Sagar Institute of Science Technology & Engineering (SISTec), Bhopal

Unit 1

Operations Management (OM)

Operations management is an area of management concerned with overseeing, designing, and controlling the process of production and redesigning business operations in the production of goods or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed, and effective in terms of meeting customer requirements. It is concerned with managing the process that converts inputs (in the forms of materials, labour, and energy) into outputs (in the form of goods and/or services)

History
In 1911 Frederick Taylor published his "The Principles of Scientific Management", in which he characterized scientific management as: 1. 2. 3. 4. The development of a true science The scientific selection of the worker Their scientific education and development Intimate friendly cooperation between management and the workers

Taylor is also credited for developing stopwatch time study, this combined with Frank and Lillian Gilbreth motion study gave way to time and motion study which is centered on the concepts of standard method and standard time. Other contemporaries of Taylor worth remembering are Morris Cooke (rural electrification in 1920s) and Henry Gantt (Gantt chart). Also in 1910 Hugo Diemer published the first industrial engineering book: Factory Organization and Administration. In 1913 Ford W. Harris published his "How Many parts to make at once" in which he presented the idea of the economic order quantity model. He described the problem as follows: "Interest on capital tied up in wages, material and overhead sets a maximum limit to the quantity of parts which can be profitably manufactured at one time; "set-up" costs on the job fix the minimum. Experience has shown one manager a way to determine the economical size of lots" In 1931 Walter Shewhart published his Economic Control of Quality of Manufactured Product, the first systematic treatment of the subject of Statistical Process Control. In 1943, in Japan, Taiichi Ohno arrived at Toyota Motor company. Toyota evolved a unique manufacturing system centered on two complementary notions: just in time (produce only what is needed) and autonomation (automation with a human touch). Regarding JIT, Ohno was inspired by American supermarkets: workstations functioned like a supermarket shelf where the customer can get products they need, at the time they need and in the amount needed, the workstation (shelf) is then restocked. Autonomation was developed by Toyoda Sakichi in Toyoda Spinning and Weaving: an automatically activated loom that was also foolproof, that is automatically detected problems. In 1983 J.N Edwards published his "MRP and Kanban-American style" in which he described JIT goals in terms of seven zeros: zero defects, zero (excess) lot size, zero setups, zero breakdowns, zero handling, zero

Sanjeev Gupta(Asst.Prof.)

Page 1

lead time and zero surging. This periods also marks the spread of Total Quality Management in Japan, ideas initially developed by American authors such as Deming, Juran and Armand V. Feigenbaum. Schnonberger

SWOT
A SWOT analysis is a structured way to evaluate a specific and defined initiative or venture. According to Wikipedia (SWOT Analysis, 2011), the SWOT elements can be broken down this way:

Strengths: characteristics of the business, or project team that give it an advantage over others Weaknesses (or Limitations): are characteristics that place the team at a disadvantage relative to others Opportunities: external chances to improve performance (e.g. make greater profits) in the environment Threats: external elements in the environment that could cause trouble for the business or project

Sanjeev Gupta(Asst.Prof.)

Page 2

Porters five forces

Porters five forces model helps in accessing where the power lies in a business situation. Porters Model is actually a business strategy tool that helps in analyzing the attractiveness in an industry structure. It let you access current strength of your competitive position and the strength of the position that you are planning to attain. Porters Model is considered an important part of planning tool set. When youre clear about where the power lies, you can take advantage of your strengths and can improve the weaknesses and can compete efficiently and effectively. Porters model of competitive forces assumes that there are five competitive forces that identifies the competitive power in a business situation. These five competitive forces identified by the Michael Porter are:
1. 2. 3. 4. 5. Threat of substitute products Threat of new entrants Intense rivalry among existing players Bargaining power of suppliers Bargaining power of Buyers

1. Threat of substitute products

Threat of substitute products means how easily your customers can switch to your competitors product. Threat of substitute is high when:
o o o o

There are many substitute products available Customer can easily find the product or service that youre offering at the same or less price Quality of the competitors product is better Substitute product is by a company earning high profits so can reduce prices to the lowest level.

Sanjeev Gupta(Asst.Prof.)

Page 3

In the above mentioned situations, Customer can easily switch to substitute products. So substitutes are a threat to your company. When there are actual and potential substitute products available then segment is unattractive. Profits and prices are effected by substitutes so, there is need to closely monitor price trends. In substitute industries, if competition rises or technology modernizes then prices and profits decline.

2. Threat of new entrants

A new entry of a competitor into your market also weakens your power. Threat of new entry depends upon entry and exit barriers. Threat of new entry is high when:
o o o o o

Capital requirements to start the business are less Few economies of scale are in place Customers can easily switch (low switching cost) Your key technology is not hard to acquire or isnt protected well Your product is not differentiated

There is variation in attractiveness of segment depending upon entry and exit barriers. That segment is more attractive which has high entry barriers and low exit barriers. Some new firms enter into industry and low performing companies leave the market easily. When both entry and exit barriers are high then profit margin is also high but companies face more risk because poor performance companies stay in and fight it out. When these barriers are low then firms easily enter and exit the industry, profit is low. The worst condition is when entry barriers are low and exit barriers are high then in good times firms enter and it become very difficult to exit in bad times.

3. Industry Rivalry
Industry rivalry means the intensity of competition among the existing competitors in the market. Intensity of rivalry depends on the number of competitors and their capabilities. Industry rivalry is high when:
o o o o o

There are number of small or equal competitors and less when theres a clear market leader. Customers have low switching costs Industry is growing Exit barriers are high and rivals stay and compete Fixed cost are high resulting huge production and reduction in prices

These situations make the reasons for advertising wars, price wars, modifications, ultimately costs increase and it is difficult to compete.

