network. The cumulative activity completion
times of the critical activities or jobs determine the overall project duration. In order to
shorten this overall project completion time, it is necessary to shorten one or more of the
activities on the critical path.
Finally, note that activity á (preparation of concrete) is completed after 2 hours, whereas
activity b (pouring of the concrete) cannot begin until after the 5 hours required to
complete activity a (construction of concrete forms) have passed. Thus, a slack period
(or float time) of 3 hours is associated with activity á. This means that the preparation of
the concrete may be delayed up to 3 hours without delaying the overall project. On the
other hand, activities a and b have zero slack; these activities cannot be delayed without
delaying the entire project. The float time calculation method will be discussed in the
later section.
8-5

4 PERT and the critical path method
PERT (program evaluation and review technique) and CPM (critical path method) are two of
the most widely used techniques for planning and coordinating large-scale projects. By using
PERT or CPM, managers are able to obtain
1. A graphical display of project activities.
2. An estimate of how long the project will take.
3. An indication of which activities are the most critical to timely project completion.
4. An indication of how long any activity can be delayed without delaying the project.
Although PERT and CPM were developed independently, they have a great deal in
common. Moreover, many of the initial differences between them have disappeared as users
borrowed certain features from one technique for use with the other. For practical purposes,
the two techniques now are the same; the comments and procedures described will apply to
CPM analysis as well as to PERT analysis of projects.
The program evaluation and review technique (PERT) and the critical path method
(CPM) are two popular quantitative analysis techniques that help managers plan, schedule,
monitor, and control large and complex projects. When they were first developed, PERT and
CPM were similar in their basic approach, but they differed in the way activity times were
estimated. For every PERT activity, three time estimates are combined to determine the
expected activity completion time. Thus, PERT is a probabilistic technique. On the other
hand, CPM is a deterministic method since it is assumed that the times are known with
certainty. While these differences are still noted, the two techniques are so similar that the
term PERT/CPM is often used to describe the overall approach. This reference is
used in this chapter, and differences are noted where appropriate.
There are six steps common to both PERT and CPM. The procedure follows:
Finding the critical path is a major part of controlling a project. The activities on the critical
path represent tasks that will delay the entire project if they are delayed. Managers derive
flexibility by identifying noncritical activities and replanning, rescheduling, and reallocating
resources such as personnel and finances.
8-6

5 Drawing the PERT/CPM Network
Once the activities have all been specified (step 1 of the PERT procedure) and management
has decided which activities must precede others (step 2), the network can be drawn (step
3).
That are two common techniques for drawing PERT networks. The first is called activity onnode
(AON) because the nodes represent the activities. The second is called activity-on-arc
(AOA) because the arcs are used to represent the activities. In this book, we present the
AON technique, as this is easier and is often used in commercial software.
In constructing an AON network, there should be one node representing the start of the
project and one node representing the finish of the project. There will be one node
(represented as a rectangle in this chapter) for each activity.
Using AON example
From the following logic table draw a fully analysed network to calculate the normal project
duration and identify the critical path.
8-7

Forward Pass
Backward Pass
8-8

Slack
Critical Path
8-9

ACTIVITY 1
(30 MINS)
Use AON method find the critical path by hand calculation and depict the forward and
backward pass clearly.
8-10

Using AOA
ACTIVITY 2
(30 MINS)
1. Use AOA and hand calculation method answer the question below:
The activities required to complete a certain project are list below. For this project:-
Activity
Duration
(mths)
Normal
Cost
Crash Cost
($)
Crash Duration
(mths)
1 - 2 4 500 100 3
1 - 3 3 300 - -
1 - 4 8 600 165 6
1 - 5 5 200 90 4
2 - 6 2 700 - -
3 - 7 5 600 110 3
4 -5 3 1000 115 2
5 -7 2 200 - -
5 -8 2 720 - -
6 -7 3 200 50 2
6 -9 6 900 80 5
7 -10 5 400 55 4
8 -10 7 1500 120 6
9- 10 6 280 - -
8-11

a. Draw the network and analyse it.
b. On presenting your project plan the client requested that the project time be reduced
by 2 months. How would you respond and what would be the consequences? Some 6
months after the start of the project, activity (1 - 4) is found to be a month behind
schedules? What action would you suggest, and why?
5 OM Tools to solve CPM/PERT problems
To do this, select Excel QM from the Add-Ins ab in Excel 2010 In the drop-down menu, put
the cursor over Project Management, and choices will appear to the right. To input a problem
that is presented in a table with the immediate predecessors and three time estimates, select
Predecessor List (AON), and the initialization window will appear. Specify the number of
activities, the maximum number of immediate predecessors for the activities, and select the
3 Time Estimate option. If you wish to see a Gantt chart, check Graph. Click OK when
finished, and a spreadsheet will appear, with all the necessary rows and columns labeled.
As this data is being entered, Excel QM calculates the expected times and variances for all
activities, and a table will automatically display the earliest, latest, and slack times for all the
activities. A Gantt chart is displayed, and this chart shows the critical path and slack time for
the activities.
8-12

Activities
Slack
8-13

Gantt Chart
6 Using Microsoft Project 2013 to solve CPM/Pert problems
Activities
8-14

Gantt Chart
Critical Path in red
8-15

ACTIVITY 3
(30 MINS)
Use Microsoft Project method find the critical path and depict the forward and backward
pass clearly.
QUICK QUIZZ
1. A project organization works best for an organization when the project resides in
only one of its functional areas. True or False
2. Gantt charts give a timeline for each of a project's activities, but do not adequately
show the interrelationships of activities. True or False
3. The shortest of all paths through the network is the critical path. True or False
8-16

4. Consider the Gantt chart shown below where the time scale is in minutes and all
activities are performed on an early start basis. How much slack is available in The
Great Hair Washing project?
A. 10 minutes
B. 15 minutes
C. 0 minutes
D. 5 minutes
5. A project that results in "doing the wrong things well" has ignored the:
A. budgetary goal.
B. technical goal.
C. customer satisfaction goal
D. scheduling goal.
6. What is the use of Gantt charts in project management?
7. What is the difference between an activity-on-arrow (AOA) network and an activityon-node
(AON) network?
8. What is the significance of the critical path?
9. Students are sometimes confused by the concept of critical path, and want to believe
that it is the shortest path through a network. Convincingly explain why this is not so.
10. Describe the meaning of slack, and discuss how it can be determined.
ANSWERS TO QUICK QUIZZ
1. FASLE
2. TRUE
3. FALSE
4. C
5. C
6. A Gantt chart is a visual device that shows the duration of tasks in a project. It is a
low-cost means of ensuring that (1) all activities are planned for, (2) their order of
performance is planned for, (3) the activity times are recorded, and (4) the overall
project time is developed.
8-17

