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Operations Management

MBA

(Annual Pattern)

First Year

Paper No. 1.9

For SDE Candidates admitted during 2011-12 and onwards

1.9 For SDE Candidates admitted during 2011-12 and onwards School of Distance Education Bharathiar University,

School of Distance Education

CONTENTS

 

UNIT I

Page No.

Lesson

1

Introduction to Operation Management

7

Lesson

2

Types of Production Systems

35

 

UNIT II

Lesson

3

Product and Product Design

45

Lesson

4

Operations Technology and Facility Location

72

Lesson

5

Plant Layout

107

 

UNIT III

Lesson

6

Production Planning and Control

143

Lesson

7

ERP and MRP-II Overview

173

Lesson

8

UNIT IV Introduction to Materials Management

189

Lesson

9

Inventory Control

210

 

UNIT V

Lesson

10

Total Quality Management

257

Lesson

11

ISO Quality Certification Concepts

282

OPERATIONS MANAGEMENT

SYLLABUS

UNIT I

Operations Management – Meaning – Importance – Historical contributions – System view of OM – Operations strategy and competitiveness – Functions of OM – Types of production systems

UNIT II

Production design and process selection – Evaluation and selection of appropriate Production and Operations Technology – Product design and process selection.

Types of layout – Analysis and selection of layout – Product and/or Process layout – Cellular – Lean and Agile manufacturing systems – Computer Integrated Manufacturing Systems – Assembly line balancing.

UNIT III

Production planning and control – Meaning – Functions – Aggregate Planning – Master Production Schedule (MPS) – Material Requirement Planning (MRP) – BOM – Capacity Requirement Planning (CRP) – An Introduction to MRP II and ERP – Business Process Re-engineering – Total Productive Maintenance (TPM)

UNIT IV

Materials Management – Functions – Material Planning and Budgeting – Value Analysis – Purchase functions and Procedure – Inventory Control – Types of Inventory – Safety stock – Order Point – Service level – Inventory Control Systems – Perpetual – Periodic – JIT – KANBAN

UNIT V

Total Quality Management Concept – Statistical Quality Control for acceptance sampling and process control – Concepts of OC Curve – Use of the OC curve – Concept of Type I and Type II error – Quality Movement – Quality Circles – ISO Quality Certifications and Type – Quality Assurance – Six sigma concept

UNIT I

5

Introduction to

Operation Management

6

Operations Management

LESSON 1 7 Introduction to Operation Management INTRODUCTION TO OPERATION MANAGEMENT CONTENTS 1.0 Aims and

LESSON

1

7

Introduction to

Operation Management

INTRODUCTION TO OPERATION MANAGEMENT

CONTENTS

1.0 Aims and Objectives

1.1 Introduction

1.2 Meaning of Operation Management

1.3 Importance of OM

1.4 Historical Contributions

1.4.1 Scientific Management – Time and Motion Studies

1.4.2 World War II to the 1960’s – Operations Research

1.4.3 The 1970s and 1980s – Japanese Challenge

1.4.4 The 1990s and After

1.5 Systems View of Operations Management

1.5.1 Transformation Approach

1.5.2 Value Driven Approach

1.5.3 Operations Management Basics

1.6 Operation Strategy and Competitiveness

1.7 Functions of Operations Manager

1.7.1 Interface with other Functions

1.7.2 Operations Management’s Future Challenges

1.8 Efficiency and Effectiveness

1.9 Let us Sum up

1.10 Lesson End Activities

1.11 Keywords

1.12 Questions for Discussion

1.13 Suggested Readings

1.12 Questions for Discussion 1.13 Suggested Readings 1.0 AIMS AND OBJECTIVES After studying this lesson, you

1.0 AIMS AND OBJECTIVES

After studying this lesson, you will be able to:

OBJECTIVES After studying this lesson, you will be able to: Describe the meanings and importance of

Describe the meanings and importance of Operations Management as a discipline a historical perspective

Operations Management Discuss the roles of operations and operations managers within the firm and the interactions with engineering, marketing, finance, accounting, and human resource management

Analyse the concept of value and the value equation, including definitions of performance and costs performance and costs

8

equation, including definitions of performance and costs 8 Learn about future challenges that operations managers are

Learn about future challenges that operations managers are likely to face.equation, including definitions of performance and costs 8 1.1 INTRODUCTION A number of forces are impacting

1.1 INTRODUCTION

A number of forces are impacting most businesses today. These are the forces of

change. They are impacting businesses through international trade, transactional finance, and global production; challenging traditional beliefs and practices challenging the way businesses compete with each other.

This is good news and bad. The bad news is that never before in the history of mankind has the rate of change, the challenges, and the cost of failure, been so high. And the good news is, never before has humankind had so much knowledge to meet the challenges.

The winds of change have brought in new industries, new products and services into the marketplace with increased competition from national and multinational corporations. The winds of change are impacting all industries, while some seemingly change gradually, and others change so rapidly that some businesses can not respond quickly enough to these changes. This makes managing change complex and difficult. No management system works well for firms competing at the different extremes of this pace spectrum.

People and processes produce the organization’s products, be it a service (e.g. booking

an airline ticket) or a product (e.g. a bar of soap). All these products have one thing that is common a conversion process. As a discipline that manages the conversion processes, Operations Management is expected to provide solutions to many of these challenges.