4. Bargaining power of suppliers

Bargaining Power of supplier means how strong is the position of a seller. How much your supplier have control over increasing the Price of supplies. Suppliers are more powerful when
o o o o o

Suppliers are concentrated and well organized a few substitutes available to supplies Their product is most effective or unique Switching cost, from one suppliers to another, is high You are not an important customer to Supplier

Sanjeev Gupta(Asst.Prof.)

Page 4

When suppliers have more control over supplies and its prices that segment is less attractive. It is best way to make win-win relation with suppliers. Its good idea to have multi-sources of supply.

5. Bargaining power of Buyers

Bargaining Power of Buyers means, How much control the buyers have to drive down your products price, Can they work together in ordering large volumes. Buyers have more bargaining power when:
o o o o o o o

Few buyers chasing too many goods Buyer purchases in bulk quantities Product is not differentiated Buyers cost of switching to a competitors product is low Shopping cost is low Buyers are price sensitive Credible Threat of integration

Buyers bargaining power may be lowered down by offering differentiated product. If youre serving a few but huge quantity ordering buyers, then they have the power to dictate you. Michael Porters five forces model provides useful input for SWOT Analysis and is considered as a strong tool for industry competitive analysis.

Production strategy of Make To Order-MTO, MTS and ATO (assemble to order);

Sanjeev Gupta(Asst.Prof.)

Page 5

Manufacturing Strategies Based on Positioning Strategy

Three fundamental manufacturing strategies are based on positioning strategy: make-to-stock, assemble-toorder, and make-to-order. Make-to-Stock Strategy. Product-focused manufacturing firms tend to use a make-to-stock strategy, in which the firms hold items in stock for immediate delivery, thereby minimizing customer delivery times. This strategy is feasible because most product-focused firms produce high volumes of relatively few standardized products, for which they can make reasonably accurate forecasts. Examples of products produced with a make-to-stock strategy include garden tools, electronic components, soft drinks, and chemicals. The term mass production is often used to define firms using a make-to-stock strategy. Because their environment is stable and predictable, mass-production firms typically have a bureaucratic organization, and workers repeat narrowly defined tasks. The competitive priorities for these companies are typically consistent quality and low costs. Assemble-to-Order Strategy. The assemble-to-order strategy is an approach to producing products with many options from relatively few major assemblies and components, after customer orders are received. The intermediate positioning strategy is appropriate for this situation because high-volume components and major assemblies can be produced with a product-focused strategy, whereas components and assemblies with lower volumes can be produced with a process-focused strategy. The assemble-to-order strategy addresses two competitive priorities: customization and fast delivery time. Operations holds assemblies and components in stock until a customer order arrives. Then, the specific product he customer wants is assembled from the appropriate assemblies and components. Stocking finished products would be economically prohibitive because the numerous possible options make forecasting relatively inaccurate. For example, a manufacturer of upscale upholstered furniture can produce hundreds of a particular style of sofa, no two alike, to meet the customer's selection of fabric and wood. Other examples include upscale farm tractors, automatic teller machines, and industrial scales. Make-to-Order Strategy. Many process-focused firms use a make-to-order strategy, whereby operations produces products to customer specifications. This strategy provides a high degree of customization. Because most products, components, and assemblies are custom-made, the production process has to be flexible to accommodate the variety. Job shops use a make-to-order strategy. Examples of products suited to the make-to-order strategy include specialized medical equipment, castings, and expensive homes. The ultimate use of the make-to-order strategy is mass customization, or dynamically creating the processes necessary to produce custom products. In the ideal mass-customization firm, the people, processes, and technologies are reconfigured continually to give customers exactly what they want in an ever-changing environment. Managers must create an environment where these resources can be integrated rapidly in the best combination or sequence for the custom products. The goal of mass-customized firms is low-cost, highquality, customized products. However appealing the concept, mass customization is relatively untested. Achieving low costs is a big hurdle, and the required organizational changes are severe. Nonetheless, as some firms are attempting to implement it, this strategy is something to watch.

Positioning Strategy and Competitive Priorities

Sanjeev Gupta(Asst.Prof.) Page 6

Operations managers use positioning strategy to translate product or service plans and competitive priorities into decisions throughout the operations function. Table 2.1 shows how positioning strategies relate to competitive priorities. In process-focused operations, the emphasis is on high-performance design quality, customization, and volume flexibility. Low-cost operations and quick delivery times are less important as competitive priorities, although these features could be used to gain a market niche. Thus a process focus meshes well with product or service plans favouring customization, short life cycles, or early exit from the life cycle. A product focus is appropriate when product plans call for standard products or services and long life cycles. Low-cost operations, quick delivery times, and consistent quality are the top competitive priorities. TABLE -1. Linking Positioning Strategy with Competitive Priorities Positioning Strategy Process Focus More customized products and services, with low volumes Shorter life cycles Products and services in earlier stages of life cycle An entrance-exit strategy favoring early exit High-performance design quality More emphasis on customization Long delivery times Product Focus More standardized products and services, with high volumes Longer life cycles Products and services in later stages of life cycle An entrance-exit strategy favoring late exit Consistent quality More emphasis on low cost and volume flexibility Short delivery times

Sanjeev Gupta(Asst.Prof.)

Page 7

Business Strategy

Sanjeev Gupta(Asst.Prof.)

Page 8