7. The difference between AOA and AON is that activities are shown on arrows in the
former and on the node in the latter.
8. Any late start or extension of an activity on the critical path will delay the completion
of the project.
9. The critical path is the shortest time possible for the completion of a series of
activities, but that shortest time is the longest path through the network. Only the
longest path allows time for all activities in the series; any smaller amount will leave
activities unfinished.
10. Slack is the amount of time an activity can be delayed and not affect the overall
completion time of the whole project. Slack can be determined by finding the
difference between the earliest start time and the latest start time, or the earliest
finish time and the latest finish time for a given activity.
ANSWERS TO ACTIVITES
1
8-18

2
a)
b) May be overtime, additional labour, outsourcing, etc..
8-19

3
8-20

CHARTER ROUNDUP
The fundamentals of PERT and CPM are presented in this chapter. Both of these
techniques are excellent for controlling large and complex projects.
PERT is probabilistic and allows three time estimates for each activity. These
estimates are used to compute the project’s expected completion time, variance, and
the probability that the project will be completed by a given date.
An extension of standard PERT, can be used to plan, schedule, monitor, and control
project costs.
PERT, CPM, and other scheduling techniques have proven to be valuable tools in
controlling large and complex projects. With these tools, managers understand the
status of each activity and know which activities are critical and which have slack; in
addition, they know where crashing makes the most sense.
Projects are segmented into discrete activities, and specific resources are identified.
This allows project managers to respond aggressively to global competition. Effective
project management also allows firms to create products and services for global
markets.
As with Microsoft Project illustrated in this chapter, a wide variety of software
packages are available to help managers handle network modeling problems.
PERT and CPM do not, however, solve all the project scheduling and management
problems. Good management practices, clear responsibilities for tasks, and
straightforward and timely reporting systems are also needed. It is important to
remember that the models we described in this chapter are only tools to help
managers make better decisions.
REFERENCES
1. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
2. Operations Management by Russell,& Benard W. Taylor, Creating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
3. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill
4. Operations Management - Stevenson, William J. 11th edition, McGraw Hill
8-21

Introduction
Sales and Operations Planning (S&OP) is an aggregate planning process that determines
the resource capacity a firm will need to meet its demand over an intermediate time
horizon—6 to 12 months in the future. Within this time frame, it is usually not feasible to
increase capacity by building new facilities or purchasing new equipment; however, it is
feasible to hire or lay off workers, increase or reduce the workweek, add an extra shift,
subcontract out work, use overtime, or build up and deplete inventory levels.
We use the term aggregate because the plans are developed for product lines or product
families, rather than individual products. An aggregate operations plan might specify how
many bicycles are to be produced but would not identify them by colour, size, tires, or type of
brakes. Resource capacity is also expressed in aggregate terms, typically as labour or
machine hours. Labour hours would not be specified by type of labour, nor machine hours by
type of machine. And they may be given only for critical processes.
Your objectives
In this chapter you will learn about the following:
Understand the sales and operations planning process
Understand strategies for adjusting capacity
Understand strategies for managing demand
Understand quantitative techniques for aggregate planning
Understand the hierarchical nature of planning
Understand application and evaluation of sales and operations planning in
organisation
1 The sales and operations planning process
There are two objectives to sales and operations planning:
1. To establish a company-wide game plan for allocating resources, and
2. To develop an economic strategy for meeting demand.
The first objective refers to the long-standing battle between the sales and operations
functions within a firm. Personnel who are evaluated solely on sales volume have the
tendency to make unrealistic sales commitments (either in terms of quantity or timing) that
operations is expected to meet, sometimes at an exorbitant price. Operations personnel who
are evaluated on keeping manufacturing costs down may refuse to accept orders that
require additional financial resources (such overtime wage rates) or hard-to-meet completion
dates. The job of operations planning is to match forecasted demand with available capacity.
If capacity is inadequate, it can usually be expanded, but at a cost. The company needs to
9-1

determine if the extra cost is worth the increased revenue from the sale, and if the sale is
consistent with the strategy of the firm. Thus, the aggregate plan should not be determined
by manufacturing personnel alone; rather, it should be agreed on by top management from
all the functional areas of the firm—operations, marketing, and finance. Because
this is such an important decision, companies engage in a structured, collaborative decision
making process called sales and operations planning (S&OP). Figure 9.1 outlines the S&OP
process.
2 Monthly sales and operations planning
Figure 9.1 Sales and operations planning
The sales and operations planning process does not stop here. The two plans must be
reconciled. Typically this involves creating an annual plan and updating it with monthly
meetings that culminate in executive approval of the final plan. The process is diagrammed
in Figure 9.2. Because of the various factors and viewpoints considered, the sales and
operations plan is often referred to as the company’s game plan for the coming year, and
deviations from the plan are carefully monitored. Monthly S&OP meeting reconcile
differences in supply, demand, and new product plans.
An economic strategy for meeting demand can be attained by either adjusting capacity or
managing demand.
9-2

ACTIVITY 1
(30 MINS)
Answer the discussion questions below:
Since opening day, the Arnold Palmer Hospital has experienced an explosive growth in
demand for its services. One of only six hospitals in the U.S. to specialize in health care for
women and children, Arnold Palmer Hospital has cared for over 1,500,000 patients who
came to the Orlando facility from all 50 states and more than 100 countries. With patient
satisfaction scores in the top 10% of U.S. hospitals surveyed (over 95% of patients would
recommend the hospital to others), one of Arnold Palmer Hospital's main focuses
is delivery of babies. Originally built with 281 beds and a capacity for 6,500 births per year,
the hospital steadily approached and then passed 10,000 births. Looking at Table 9.1,
Executive Director Kathy Swanson knew an expansion was necessary.
With continuing population growth ill its market area serving 18 central Florida counties,
Arnold Palmer Hospital was delivering the equivalent of a kindergarten class of babies every
day and still not meeting demand. Supported with substantial additional demographic
analysis, the hospital was ready to move ahead with a capacity expansion plan and a new
11- story hospital building across the street from the existing facility.
Thirty-five planning teams were. established to study such issues as (1) specific forecasts,
(2) services that would transfer to the new facility, (3) services that would remain in the
existing facility, (4) staffing needs, (5) capital equipment, (6) pro forma accounting
data, and (7) regulatory requirements. Ultimately, Arnold Palme Hospital was ready to move
ahead with a budget of $100 million and a commitment to an additional 150 beds. But given
the growth of the central Florida region, Swanson decided to expand the hospital in
stages: the top two floors would be empty interiors ("shell") to be completed at a later date,
and the fourth-floor operating room could be doubled in size when needed. "With the new
facility in place, we are now able to handle up to 16,000 births per year," says Swanson.
9-3