The first step, to meet these challenges, is to find some means to classify firms and industries on the basis of their requirement to change. Charles Fine of MIT tackled this problem. He coined the term “clock-speed” to describe the pace of change existing within an industry and by the rate at which customers demand or are able to get new goods or services.

While it is difficult to define one attribute to measure a firm’s clock-speed, Fine cites a list of industries to illustrate the concept.

Table 1.1: Industry Classification by Clock-speed

Fast Clock-speed

Moderate Clock-speed

Slow Clock-speed

Personal computers

Bicycles

Commercial aircraft

Software

Automobiles

Tobacco

Toys and games

Computer operating systems

Steel

Athletic footwear

Agriculture

Military aircraft

Semiconductors

Fast food

Shipbuilding

Clock-speed also indicates how fast a firm or parts of a firm must respond to competitive threats, and to other organizational challenges. It provides a framework for organizations to decide whether they should act reactively, actively or proactively.

Slow and steady improvement is appropriate in some situations, while in others, attempts at dramatic breakthroughs are appropriate. Different improvement strategies

require different resources, management styles, and support structures. They not only require different organizational capabilities but also require creating new ones.

In fast-paced organizations most competitive advantages are quite temporary. The

challenge for such organizations is to be able to anticipate and adapt to change fast

enough to avoid decline and possibly extinction.

In slow clock-speed industries, change comes, but at a more gradual pace. These

changes are often predictable because they have their roots in the driving forces and

you have the time to prepare for them.

Competitive advantage flows from the ability to make the conversion process more efficient, eliminate wastes, lower costs, increase the outputs from limited resources and provide more value to the consumer. All organizations whether manufacturing a product or offering a service, whether fast clock-speed or slow clock-speed, must manage processes and people effectively to achieve this state.

9

Introduction to

Operation Management

1.2 MEANING OF OPERATION MANAGEMENT

Operations Management concentrates on the core businesses, squeezes out the waste, and focuses on differentiating between competitors in meaningful ways. The importance of Operations Management lies in examining the processes by which goods and services are created and to use the available knowledge and techniques to resolve problems. It has to think and rethink, whether the practices adopted are still appropriate today. And, if not, what new techniques and methodologies should replace them?

In fast clock speed industries, the focus of operations management is on the structural

components of the discipline, i.e. product design, process, capacity and location.

In slow clock-speed industries the focus of the discipline is on the infrastructural

components, i.e., quality, manufacture, outsourcing, planning and other components of

the transformation process.

1.3 IMPORTANCE OF OM

The importance of Operations Management can be measured by its ability in creating world class companies. For example, in moderate clock-speed industries, Bajaj Auto

has focused on Operations Management to emerge as lowest cost manufacturer of two-wheelers in the world. Reliance Industries leads worldwide in project management. In slow clock-speed industries, Tata Steel is the lowest cost steel producer, internationally. Infosys, Tata Consultancy Services and Wipro have established their superiority over their international rivals in fast clock-speed products like software. These and many such Indian stories and case studies will be elaborated

in the rest of the book.

1.4 HISTORICAL CONTRIBUTIONS

A leisurely cruise through the history of any subject offers the reader a historical

perspective and an opportunity at reflection. Tracking the changing concepts of the subject, and what it has been at different points in time, also helps in identifying patterns in the development of ideas. Most important, I hope, an understanding of history should foster the ability to sort through the barrage of ideas – some good and some not so good – about the subject.

Operations Management has been variously known as Industrial Management, Management Science/Operations Research, Production Management, and Production and Operations Management.

Operations Management The concepts associated with Operations Management, perhaps, have their roots

embedded in the development of early organizations. The class of problems represented by Operations Management came into high relief in the era after the Industrial Revolution. This was a period of radical changes. People got replaced by machines, and water and mule power replaced human muscular effort. These developments changed the nature of production. As production moved from the cottage to the factory, the seeds of operations management spouted on fertile ground.

10

1.4.1 Scientific Management – Time and Motion Studies

In 1769, James Watt applied for the patent of the steam engine. By 1785, the steam engine was being manufactured and used. In 1799, Eli Whitney began mass production and introduced the concept of standard interchangeable parts. By the late 1700s, this had resulted in the development of the machine tool industry – metal tools and machines that built the parts of other machines or goods became available. Many organizations evolved into large, vertically integrated businesses. Managers of organizations faced coordination problems of unprecedented scope.

Treatises on organizing, measuring, and managing production in these challenging settings were published. Frederick Winslow Taylor enunciated his theory of "scientific management" in the late 19th and early 20th centuries. The basis of "scientific management" was a focus on machines and the system of their utilization. It was based on Taylor's postulations:

The stress here is focused on the population of the inputs, techniques, and outputs needed to create a new design method that responds to the paradigm shift in an industry. Drawing on information presented for the execution of each step, the TIES method may be presented. The techniques utilized to execute each step of the method were chosen based on robustness and generality and should allow for a substantial the method were chosen based on robustness and generality and should allow for a substantial reduction in design cycle time and provide quantitative justification for design decisions. Scientific laws govern work, so scientific methods can be used to analyze work.

Workers are different, so match workers to their job and then train them thoroughly. thoroughly.

Use employee self-interest to motivate.match workers to their job and then train them thoroughly. Separate the responsibilities of workers and

Separate the responsibilities of workers and managers.them thoroughly. Use employee self-interest to motivate. The concept of Scientific Management led to the development

The concept of Scientific Management led to the development of 'time and motion study'. The first contribution in this direction was made by Taylor in the 1880s. Early in the 20th century, Frank and Lillian Gilbreth developed a more systematic and sophisticated method of 'time and motion study', taking into account the limits of human physical and mental capacity and the importance of a good physical environment.

Time and motion study is an analysis of the operations required to manufacture an article in a factory, with the aim of increasing efficiency. Each operation is studied minutely and analyzed in order to eliminate unnecessary motions and thus reduce production time and raise output, which increases productivity.

In the early 1900s, Alfred P. Sloan of General Motors introduced the concept of 'organizational management' and Henry Ford introduced 'assembly-line manufacturing'. The Hawthorne Studies by Elton Mayo, in 1927, resulted in the Human Resources Movement. These developments changed the way operations were managed in many businesses, during this period.

1.4.2 World War II to the 1960’s – Operations Research

Before World War II the focus of ‘scientific management’ was based on the micro-environment in the manufacturing sector. During the War, the focus moved from the micro-environment to the macro-environment.

A new multi-disciplinary approach to problem solving, called Operations Research, was developed. This was a quantitative approach basically concerned with the efficient allocation and control of resources. Multi-disciplinary operations research groups, largely initiated and founded by government and quasi-governmental organizations, were formed.

These groups focused on developing algorithms and methodologies to solve optimization problems that arose in a broad range of functional areas. They successfully developed models on linear programming, network flow problems, inventory theory, dynamic programming, machine maintenance, queuing and game theory, etc., to identify how operations could be improved.

For example, while Dantzig applied linear programming to the travelling salesman problem; Clark, Scarf, etc., developed models on inventory theory and so on. The Ford Harris Economic Order Quantity model, however, dates as far back as 1915. These early successes resulted in the birth of operations research groups at many business organizations which were formed with the objective of finding ways of improving performance.

During the late 1960s, business schools began to take interest in the more scientific and rigorous approaches advocated by operations research groups for decision making and incorporated this discipline in business curricula.

Box 1.1: Mathematical Models in Operations Management

11

Introduction to

Operation Management

At the centre of operations research, practice and theory is a diverse set of mathematical models that are used to capture and explore a wide range of real-world settings. An operations research model is a mathematical abstraction or simplification of reality. The degree of simplification is a function of data availability, time and resources, and the situational issues and decisions that the model is designed to address. Mathematics is, therefore, useful as an aid in calculating and giving insight to real world situations. There are two types of models that are used:

Optimization Models: Production problems offer great opportunities for cost savings using optimization models. Such models reflect complex systems involving large numbers of decision variables and constraints and are broadly labeled mathematical programming models. Some of the most complex constrained optimization models involve tens of thousands of constraints and hundreds of thousands of decision variables. Operation researchers not only model these complex systems but also have developed algorithms that can efficiently search for optimal or near optimal solutions. Another class of deterministic models involves networks: routing through the network or optimal location on a network. Decisions involving multiple objectives can be addressed with a general class of models called Multi-Criteria Decision Analysis (MCDA).

Heuristic Models: For a great many problems, no solution technique is known at all. For these problems, heuristic solution techniques are the alternative. These are mathematical models to predict the behaviour of systems that attempt to provide service for randomly arising demands. Heuristic problem solving involves finding a set of rules or a procedure, that provides satisfactory solutions to a specific problem. These models are sometimes called "good enough, fast enough'' solution techniques. There are many valuable applications of heuristic models, including traffic flow (vehicles, aircraft, people, communications), scheduling (patients in hospitals, jobs on machines, programs on a computer), and facility design (banks, post offices, amusement parks, fast-food restaurants), etc.

Mathematical models are created in a world of make-believe, and not in the real world. However, with a mathematical model in hand, the operations researcher can work with managers and decision makers to evaluate decision alternatives or system redesign. The purpose of computing is insight, but it should not replace thought.

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Operations Management

1.4.3 The 1970s and 1980s – Japanese Challenge

Operations research faced a new challenge in this period. Japan, without the extensive knowledge of operations research and the new models and methodologies, was able to deliver vehicles to the European market at lower costs than the Europeans themselves. This made no sense at all to the west and the industry attention moved to Japan. Since the Japanese systems produced results, this created an interest in the use of these systems.