Discussion Questions:
1. Given the capacity planning, what approach is being taken by Arnold
Palmer Hospital toward matching capacity to demand?
2. What kind of major changes could take place in Arnold Palmer
Hospital's demand forecast that would leave the hospital with an underutilized
facility (namely, what are the risks connected with this capacity decision)?
3. Use regression analysis to forecast the point at which Swanson needs
to "build out" the top two floors of the new building, namely, when demand will
exceed 16,000 births.
Figure 9.2 Monthly sales and operations planning
DEFINITION
Aggregate planning: The process of determining the quantity and timing of production over
an intermediate time frame.
Pure strategy: Varying only one capacity variable in aggregate planning.
Mixed strategy: Varying two or more capacity factors to determine a feasible production plan.
Chase demand: An aggregate planning strategy that schedules production to match
demand and absorbs variations in demand by adjusting the size of the workforce.
Backlog: Accumulated customer orders to be completed at a later date.
Backordering: Ordering an item that is temporarily out-of-stock.
9-4

3 Strategies for adjusting capacity
If demand for a company’s products or services is stable over time, then the resources
necessary to meet demand are acquired and maintained over the time horizon of the plan,
and minor variations in demand are handled with overtime or undertime. Aggregate planning
becomes more of a challenge when demand fluctuates over the planning horizon. For
example, seasonal demand patterns can be met by:
1. Producing at a constant rate and using inventory to absorb fluctuations in demand
(level production)
2. Hiring and firing workers to match demand (chase demand)
3. Maintaining resources for high-demand levels
4. Increasing or decreasing working hours (overtime and undertime)
5. Subcontracting work to other firms
6. Using part-time workers
7. Providing the service or product at a later time period (backordering)
When one of these alternatives is selected, a company is said to have a pure strategy for
meeting demand. When two or more are selected, a company has a mixed strategy.(These
topics have been discussed in chapter 3 on this course guide)
4 Strategies for managing demand
Even with good forecasting and facilities built to that forecast, there may be a poor match
between the actual demand that occurs and available capacity. A poor match may mean
demand exceeds capacity or capacity exceeds demand. However, in both cases, firms have
options.
4. 1 Demand Exceeds Capacity
When demand exceeds capacity, the firm may be able to curtail demand simply by
raising prices, scheduling long lead times (which may be inevitable), and discouraging
marginally profitable business. However, because inadequate facilities reduce revenue
below what is possible, the long term solution is usually to increase capacity.
4. 2 Capacity Exceeds Demand
When capacity exceeds demand, the firm may want to stimulate demand through price
reductions or aggressive marketing, or it may accommodate the market through product
changes. When decreasing customer demand is combined with old and inflexible
processes, layoffs and plant closings may be necessary to bring capacity in line with
demand.
4.3 Adjusting to Seasonal Demands
A seasonal or cyclical pattern of demand is another capacity challenge, in such cases,
management may find it helpful to offer products with complementary demand patterns
- that is, products for which the demand is high for one when low for the other. For
example, in Figure 9.3 the firm is adding a line of snowmobile motors to its line of jet
skis to smooth demand. With appropriate complementing of products, perhaps the
utilization of facility, equipment and personnel can be smoothed.
9-5

4. 3 Tactics for Matching Capacity to Demand
Various tactics for matching capacity to demand exist. Options for adjusting capacity
include:
1. Making staffing changes (increasing or decreasing the number of
employees or shifts)
2. Adjusting equipment (purchasing additional machinery or selling or leasing
out existing equipment)
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to better meet changing product preferences
6. Closing facilities
The foregoing tactics can be used to adjust demand to existing facilities. The strategic
issue is, of course, how to have a facility of the correct size.
5 Quantitative techniques for aggregate planning
One aggregate planning strategy is not always preferable to another. The most effective
strategy depends on the demand distribution, competitive position, and cost structure of a
firm or product line. Several quantitative techniques are available to help with the aggregate
planning decision. In the sections that follow, we discuss pure and mixed strategies, linear
programming, the transportation method, and other quantitative techniques.
5. 1 Pure strategies
Solving aggregate planning problems involves formulating strategies for meeting
demand, constructing production plans from those strategies, determining the cost and
feasibility of each plan, and selecting the lowest cost plan from among the feasible
alternatives. The effectiveness of the aggregate planning process is directly related to
management’s understanding of the cost variables involved and the reasonableness of
the scenarios tested.
9-6

5.2 General linear programming model
Strategies for production planning may be easy to evaluate, but they do not necessarily
provide an optimal solution. The optimal production plan is probably some combination
of inventory and workforce adjustment. We could simply try different combinations and
compare the costs (i.e., the trial-and-error approach), or we could find the optimal
solution by using linear programming. If you are unfamiliar with linear programming.
5.3 Mixed strategies
Most companies use mixed strategies for production planning. Mixed strategies can
incorporate management policies, such as “no more than x% of the workforce can be
laid off in one quarter” or “inventory levels cannot exceed x dollars.” They can also be
adapted to the quirks of a company or industry. For example, many industries that
experience a slowdown during part of the year may simply shut down manufacturing
during the low-demand season and schedule employee vacations during that time.
5.4 The transportation method
For cases in which the decision to change the size of the workforce has already been
made or is prohibited, the transportation method of linear programming can be used to
develop an aggregate production plan. The transportation method gathers all the cost
information into one matrix and plans production based on the lowest-cost alternatives.
Table 9.2 shows a blank transportation tableau with i for inventory, h for holding cost, r
for regular production cost, o for overtime, s for subcontracting, and b for backordering.
The capital letters indicate individual capacities or demand. The periods of production,
along with the production options, appear in the first column. The periods of use
(regardless of when the items are produced) appear across the top row. Cost entries in
the period-of-use columns differ by the cost of holding the item in inventory before its
use.
9-7

Table 9.2 Transportation Tableau
6 The hierarchical nature of planning
Planning involves a hierarchy of decisions. By determining a strategy for meeting and
managing demand, aggregate planning provides a framework within which shorter term
production and capacity decisions can be made. The levels of production and capacity
planning are shown in Figure 9.4. In production planning, the next level of detail is a master
production schedule, in which weekly (not monthly or quarterly) production plans are
specified by individual final product (not product line). At another level of detail, material
requirements planning plans the production of the components that go into the final
products. Shop floor scheduling schedules the manufacturing operations required to make
each component.
In capacity planning, we might develop a resource requirements plan, to verify that a sales
and operations plan is doable, and a rough-cut capacity plan as a quick check to see if the
master production schedule is feasible. One level down, we would develop a much more
detailed capacity requirements plan that matches the factory’s machine and labour
resources to the material requirements plan. Finally, we would use input/output control to
monitor the production that takes place at individual machines or work centers.
At each level, decisions are made within the parameters set by the higher-level decisions.
The process of moving from the aggregate plan to the next level down is called
disaggregation.
9-8