One of the major focus areas was the Toyota production system. The Toyota production system was developed by Taiichi Ohno and is now being implemented in many western companies, usually under the names of Lean production or World Class Manufacturing program. Ohno identified seven categories of Muda (Waste), which form the basis for process improvements:

Defects, including rework(Waste), which form the basis for process improvements: Overproduction of goods not needed/wanted by customers

Overproduction of goods not needed/wanted by customersbasis for process improvements: Defects, including rework Inventories of goods awaiting further processing Unnecessary

Inventories of goods awaiting further processingOverproduction of goods not needed/wanted by customers Unnecessary processing Unnecessary movement of people

Unnecessary processingcustomers Inventories of goods awaiting further processing Unnecessary movement of people Unnecessary transportation of

Unnecessary movement of peopleof goods awaiting further processing Unnecessary processing Unnecessary transportation of goods Waiting by employees for

Unnecessary transportation of goodsUnnecessary processing Unnecessary movement of people Waiting by employees for upstream activity. This resulted in

Waiting by employees for upstream activity.movement of people Unnecessary transportation of goods This resulted in important changes in the field of

This resulted in important changes in the field of Operations Management. Holistic systems of physical and human processes that extended its reach into the whole firm in a cross-disciplinary manner were introduced. Some of these that had a significant impact on business practice and performance were Material Requirements Planning (MRP) systems, then later concepts such as Just-In-Time (JIT), and Total Quality Management (TQM), etc. By the end of the 1980s, researchers and practitioners were using a broader set of paradigms in their quest to improve operations. Researchers were beginning to examine higher-level issues in manufacturing strategy using an empirical approach.

Box 1.2: Toyota Production System-Autonomation

Although JIT systems control production quantities, defects would stop the flow of parts to subsequent operations. Such a situation is avoided by a concept called an Autonomation System. This is a Toyota coined word that means 'autonomous defects control'. It is a worker controlled quality program.

There are two versions of this. In mechanical equipment, this system is called Bakayoke by Toyota. Machines in their factories are equipped with automatic stopping devices that detect defective parts. As soon as a defective part is detected, the machine comes to a stop so as to prevent flow of defective parts to the next operation. In manual systems, such as assembly operations, the system is called Andon. It is implemented through the worker, who is required to press a stop button that interrupts the line, when defective parts are detected. This prevents defective items from being produced in any quantity. The line is restarted when the problem has been solved.

In addition, the Yo-î-don system is used to extend the concept of teamwork on the shop floor and ensure that work at the various work stations is balanced. The system involves teamwork between adjacent operations. As workers at each station complete their work, they press a button. At the end of the cycle time, a red light lights up at the work stations where the work is not completed. The entire line stops and normally others nearby pitch in to help workers having difficulty. The line starts again when all the red lights are off again.

1.4.4 The 1990s and After

The changes and challenges of the 1970s and 1980s generated a sense of identity crisis in Operations Management. The disillusionment with Operations Management, however, was short lived. There was a refocusing of research questions. This was a crucial driver of growth of the field in the 1990s. Particularly, the research focus became more managerial (e.g., focusing on system design, information, and incentives) and less on tactical execution.

Another more important reason for the re-emerging importance of Operations Management was developments in the field of computers and communications technology. By the end of the 1980s, as the computational capacity increased dramatically, computers found use in design and production; and newer models were developed for solving operations problems. These models were application based and did not require extensive knowledge of mathematics.

Table 1.2: Historical Milestones in Operations Management

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Introduction to

Operation Management

Date

 

Initiator

 

Event

 

1875

James Watt

 

The Steam Engine was commercially manufactured

 

1899

Eli Whitney

 

Introduced mass production and the concept of standard interchangeable parts

1900

Frederick W. Taylor

 

Scientific Management

 

1900

Frank & Lillian Gilbreth

Time & Motion Studies

 

1901

Henry H. Gantt

 

Scheduling

1905

Henry Ford

 

Assembly Line

 

1905

Alfred P. Sloan

 

Organizational Management

 

1927

Elton Mayo

 

Human Resources Movement

 

1931

Walter A. Shewart;

 

Quality Control Charts

 

1935

H.F. Dodge & H.G. Romig

Statistical Sampling applied to quality control

 

1940

P.M.S. Blacket et al

 

Operations Research Applications

 

1947

George B. Dantzig et al

Linear Programming

 

1950

A.

Charnes, W.W. Cooper &

Non-linear and Stochastic Processes Programming

 

H.

Raiffa

 

1970

J. Orlicky & O. Wright

 

Computer applications to Manufacturing – Material Requirement Planning (MRP)

1980

W.E. Deming, Philip Crosby & J. Juran

Quality and productivity applications from Japan;

 

Computer

aided

Design

and

Manufacturing

(CAD

General Motors & IBM

/CAM); Robotics,

 

1990

Netscape, US Department of Defense

Internet, Electronic Enterprise

 

Business Process Reengineering

Michael

Hammer,

James

 

Champy

 

2000

Amazon,

eBay,

Yahoo,

E-commerce,

 

America Online

 

Dr. Daniel Whitney and Professor Charles Fine, MIT

Agile Manufacturing, High performance Work systems

The combination of computer and communication advances affected the way business was conducted and it particularly impacted many service industries. The development of the better and faster microprocessors, communication technology, miniaturization, and digitization created a new lease of life and added vigour to the development of new techniques in Operations Management.

14

Operations Management

14 Operations Management Figure 1.1: Chronology of Operations Management Themes Some important developments during this

Figure 1.1: Chronology of Operations Management Themes

Some important developments during this period were to move towards an interdisciplinary research. There was also an explicit recognition of businesses as decentralized entities of control that provided local incentives to its employees. This relationship altered the criteria for analysis. There was re-emergence of economic equilibrium and the sole-owner optimality became the focal criteria in the new approach.

Operations Management underwent three key shifts in emphasis:

1. From cost and efficiency to value creation.

2. From mass production to agility and customization.

3. From

functional

specialization

to

a

systems

performance.

approach

to

achieving

high

Figure 1.1 shows the way Operations Management themes have been changing over the last four decades.