Figure 9.4 Hierarchical planning
7 Application and evaluation of sales and operations planning in organisation
7.1 Background of the company
Toshiba Singapore Pte Ltd (TSP)'s direct sales and marketing activities in Singapore
date back to 1974 with a local company as it joint venture partner. It established itself
as a wholely-owned subsidiary of Toshiba Corporation, Japan 4 years later. In less
than a decade, as a fully owned subsidiary of Toshiba Corporation, TSP has complete
production lines producing Colour Television sets and several other consumer
electronics products.
Currently, it has a workforce of more than 890 people with full-fledged business
function in manufacturing, marketing, warehousing, distribution and servicing with the
exception of research and development.
Its parent company, Toshiba Corporation, since its foundation in 1895, was a fast
outward growing and dynamic company maintaining technological lead in the field of
consumer electronics and electrical engineering. For more than a century, they set the
foresight with a vision to bring world class products with world-wide ability to
subsidiaries, production facilities and distribution centre around the world.
The manufacturing division and marketing division of TSP worked in synergy to
successfully distribute the local manufactured, colour television CTV to the Asean
subsidiaries and affiliates in North Asia. To satisfy the local consumer behaviour, intersubsidiaries
trading are also carried out to bring other arrays of consumer products
9-9

from its Asean neighbours or Japan to complement its breath and depth of product
offering.
The mission statement (shown in Figure 9.5) is translated from the vision to globalise
all our product,
people, process and technology in the borderless society of the 21st century.
The managerial goal and policy are to pursue:
Policy of customer first.
Business from international stand-point with good corporate citizens in host
countries.
Employees are our stake-holders, nurture and cultivate their best and abilities.
Manage scarce resources efficiently and effectively.
Participate in environmental engineering (ISO 14000)
Earn reasonable profits through entire customer satisfaction with returns to
shareholders, employees and society.
Figure 9.5 Toshiba’s Mission
9-10

7. 2 Toshiba Singapore Pte Ltd (TSPL)
P(Procluction and Purchase)/S(Sales)/I(inventory) PSI System
Toshiba PSI focuses on the improvement of administration and management activities
in a production, sales and stock cycle. Although the central theme is logistics
improvement, it expands its information sharing linkages into areas that calls for
active participation of design, engineering manufacturing, sales marketing and
quality assurance groups within the organisation. In addition, external contact points
must be included, such as customer and supplier.
The key issue is this system involves the time to customer and its acceptance.
In the distribution areas, the inclination is the developing of logistics results in
increasing the asset turnover rate, and reducing the amount of assets (particularly for
finished goods inventory to sales channel)
Production
In this area the main point is to reduce production/sales lead time. Depicted below (fig
9. 6), the following measures are developed to produce production/sales lead time. In
this relation, the end task is in the raising the flexibility of manufacturing line.
Figure 9. 6
9-11

Distribution
In this area the main point is to reduce the administration processing lead time to
shorten distribution path (Figure 9.7)
The logistics adherence in this system is the concept PSI performance and plans that
should be linked with the "sales-out" and "sale-in" on consolidated base. The
assessment should be set as a logistics result index, which is scrutinised and
controlled as follows:
Stress on market-linked PSI (Production response to the speed of sales)
Production planning is performed on a sale-out base and conditional on
production preparation being completed.
Need to eliminate practices such as increase in stock due to supply and demand
from internal sales
Practices should be in agreement with a consolidated management
approach: they should not be directed at TOSHIBA only, but performed on a
aggregated basis (TOSHIBA + TOSHIBA group companies including sales
companies in Japan and overseas). It is important that an improvement be
made in the total assets turnover rate.
PSI applied to goods on the mass production, particularly make to stock goods
The goal is to reduce the inventory through improvements in supply and
demand, including change of production style (from "make to stock" to
"assembly to order"). This raises the need for linkage among production,
sales and technology, aimed at overall optimisation, which is one of the
main points of logistics. For this reason, logistics is positioned within the
perspective of these connected activities.
9-12

TOSHIBA is aiming to reform its management system in view of logistics
As an indicator of logistics, aggregated PSI is introduced into the Executive
Information Systems (EIS) with inventory, asset results etc., and it becomes
a matter for observation and control by TOSHIBA top management. Also,
the result report from the "Logistics Planning Group" is distributed to
General Manager of all divisions and their responsible stag and each
division performs based on awareness of figures, and follow-up.
8 The scope of factory responsibility
The following figure shows the target of PSI in a logistics concept and the scope of factory
responsibility (Figure 9.8)
The management structure is that the basic idea is market pull, and each work section runs
with the theory organising "a merchandising community sensitive and quickly responsive to
the market"
In sales, a shift is made to an outward-oriented approach, centred on market
promotion, stressing sale-out as its main activity.
In distribution, the aim is to switch to a system that stress strengthening the distribution
function to overcome the trade-off between service levels through small
batch frequent dispatch with integrated cargo information and distribution cost.
9-13

9 A fully-optimum management system is depicted in Figure 9.9
The gist of it is a "market pull" system involving Technology. Production, Distribution
and Sales. Areas of importance are: Production - automation, smaller batch production;
Distribution: reducing number of tiers, automatic replenishment system. Marketing and
Product strategy involving strategic supply and demands, Technology: the JIT concept,
standardisation of part. This PSI management system is geared toward a better time to
market.
Furthermore a fully computerised information on-line system complemented its success
as shown in Figure 9.10.
9-14

ACTIVITY 2
(30 MINS)
Evaluate the Product Sales Inventory (PSI) of Toshiba Singapore Pte Ltd. Recommend
improvement if you think there could be further improvement. Why?
QUICK QUIZZ
1. The term capacity refers to the maximum quantity an operating unit can process
over a given period of time. True or False
2. Capacity planning requires an analysis of needs; what kind, how much and
when. True or False
3. The impact that a significant change in capacity will have on a key vendor is a:
A. supply chain factor
B. process limiting factor
C. internal factor
D. human resource factor
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4. Which of the following is not a strategy to manage service capacity?
A. Hiring extra workers
B. Backordering
C. Pricing and promotion
D. Part time workers
5. When buying component parts, risk does not include:
A. loss of control
B. vendor viability
C. interest rate fluctuations
D. need to disclose proprietary information
6. 6 Distinguish between design capacity and effective capacity.
7. 7 Explain why doubling the capacity of a bottleneck may not double the system
capacity.
8. Under what conditions would a firm want its capacity to lag demand? to lead
demand?
9. How is actual, or expected, output computed?
10. 10 What are the techniques available to operations managers to deal with a
bottleneck operation? Which of these does not decrease process cycle time?
ANSWERS TO QUICK QUIZZ
1. True
2. True
3. A
4. B
5. C
6. Design capacity is the theoretical maximum output of a system in a given period.
Effective capacity is the capacity a firm can expect to achieve given its current
product mix, methods of scheduling, maintenance, and standards of quality.
7. Doubling capacity of a bottleneck only moves the bottleneck somewhere else; every
system has at least one bottleneck. There would need to be a lot of excess capacity
in the process for system capacity to double.
8. Lagging is preferred when short-term options like overtime and subcontracting are
relatively low cost and/or easy to use. Leading is preferred when a firm cannot a-ford
to lose customers for lack of product availability, and overtime, etc., are not available
9. Expected output = Effective capacity x Efficiency
10. Techniques for dealing with bottlenecks include offloading some of the work to another
workstation, increasing the capacity of the bottleneck, subcontracting, using
alternative routings, and reducing setup times. Process cycle time is the time for a
product to go through the production process; unless the bottleneck operation is
made faster, process cycle time remains the same. (Alternative routing and subcontracting
may expand the volume of units processed but not speed up the pro-cess
cycle time.
9-16

ANSWERS TO ACTIVITIES
Activity 1
Case - Arnold Palmer Hospital
1. Given the discussion in the text, what approach is APH taking to match capacity to
demand?
Arnold Palmer Hospital’s capacity first lagged demand (part b) and now is leading
demand with incremental expansion (part a). The new building will provide sufficient
capacity for several years. The top two floors (left unfinished for additional beds) and
operating rooms (on the 4th floor, available for horizontal expansion) will be built out
when needed.
2. What kind of major changes can take place in APH’s demand forecast that would
leave the hospital with an underutilized facility (namely, what are the risks connected
with this capacity decision)?
Possible risks:
Demand will not continue to grow dramatically. The hospital believes that
the new building will attract new OB/GYN doctors to deliver there. The other
major hospital chain in Orlando, Florida Hospital, has also just announced a
major expansion. This may flood the hospital bed market in the short run.
The population boom in Central Florida could abate with rising housing
prices that are discouraging future growth. In-deed, during the 2008-2010
recession, population in Central Florida levelled off.
There are always unforeseen disasters in medicine that could damage the
hospital’s sterling reputation (e.g., lawsuits, drop in quality).
There is a nursing shortage that could create a staffing bottleneck if not
corrected. Recently, the two major hospital chains in central Florida got into
a bidding war in attempts to recruit each other’s nurses.
3. Use regression analysis to forecast the point at which Swanson needs to “build out”
the top two floors of the new building.
Regression analysis on the birth data in Table S7.3 yields:
Y = projected births = 4532 + 691x
(where x = time in years. x = 1 is 1995, x = 2 is 1996,
x = 14 in 2008.)
The R = .986, so R2 = .972, a very high coefficient of determination
To forecast the point at which the top two floors will need to be built out, we examine
2009, x = 15 gives y = 14,896; for 2010, x = 16 gives 15,587; for 2011, x = 17 gives
16,278; for 2012,
x = 18 gives 16,969.
So the top two floors need to be built out before 2011.
ACTIVITY 2
Students answer will vary. The essence is to realise that operations must plan with our
departments and even suppliers.
9-17

CHAPTER ROUNDUP
Managers tie equipment selection and capacity decisions to the
organization's missions and strategy.
Sales and Operations Planning (S&OP) is a structured collaborative
process for matching supply and demand. The sales plan and operations
plan are expressed in aggregate terms, hence the name aggregate
planning.
Four additional considerations are critical: (1) accurately forecasting
demand; (2) understanding the equipment, processes, and capacity
increments: (3) finding the optimum operating size; and (4) ensuring the
flexibility needed for adjustments in technology, product features and mix,
and volumes.
Production and capacity plans are developed at several levels of detail. The
process of deriving more detailed production and capacity plans from the
aggregate plan is called disaggregation.
Collaborative planning sets production plans in concert with
suppliers and trading partners.
Techniques that are particularly useful to operations managers when making
capacity decisions include good forecasting, bottleneck analysis, break-even
analysis, expected monetary value, cash flow, and net present value (NPV).
The single most important criterion for investment decision is the
contribution to the overall strategic plan and the winning of profitable orders.
Successful firms select the correct process and capacity with Sales
department and organisation as a whole.
REFERENCES
1. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
2. Operations Management by Russell,& Benard W. Taylor, Creating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
3. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill
4. Operations Management - Stevenson, William J. 11th edition, McGraw Hill
9-18

Introduction
A business organization produces goods and services to meet its customers’ needs.
Customers want value and quality has become a major factor in the value of products and
service. Customers know that certain companies produce better-quality products than
others, and they buy accordingly. That means a firm must consider how the consumer
defines quality. The customer can be a manufacturer purchasing raw materials or parts, a
store owner or retailer purchasing products to sell, or someone who purchases retail
products or services over the Internet. W. Edwards Deming, author and consultant on
quality, says that “The consumer is the most important part of the production line.
Quality should be aimed at the needs of the consumer, present and future.” From this
perspective, product and service quality is determined by what the customer wants and is
willing to pay for. Since customers have different product needs, they will have different
quality expectations. This results in a commonly used definition of quality as a service’s or
product’s fitness for its intended use, or fitness for use; how well does it do what the
customer or user thinks it is supposed to do and wants it to do?
Your objectives
In this chapter you will learn about the following:
Understand Quality Management System (QMS)
Understand the Cost of Quality (COQ)
Understand Quality tools
Understand Total Quality Management (TQM) and its implementation
Understand Six Sigmas
Understand how Quality Management improve Productivity
Understand the application of TQM/ Six Sigmas in a Business context
1 Quality Management System (QMS)
This approach (or term) has evolved out of the ISO certification process that many
companies around the world have gone through; essentially ISO certifies a company’s
quality management system,” and much of the ISO’s written materials refer directly to
“quality management systems.” A QMS is not as much of a philosophy as TQM; rather, it is a
system that complements a company’s other systems and functions. It is a systematic
approach to achieving quality and hence customer satisfaction, and while it suggests no less
commitment to that goal than TQM, maintains less of a core strategic focus that TQM.
Further, since a QMS is not a “philosophy,” it more naturally is designed to meet the
individual needs and circumstances of a particular company. It outlines the policies and
procedures necessary to improve and control specific (but not all) processes that will lead to
10-1