Check Your Progress 1

State whether the following statements are true or false:

1. Productivity = Input over output.

2. Output per man is a fixed unit that remains constant across industries.

3. Productivity is a function of actual man hours worked.

4. Reduction in wastesity should be promoted but it does not bring about an increase in production effort.

5. Man, machines and money are the primary inputs of production.

1.5 SYSTEMS VIEW OF OPERATIONS MANAGEMENT

15

Introduction to

Operation Management

Productive systems are those that convert or transform resource inputs into useful goods and services as outputs. Such productive systems are generally referred to as Operations systems. Operations Management, often described as Production and Operations Management (POM), relates to the management of such systems. Of the many developments taking place in the discipline in the recent past, the most radical is perhaps the concept of what the discipline represents. Up to the 1970s, Operations Management was considered as a ‘centre’ system with its basic focus on ‘cost reduction’. Since the 1990s, it has been increasingly recognized as a ‘basis’ for ‘value creation’ within the organization.

Both these views on Operations Management co-exist today. In smaller organizations where the competition is price sensitive, markets are small and the customer needs are well defined, the focus is on the cost reduction aspect of Operations Management. However, as organizations grow, the parameters of competition increase, market logistics become more complex and customers become more demanding, the focus of Operations Management as a ‘value creation’ function, provides greater rewards.

There are, therefore, two ways traditional and modern in which Operations Management is viewed:

1. The traditional view perceives Operations Management as a system that is involved with the manufacture and production of goods and services.

2. The more modern view perceives Operations Management as a system designed to deliver value.

Let us discuss these two perspectives in greater detail.

1.5.1 Transformation Approach

The traditional definition considers Operations Management to be a transformation system. According to this view:

Operations Management is the business function that manages that part of a business that transforms raw materials and human inputs into goods and services of higher value.

According to this definition, Operations Management transforms inputs into outputs of goods or services. For example, a manufacturing plant takes raw materials in the form of parts, components, and sub-assemblies and transforms them into a manufactured product such as an automobile, by the use of resources such as labour, capital, and energy.

It is the task of Operations Management to set-up and run the system that can produce or provide the required outputs. The specifications of the outputs are the starting point. For getting the desired output, the specifications and quality of the inputs is first determined. The responsibility of Operations Management is to transform these inputs into outputs in such a way that the outputs have greater value than the costs of inputs plus the costs related to investments in the process.

The primary system of analysis and control of the effectiveness of the Operations Management system is the breakeven analysis. This is because, in a system based on the input-output concept, controls can be basically exercised on variable costs. The variable costs are made up of the input costs and the process costs. Once a process has been selected, it is difficult to alter the processes; therefore, process costs are relatively stable. The input costs reflect that part of variable costs that can basically be

16

Operations Management

controlled. Control of input costs, therefore, becomes the basis for the measurement of performance of the system.

Inputs Transformation Output Inputs Process Output Performance Measurement
Inputs Transformation Output
Inputs
Process
Output
Performance
Measurement

Figure 1.2: Operations Management as a Transformation Process

Operations Management has a number of functions to carry out the transformation process effectively. The functions incorporate different roles that are interdependent but which can be grouped under five main headings:

1. Product: The role of Operations Management is to ensure that the product is manufactured as per specifications and the plan.

2. Plant: In order to make the product, plant and equipment is required; Operations Management has to consider that the plant meets specifications and is in keeping with the requirements.

3. Process: There are many ways of producing the product, and Operations Management has the responsibility of choosing the best way.

4. Program: The production programme ensures that the schedules of production are met.

5. People: Production depends on people and their skills and motivation. Operations Management has to ensure that skilled and motivated workers are available.

Operations Management, seen in this way, is the science of optimizing transformation processes, during which ‘sets of inputs’ are converted efficiently and economically into outputs, with the objective of improving profitability of the organization. We will discuss the components of Operations Management in the value driven approach. As the value driven approach is broader based, this traditional view becomes a subset of the larger landscape.

1.5.2 Value Driven Approach

The second approach is a value driven approach to operations management. The value driven approach starts by recognizing that a business is a ‘set of processes’, each of which has inputs, outputs, and structure. Each process has a job to do and each process should be measured on how effective it is in achieving the desired outcomes.

The Core Process Model as shown in Table 1.3 is a simple model, based on the four core business processes describing the functioning of a business organization. There can be many more core processes depending upon the business and how it is structured.

Table 1.3: Core Process Model

 

SUPPORTING BUSINESS PROCESSES

 
 

Determine

Monitor

Market Products & Provide After- Sales Service

Measure

Understand Customers, Market Segments & the Competitive Environment

Customer

Competitive

Customer

Needs

Environment

Satisfaction

CORE PROCESSES

Develop

Evaluate

Create New

Build and Test Prototypes

Develop New Products or Product Improvements

Product

Product

Products Design

Strategy

Concept

or Product

 

Improvements

 

Secure

Operations

Manage Product

Manage

Manage the Supply Chain Process

Processes

Planning &

Transformation

Business

&

Control

Processes

Logistics

 

Materials

Processes

to Satisfy

 

Demand

Manage

Manage

Manage

Manage

Enterprise

Strategic

Human

Information

Financial

Management &

Planning

Resources

Systems

Resources

Business Support

Processes

Activities

17

Introduction to

Operation Management

The four core business processes in this model are described below:

1. Determine Customer Needs: It is critical for the organization to know the customers needs in order to support the firm's demand, its forecasting needs and its product design and development activities. In order to do this it is necessary to monitor the competitive environment. The supporting business processes are involved in marketing products and providing after-sales service. There has to be a measure of customer satisfaction. There is also a requirement to understand the specific needs of different market segments and the nature of the competitive environment. For fast-pace firms, Customer Relations Management (CRM) has become important. Many software firms in India are developing applications that are designed to keep them in a position to understand what their customers want and in some cases, how it can enhance the marketing capabilities of its sales force.

2. Develop Product Strategy: This involves marketing, operations, and engineering activities in order to create products that customers desire. This requires an ability to evaluate product concepts so that there is support to design new products or introduce product improvements. The slower the pace, the more is the focus on delighting customers by finding better ways to incrementally improve products that already exist. But as the pace of business increases, the greater is the need to be aware of the competitive challenges that new technologies and competitors introduce into the marketplace.

The organization has to develop the ability to understand the potential customer and the pleasing/displeasing consequences associated with changes. An aggressive competitive market exploits the limitations of an organization; as such, it has to possess the ability to design, build and test prototypes, and develop new products or product improvements before the competition. The risk is that if the firm does not replace, upgrade its existing products in time, some other firm will.

3. Secure Processes and Materials to Satisfy Demand: Management activities involve selection of raw materials from vendors and the ultimate delivering and servicing of the product for the customer. These activities include operations planning and control processes and managing the product transformation processes. In addition, the business logistics and the supply chain process play a critical part and have to be managed effectively. In today's world, supply chain

Operations Management players are widely distributed and will seldom lie within the firm's boundaries,

hence making the need to manage the flow of materials effectively more challenging.

4. Manage Strategic Planning Processes: Support business processes are essential to all organizations. The strategic planning process defines the firm's as well as its own Operations Management function. It also specifies what it must do to achieve its corporate goals. The human resource management function creates an organization design that is suited to the competitive environment and provides and/or enhances the human capital needed by other functions to effectively carry out their tasks. The Management Information Systems groups provide timely information that is needed to assess the competitive environment and the performance of its business functions. The accounting and finance groups monitor the use of financial assets and take steps to ensure that the financial base of the organization is both adequate and efficiently utilized. There has to be an adequate interface between all these functions.

Operations Management activities are mostly involved in the second and third core processes. Operations Management, as a value creating activity, contributes to the customer satisfaction process by assisting to design and develop products that possess the capability to satisfy the customer’s functional need with the desired level of design, quality and cost. Operations Management is defined as the following:

“Operations Management constitutes all of the activities that an organization conducts in order to deliver value to its customers. It is the set of processes that transforms either materials or information into a product or service.”

The operations function contributes to the ‘value’ delivery to customers by significant improvements in the cost, quality, timeliness, and availability of products and services. Organizations can use effective Operations Management either to show improvements in performance and quality, coupled with lower prices in real value, or to help raise their bottom-line.

Consider the Consumer Durable Sector in India: During the last twelve months, the market leaders have given a lead by lowering prices by 25-40 per cent on almost their entire product range. The decline in prices is attributed to substantial value engineering and technology improvement. This in turn has resulted in a 16-18 per cent increase in consumer demand for the industry. Such dramatic changes are also seen in other technology products.

On the other hand, during the same period in the FMCG segment, most leading companies have reported appreciable growth in profits despite the reductions in sale and sagging top-lines. They have managed to effectively protect prices by squeezing costs through better sourcing, better supply chain and by reducing overhead costs. The average profit growth has been in the region of 10 per cent while average sales have reduced by 5 per cent.

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Value Chain Model

In the overall execution of the core processes, Operations Management plays an exceedingly important role. Operations Management processes are designed to deliver value and contribute to the customer satisfaction process in two significant ways:

Operations Management assists in the organization's product innovation process to design and develop products that can satisfy the customer's functional need with the desired level of design quality and cost. Product Design determines product specifications to meet customer needs; Process Development subscribes the production methods necessary to make the products.

These two functions have to work together, for innovation and systematization go hand in hand. It is only possible with tight integration between these two functions that more new products can be launched faster. Shrinking product lifecycles makes this an important requirement, especially for fast clock-speed industries. Initiatives such as simultaneous engineering and early supplier involvement in the product design process elevate the role of operations in the product and service concept design process.

Operations Management designs and manages the value chain for manufacturing goods and delivering services, i.e., the process and supply chain needed to create, deliver, and service the products sold. It is in addition, involved in designing and managing processes that support the value chain—such as purchasing and materials management, storage and transportation, customer support, and work systems.

Its performance metrics in delivering value in controlling and improving the value chain and support processes to achieve and sustain high levels of business and organizational performance can be judged on its capability to:

Deliver a product that measures up to design specificationsperformance can be judged on its capability to: Be flexible enough to offer products to customers

Be flexible enough to offer products to customers depending on how, when, and where they want it. where they want it.