improved business performance. A QMS tends to focus more on individual projects that
have a quantifiable impact (i.e., increased profitability). Some companies have adopted the
Malcolm Baldrige National Quality Award criteria as its QMS; another well known
QMS is Six Sigma (which we will discuss in greater detail in a later section).
Regardless of the term a company uses to identify its approach to achieving quality
improvement, and the possible differences between TQM and a QMS or other approaches,
there are certain common characteristics of company-wide approaches to quality
improvement, such as customer satisfaction and employee involvement.
1.1 International Quality Standards – ISO 9000
Quality is so important globally that the world is uniting around a single quality
standard, ISO 9000. ISO 9000 is the only quality standard with international
recognition. In 1987, 91 member nations (including the U.S.) published a series of
quality assurance standards, known collectively as ISO 9000. The U.S., through the
American National Standards institute (ANSI), has adopted the ISO 9000 series as the
ANSI/ASQ Q9000 series. The focus of the standards is to establish quality
management procedures, through leadership, detailed documentation, work
instructions and recordkeeping. These procedures, we should note, say nothing about
the actual quality of the product - they deal entirely with standards to be followed.
To become ISO 9000 certified, organizations go through a 9 to 18-month process that
involves documenting quality procedures, an on-site assessment, and an ongoing
series of audits of their products or services. To do business globally being listed in the
ISO directory is critical. As of 2009, there were over 1 million certifications awarded to
firms in 175 countries. About 40,000 U.S. firms are ISO 9000 certified. Over 200,000
Chinese firms have received certificates. ISO upgraded its standards in 2008 into more
of a quality management system, which is detailed in its ISO 9001: 2008 component.
Leadership by top management and customer requirements and satisfaction play a
much larger role, while documented procedures receive less emphasis under ISO
9001: 2008.
1.2 International Quality Standards – ISO 14000
The continuing internationalization of quality is evident with the development of ISO
14000. ISO 14000 is a series of environmental management standards that contain five
care elements:
(1) environmental management,
(2) auditing,
(3) performance evaluation,
(4) labeling, and
(5) life cycle assessment.
The new standard could have several advantages:
Positive public image and reduced exposure to liability.
Good systematic approach to pollution prevention through the minimization of
ecological impact of products and activities.
Compliance with regulatory requirements and opportunities for competitive
advantage.
Reduction in need for multiple audits.
10-2

DEFINITIONS
Total quality management (TQM): Managing the entire organization so that it excels on all
dimensions of products and services that are important to the customer.
Cost of quality: Expenditures related to achieving product or service quality, such as the
costs of prevention, appraisal, internal failure, and external failure.
Six Sigma: A statistical term to describe the quality goal of no more than four defects out of
every million units. Also refers to a quality improvement philosophy and program.
DMAIC: An acronym for the Define, Measure, Analyse, Improve, and Control improvement
methodology followed by companies engaging in Six-Sigma programs.
Internal failure costs: Costs of poor-quality products discovered during the production
process—that is, scrap, rework, and the like.
External failure costs: Costs of poor quality incurred after the product gets to the customer;
that is, customer service, lost sales, and so on.
Cause-and-effect diagram or fishbone diagram: A graphical description of the elements of a
specific quality problem.
Cause-and-effect matrix: A grid used to prioritize causes of quality problems.
2 Cost of Quality (COQ)
The COQ is explained in previous chapter 5 as in Figure 10.1
In addition, it is important to note that External costs: costs that occur after delivery of
defective parts or services (e.g., rework, returned goods, liabilities, lost goodwill, costs to
society) is hard to quantify.
When GE had to recall 3.1 million dishwashers (because of a defective switch alleged to
have started seven fires), the cost of repairs exceeded the value of all the machines. This
leads to the belief by many experts that the cost of poor quality is consistently
underestimated.
Companies that consider quality important invest heavily in prevention and appraisal costs in
order to prevent internal and external failure costs. The earlier defects are found, the less
costly they are to correct. For example, detecting and correcting defects during product
design and product production is considerably less expensive than when the defects are
found at the customer site. This is shown in Figure 10.2.
10-3

ACTIVITY 1
(30 MINS)
Scenario 1
Your task is to answer questions shown below:
An avant-garde clothing manufacturer runs a series of high-profile, risque` ads on a billboard
on Highway 101 and regularly collects protest calls from people who are offended by them.
The company has no idea how many people in total see the ad, but it has been collecting
statistics on the number of phone calls from irate viewers:
Type Description Number of Complaints
R Offensive racially/ ethnically 10
M Demeaning to men 4
W Demeaning to women 14
I Ad is Incomprehensible 6
O Other 2
a) Depict this data with a Pareto chart. Also depict the cumulative complaint line.
b) What percent of the total complaints can be attributed to the most prevalent complaint?
10-4

3 Quality Tools
Figure 10.3 shows some of the common quality tools. They are easy to understand, yet
extremely useful in identifying and analysing quality problems. Sometimes workers use only
one tool at a time, but often a combination of tools is most helpful.
3. 1 Cause-and-Effect Diagrams
Cause-and-effect diagrams identify potential causes of particular quality problems.
They are often called fishbone diagrams because they look like the bones of a fish
(Figure 10.3). The “head” of the fish is the quality problem, such as damaged zippers
on a garment or broken valves on a tire. The diagram is drawn so that the “spine” of the
fish connects the “head” to the possible cause of the problem.
3.2 Flowcharts
A flowchart is a schematic diagram of the sequence of steps involved in an operation or
process. It provides a visual tool that is easy to use and understand. By seeing the
steps involved in an operation or process, everyone develops a clear picture of how the
operation works and where problems could arise.
10-5

3.3 Checklists
A checklist is a list of common defects and the number of observed occurrences
of these defects. It is a simple yet effective fact-finding tool that allows the
worker to collect specific information regarding the defects observed.
3.4 Control Charts
Control charts are a very important quality control tool. These charts are used to
evaluate whether a process is operating within expectations relative to some measured
value such as weight, width, or volume.
3. 5 Scatter Diagrams
Scatter diagrams are graphs that show how two variables are related to one another.
They are particularly useful in detecting the amount of correlation, or the degree of
linear relationship, between two variables.
3.6 Pareto Analysis
Pareto analysis is a technique used to identify quality problems based on their degree
of importance. The logic behind Pareto analysis is that only a few quality problems are
important, whereas many others are not critical.
3.7 Histograms
A histogram is a chart that shows the frequency distribution of observed values of a
variable. We can see from the plot what type of distribution a particular variable
displays, such as whether it has a normal distribution and whether the distribution is
symmetrical.
10-6

4 Total Quality Management (TQM) and Its Implementation
The Total Quality Management (TQM) philosophy emphasises the total effort within an
organisation and participation from suppliers and customers to achieve total satisfaction for
both internal and external customers. The major concepts of total quality management are
continuous improvement, Six Sigma, employee empowerment, benchmarking, just-in-time
(JIT), Taguchi concepts, and knowledge of TQM tools. Through systematic management
and use of proper tools for continuous improvement, defect prevention can he achieved in a
cost-effective manner. Seven TQM concepts are shown in Figure 10.4
Besides, the TQM concept is genetic enough for it to be adapted for a quality system that
leads to ISO 9000 certification or even credible quality awards. Organisations, both large
and small, can benefit from TQM implementation. For the small and medium-sized
enterprises (SMEs), a simple framework can be adopted to tailor TQM to their environments.
There are 10 Major principles of TQM as in Table 10 .1
10-7

Table 10.1
The framework comprises seven phases - management planning; organising and developing
a quality system; launching a company-wide TQM programme; introducing process control
techniques; monitoring progress and gathering feedback; reviewing benefits and levels of
success; and sustaining employee participation through continuous improvement.
4.1 Phase 1: Management Planning
TQM implementation is not an overnight effort. It requires the commitment of the whole
organisation, from top management to the lowest level. It is therefore for the
organisation to define its TQM objectives in simple terms that can be understood by all
employees, and inspire them to provide inputs for improvement activities.
Brainstorming is the first step in the management planning process whereby all
decision makers are involved in formulating plans and creating a corporate quality
policy. After that, the rationale and purpose of implementing TQM will be disseminated
down the line.
At the department level, managers plan their programmes to fit into the overall TQM
objective. All discussions require in-depth deliberation of the responsibilities and
relationships between functional groups. Furthermore, training on the TQM concept is
vital, especially among middle managers
4. 2 Phase 2: Organising And Developing a Quality System
Quality management standards such as the ISO 9000 series can be adopted as a basic
quality system framework. ISO 9001, which includes design service requirements, is a
useful model to start with.
Some organisations engage external consultants to assist in setting up the quality
system
In Singapore, government funding and assistance schemes, for example, the Local
Enterprise Technical Assistance Scheme, are available to help SMEs defray part of the
consultancy cost.
After the model and mode of implementation have been identified, improvement
activities are integrated into the quality system. Specifically, this phase involves the
appointment of process owners whose roles are clearly defined.
Other steps include drafting and writing of the quality manual; identifying suitable
process control tools; and training of all employees on the use of such tools.
10-8

4. 3 Phase 3: Launching the TQM Programme Company-Wide
The organisation then holds some form of launching ceremony for its TQM programme.
This helps to demonstrate top management's commitment to the programme; and at
the same time, provide a platform to unveil the organisation's quality policy and
introduce key leaders in the programme. It is also the time to solicit employees'
commitment to participating in the various improvement activities.
4. 4 Phase 4: Introduce Process Control Techniques
Almost all activities require some form of process control. The choice of process control
techniques depends on the needs of specific tasks. For instance, the work of the
fabrication and quality assurance departments involves stringent process control to be
successful.
Individual departments will have to review their current practices and recommend
alternative techniques where possible.
Individual departments will have to review their current practices and recommend
alternative techniques where possible.
The Statistical. Process Control (SPC) is, in particular, a useful tool to evaluate the
suitability of techniques. Whenever a new technique is employed, it is important that
employees are trained to carry out the tasks. A good process control technique yields
the following benefits:
Better work flow through more efficient use of equipment and trained
employees;
Quality is practised in daily work;
More efficient document control;
Traceability of product in every step of design, fabrication, testing and delivery;
Consistent standard of training of employees; and
Reduction in rework.
4. 5 Phases: Monitoring progress and gathering feedback
The progress of TQM implementation is monitored on a regular basis by the process
owner and reported to higher management. Employee feedback sessions are
conducted to evaluate the effectiveness of new tools, techniques and training so that
fine-tuning and improvements can be made. Pre-emptive moves to prevent and
minimise errors in daily work are also made through group discussions and
brainstorming sessions.
Due to the "fault-finding" nature of such sessions, all employees are advised
beforehand to treat these discussions openly and objectively to avoid conflict. A time
scale is useful in monitoring progress. However, different timelines must be allocated to
different activities and tasks. Also, employees will be more receptive to the TQM
programme if they are allowed time to learn new skills and be inducted into the new
work routine.
4. 6 Phase 6: Reviewing benefits and levels of success
Achievement targets identified at the onset must be measured and reviewed to
determine whether objectives have been met. The following questions are useful for the
review on the levels of success.
Has there been an improvement in the quality of goods and services? Are there
more happy customers, fewer complaints and more plaudits?
Has communication between functional teams and comradeship among
employees been enhanced?
Has productivity improved and generated cost savings for the organisation?
10-9

Has the overall market rating of the organisation improved? Has the sales
volume improved due to an increase in customers?
Are there other benefits?
4. 7 Phase 7: Encouraging participation for continuous improvement
A TQM programme can only succeed if the people involved are encouraged to adjust to
the new "improvement culture". Reward or compensation schemes may be introduced
to recognise employees who have shown commitment to TQM. Suitable recognition
programmes also help to cultivate an environment for continuous improvement, which
in the long run, can help in fostering team spirit among employees and creating a
sense of belonging to the organisation.
5 The Six Sigma Process
As implemented by Motorola, Six Sigma follows four basic steps—align, mobilize,
accelerate, and govern. In the first step, “align,” senior executives create a balanced
scorecard of strategic goals, metrics and initiatives to identify the areas of improvement that
will have the greatest impact on the company’s bottom line. Process owners (i.e, the senior
executives who supervise the processes) “champion” the creation of high-impact
improvement projects that will achieve the strategic goals.
In the second step, “mobilize,” project teams are formed and empowered to act. The process
owners select “black belts” to lead well-defined improvement projects. The teams follow a
step-by-step, problem-solving approach referred to as DMAIC.
In the third step, “accelerate,” improvement teams made up of black belt and green belt team
members with appropriate expertise use an action-learning approach to build their capability
and execute the project. This approach combines training and education with project work
and coaching. Ongoing reviews with project champions ensure that projects progress
according to an aggressive timeline.
In the final step, “govern,” executive process owners monitor and review the status of
improvement projects to make sure the system is functioning as expected. Leaders share
the knowledge gained from the improvement projects with other parts of the organization to
maximize benefit.
The standard approach to Six-Sigma projects is the DMAIC methodology developed by
General Electric, described below:
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6 The Effect Of Quality Management On Productivity
Quality management can also improve productivity—the number of units produced from
available resources.
6.1 Productivity
Productivity is a measure of a company’s effectiveness in converting inputs into
outputs. It is
broadly defined as:
An output is the final product from a service or production process, such as an
automobile,
a hamburger, a sale, or a catalogue order. Inputs are the parts, material, labour,
capital, and so on that go into the productive process. Productivity measures,
depending on the outputs and inputs used, are labour productivity (output per labourhour)
and machine productivity (output per machine-hour). Improving quality by
reducing defects will increase good output and reduce inputs. In fact, virtually all
aspects of quality improvement have a favourable impact on different measures of
productivity. Improving product design and production processes, improving the quality
of materials and parts, and improving job designs and work activity will all increase
productivity.
6.2 Measuring Product Yield and Productivity
Product yield is a measure of output used as an indicator of productivity. It can be
computed for the entire production process (or for one stage in the process) as follows:
10-11