Do the above at an acceptable cost.customers depending on how, when, and where they want it. Operations Management is no longer merely

Operations Management is no longer merely something that has to "get done" in order to proceed with business as usual. It successfully helps organizations to squeeze out the waste, and to focus on how to differentiate from competitors in meaningful ways. Where Operations Management was once viewed primarily as a manufacturing function, service firms are now recognizing its tremendous competitive potential. Instead of a focus on cost, the focus now encompasses reliability as well as delivery times. Operations Management is now a major contributor to the design and management of the supply chain needed to create, deliver, and service the products sold.

1.5.3 Operations Management Basics

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Introduction to

Operation Management

The value driven approach focuses on the value provided to the customer. Customers are those who purchase final goods and services. Those who ultimately use the products are called consumers.

The consumer and the customer may not be the same person. For example, it is known that wives generally buy their husband's wardrobe. Here, the consumer is the man while the customer is the woman. Similarly, the recipients of goods and services from external suppliers are called external customers, while the recipients of goods and services from internal suppliers are called internal customers.

For example, in Escorts Ltd. the engine plant of the Tractor Division in ‘Plant I’ purchases engine castings from Menon & Menon in Kohlapur, the engine plant is an external customer of the casting company. In turn, the engine plant supplies the machined engine block to the Tractor Assembly in ‘Plant III’. ‘Plant III' is an internal customer to ‘Plant I’.

This distinction between consumers and customers (internal and external) is important for operations managers. The concept of internal customer has profoundly changed Operations Management thinking. It helps employees understand how they fit into the system and how their work contributes to the final product, and it enables managers to view the organization as a system. The needs of each group are quite different and lead to different operations capabilities that must be met.

20

Operations Management For example, a consumer product company like Hindustan Lever must pay attention to

consumers’ needs for product quality and performance, as well as to external customers’ (an independent retail outlet like Morning Stores in Delhi) needs to supply the right products at the right time.

Delhi) needs to supply the right products at the right time. Figure 1.3: The Value Seesaw

Figure 1.3: The Value Seesaw

The ‘value’ concept is represented by the value seesaw, shown in Figure 1.3.

The right-hand box represents the product-life cost associated with acquiring, operating, and disposing of the product. For a simple product, such as a bar of Cadbury's chocolate, there is the price of the chocolate and perhaps some tooth decay, too. Note that the customer perhaps your mother worries about tooth decay, but you as

a consumer are less concerned with this long-term consequence. For other products,

such as a nuclear power plant, calculating the lifecycle costs of the product is more difficult since its economic life and end-of-life disposal costs are hard to estimate.

The left-hand box represents the sum of the benefits that will occur if the product is purchased and consumed. No matter how cheap a chocolate is, consumers won't want

it if it doesn't satisfy a need. What we need is some means to measure these benefits.

The value of a product is the ratio of performance divided by cost as is shown in the equation below:

Value = Performance/Cost

Where:

Performance = f (functionality, quality, speed, timeliness, flexibility).

If a company's product is compared with that of a competitor's product, the product with the highest ratio will be the most valued by the customer. This is the value equation.

Performance is defined by the cumulative benefits that will result if the product is purchased and used as intended.

When a product or service is purchased; the buyer has an intended use for it. Functionality is a measure of the extent the product, when properly used, is able to accomplish the intended feat.

Quality is broadly defined as the extent to which a product or service is delivered in consistence with what the customer has been led to expect.

An organization's speed is often measured in two dimensions:

1. How long a customer must wait for the product once it is requested? and

2. How long it takes to design, develop, and introduce new products?

Timeliness is the ability of a firm to get the right product to targeted customers at the most desirable time.

Flexibility is the input to the value equation relating to the ability of the Operations Management system to give the customer the desired product.

Operations managers evaluate cost, measured in money terms, for its contributions in two important roles:

1. Enhancing value, and

2. Serving as a performance metric for evaluating business processes.

The element in the value equation that is of primary importance is often called the order winner. Order winners are attributes that reflect a customer's preference and dominate the other elements of value. Excellent food offered by a restaurant may be an order winner. Over time, order winners often evolve into order qualifiers, as the value provided by competition improves.

For example, Sony’s Trinitron picture tube that was an order winner became an order qualifier as the quality of competition improved. Having a high-quality picture tube was no longer enough for Sony to win the customer.

Sometimes, a value equation component has a trait that can make the consumer decide in not purchasing the product. Such traits are called order losers. Human rights activists dissuade people from buying products made through child labour. In this case, products identified as being produced by children become order losers.

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Introduction to

Operation Management

1.6 OPERATION STRATEGY AND COMPETITIVENESS

Role of Operation Strategy

The role of operations strategy is to provide a plan for the operations function so that it can make the best use of its resources. Operations strategy specifies the policies and plans for using the organization’s resources to support its long-term competitive strategy. Figure 1.4 shows this relationship.

competitive strategy. Figure 1.4 shows this relationship. Figure 1.4: Relationship between the Business Strategy and

Figure 1.4: Relationship between the Business Strategy and the Functional Strategies

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Operations Management

Remember that the operations function is responsible for managing the resources needed to produce the company’s goods and services. Operations strategy is the plan that specifies the design and use of resources to support the business strategy. This includes the location, size, and type of facilities available; worker skills and talents required; use of technology, special processes needed, special equipment; and quality control methods. The operations strategy must be aligned with the company’s business strategy and enable the company to achieve its long-term plan. For example, the business strategy of FedEx, the world’s largest provider of expedited delivery services, is to compete on time and dependability of deliveries. The operations strategy of FedEx developed a plan for resources to support its business strategy. To provide speed of delivery, FedEx acquired its own fleet of airplanes. To provide dependability of deliveries, FedEx invested in a sophisticated bar code technology to track all packages.