In this formula, yield is the sum of the percentage of products started in the process (or
at a stage) that will turn out to be good quality plus the percentage of the defective
(rejected) products that are reworked. Any increase in the percentage of good products
through improved quality will increase product yield.
Activity 3
(30 MINS)
Scenario 2
Your task is to solve the following problem:
The H&S Motor Company starts production for a particular type of motor with a steel motor
housing. The production process begins with 100 motors each day. The percentage of good
motors produced each day averages 80% and the percentage of poor-quality motors that
can be reworked is 50%. The company wants to know the daily product yield and the effect
on productivity if the daily percentage of good-quality motors is increased to 90%.
7 The Application Of TQM/Six Sigmas In a Business Context
Toshiba Singapore Pte Limited is a subsidiary of Toshiba in Japan. The background has
been discussed in Chapter 9 of this study guide. The Sigmas endeavour compliments The
TQM of the organisation with ‘synergy effect’ named as Management Innovation (MI). The
following evaluates the program by the Service Centre of the Fast Moving Consumer
Product (FMCP) company. The products sold and maintained by the Service Centre are
mainly Colour Televisions. The following are summary of the Techniques Design, Measure,
Analyse, Implement and Control (DMAIC) of the Management Innovation (MI).
10-12

Division/Department
Toshiba Asia Oceania/Customer Relation
Nature of Project
Through the Voice of Customer (VOC), project was aimed to increase the Customer
Satisfaction by improving the Repair Speed.
Planned Against Target
Achieved an improvement of 12.13% for indoor calls in FY2001 (till Nov 2001)
& 17.96% for outdoor calls in FY2001 (till Nov 2001)
Methods & Procedures Applied
Used DMAIC 6 Sigmas Methodology as the key driver for improvements. Through C&E
Matrix & FMEA, new process capabilities were identified. Furthermore, the usage of
Minitab made the "Homogeneity of Variances & "One Way Analysis of Variance"
convenient for the "Hypothesis Testing" that followed. Coupled with Design of
Experience (DOE), lurking problematic variables were dramatized. The added valued
processes with interaction of man & processes were the key to success.
Summary of Achievement
Improvement of Turn-Around-Time from: FY2000 Indoor calls of 77.09% to FY2001
indoor calls of 89.22% & FY2000 Outdoor calls of 71.07% to FY2001 Outdoor calls of
89.03%.
10-13

In accordance to the concept of Six Sigmas:
Figure 10.5 DMAIC of TSPL
10-14

The QualityTools used:
Figure 10.6 Quality Tools Used
10-15

Activity 3
(30 MINS)
Your task is to develop a flowchart of Customer Handling System (CHS) in a typical
Singapore Service Centre.
QUICK QUIZZ
1 Internal failure costs are associated with scrap, rework, and downtime. True or False
2 Quality is mostly the business of the quality control staff, not ordinary employees. True or
False
3 Line employees need the knowledge of TQM tools. True or False
4 "Quality is defined by the customer" is
A) an unrealistic definition of quality
B) a user-based definition of quality
C) a manufacturing-based definition of quality
D) a product-based definition of quality
5 Three broad categories of definitions of quality are
A) product quality, service quality, and organizational quality
B) user-based, manufacturing-based, and product-based
C) internal, external, and prevention
D) low-cost, response, and differentiation
6 A pizza delivery company wants to improve its response time to gain a competitive
advantage. Create a flowchart with 8 unique events from the time the customer calls in to
the time the pizza is delivered.
7 Construct a cause-and-effect diagram showing why a student might be dissatisfied with the
cafeteria.
8 How is source inspection related to employee empowerment?
9 Identify the major concepts of TQM.
10 Identify the five steps of DMAIC.
ANSWERS TO QUICK QUIZZ
1.False
2.True
3.False
4.B
5.B
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6
7
8 Source inspection involves the operator ensuring that the job is done properly. These
operators are empowered to self-check their own work. Employees that deal with a system
on a daily basis have a better understanding of the system than anyone else, and can be
very effective at improving the system.
9 The major concepts of total quality management are continuous improvement, Six Sigma,
employee empowerment, benchmarking, just-in-time (JIT), Taguchi concepts, and
knowledge of TQM tools.
10 (1) Define the project's purpose, scope, and outputs and then identify the required
process in-formation, keeping in mind the customer's definition of quality; (2) Measure the
process and collect data; (3) Analyse the data, ensuring repeatability (the results can be
duplicated), and reproducibility (others get the same result); (4) Improve, by modifying or
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edesigning, existing pro-cesses and procedures; and (5) Control the new process to make
sure performance levels are maintained.
ANSWERS TO ACTIVITIES
Activity 1
a)
b) 39% of complaints, W, are demeaning toward women.
Activity 2
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Activity 3
CHAPTER ROUNDUP
In our discussion of quality management in this chapter, certain consistencies or
commonalities have surfaced. The most important perspective of quality is the
customer’s; products and services must be designed to meet customer expectations
and needs for quality.
Companies now expect employees to understand the Six-Sigma improvement
methodology. DMAIC, the acronym for define, measure, analyze, improve, and
control, is a process fundamental to the approach companies use to guide
improvement projects.
The “capability” of a process is a measure of how often that process is expected to
produce a defect given that the process is in control. Six-Sigma processes are
designed to produce very few defects.
A total commitment to quality is necessary throughout an organization for it to be
successful in improving and managing product quality. This commitment must start at
the top and filter down through all levels of the organization and across all areas and
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departments. Employees need to be active participants in the quality-improvement
process and must feel a responsibility for quality.
Employees must feel free to make suggestions to improve product quality, and a
systematic procedure is necessary to involve workers and solicit their input.
Improving product quality is cost-effective; the cost of poor quality greatly exceeds
the cost of attaining good quality. Quality can be improved with the effective use of
statistical quality-control methods.
Statistical process control techniques include control charts and acceptance
sampling, which ensure that processes are operating as they are designed to
operate.
World-class companies have implemented extensive training programs (often
referred to as “green and black belt training”) to ensure the understanding of these
concepts.
REFERENCES
1. Operations Management by Schroeder, Contemporary Concepts and Cases
Publisher : McGraw Hill
2. Operations Management by Russell,& Benard W. Taylor, Creating Value Along the
Supply Chain 7 th edition , John Wiley and Sons
3. Operations Management by Chase. Richard B. & Nicholas J. Aquilano., Operations
Management for competitive advantage, 11th edition, McGraw Hill
4. Operations Management - Stevenson, William J. 11th edition, McGraw Hil
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