Importance of Operations Strategy

Operations strategy did not come to the forefront until the 1970s. Up to that time U.S. companies emphasized mass production of standard product designs. There were no serious international competitors, and U.S. companies could pretty much sell anything they produced. However, that changed in the 1970s and 1980s. Japanese companies began offering products of superior quality at lower cost, and U.S. companies lost market share to their Japanese counterparts. In an attempt to survive, many U.S. companies copied Japanese approaches. Unfortunately, merely copying these approaches often proved unsuccessful; it took time to really understand Japanese approaches. It became clear that Japanese companies were more competitive because

of their operations strategy; that is, all their resources were specifically designed to

directly support the company’s overall strategic plan.

Harvard Business School professor Michael Porter says that companies often do not understand the differences between operational efficiency and strategy. Operational efficiency is performing operations tasks well, even better than competitors. Strategy,

on the other hand, is a plan for competing in the marketplace. An analogy might be

that of running a race efficiently, but it may be the wrong race. Strategy is defining in

what race you will win. Operational efficiency and strategy must be aligned; otherwise you may be very efficiently performing the wrong task. The role of operations strategy is to make sure that all the tasks performed by the operations function are the right tasks. Consider a software company that recently invested millions of dollars in developing software with features not provided by competitors, only to discover that these were features customers did not particularly want.

Now that we know the meaning of business strategy and operations strategy and their importance, let’s look at how a company would go about developing a business strategy. Then we will see how an operations strategy would be developed to support the company’s business strategy.

1.7 FUNCTIONS OF OPERATIONS MANAGER

A modern operations manager performs many functions. Figure 1.5 reflects the

relationships between the various process components of the business environment.

As will be seen from the figure, unlike the transformation approach, the organizational

relationship starts with the external environment that includes suppliers and customers. There is a continuous feedback into the system which makes the environment dynamic.

Feedback INPUTS: Materials Processes OUTPUTS: Capital Goods Suppliers Equipment (Tangible) Customers People
Feedback
INPUTS:
Materials
Processes
OUTPUTS:
Capital
Goods
Suppliers
Equipment
(Tangible)
Customers
People
Services
Information
(Intangible)
Energy
Operations
Management

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Introduction to

Operation Management

Figure 1.5: Value Driven Concept of Operations Management

In this dynamic environment, the operations manager must understand his roles. These keep modifying and the focus keeps changing in the context of the forces of change that operate and impact the functioning of the organization. The roles of the operations manager have to be suitably moderated depending on the changed circumstances. The primary role of the operations manager is to accomplish the department's mission as best as possible.

The department’s mission can be segregated into three different decision areas. These are as follows:

1. Structural decisions,

2. Infrastructural decisions, and

3. Organizational decisions.

Structural decisions refer to the 'hardware' of organizations; they are long-term decisions that require substantial capital investment and are difficult to reverse once they are in place. Examples of structural decisions are the number and size of facilities and the type of processing equipment.

Infrastructural decisions are the ‘software’ of operations. These are typically tactical in nature and facilitate the management of day-to-day issues. An example is machine loading and the changing of ‘dies’ in a forging unit. Table 1.4 given below describes the decision areas in detail; however, the Human Resource decisions will be discussed later.

Table 1.4: Decision Areas of Operations Manager

Category

Decision Area

Typical Questions

Contemporary Challenges

Structure

Products

Do we produce standard or custom products and services?

How do we design products

(What?)

Do we make to order or make to stock?

and services that are easy to make?

How can we coordinate design teams that are scattered across the world?

Processes

What kind of equipment should we use?

How do we exploit new IT developments such as the Internet for rapid and flexible response to customer needs?

(How?)

How much of the process should be automated?

How should processes be configured?

Contd…

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Operations Management

 

Capacity

How much is needed?

How do we use flexible capacity options (such as temporary workers) and economies of scope for competitive advantage?

(How much?)

What type?

When should capacity be increased or decreased?

Facilities

Where are they located?

How do we manage and exploit global opportunities for locating facilities?

(Where?)

What products should be produced in each?

Infrastructure

Quality

How do we prevent defects and errors?

How can we better learn from customers?

Management

(How to

How do we improve products and processes?

How can we improve quality to world-class standards?

improve?)

Schedule

Should scheduling be centralized or decentralized?

How do we use available cost and financial information in scheduling?

Management

(When?)

How do we prioritize work and/or customer orders?

How do we integrate enterprise resource planning systems into operations?

Inventory and

What products should we outsource?

How do we manage the supply chain for increased value to the customer?

Supply Chain

Management

How many suppliers should we use?

(How to acquire and deliver?)

What effect does the Internet have?

People

and

Workforce and

What skill level and training should employees have?

How can we develop truly “high-performance” work systems?

organization

Productivity

(Who?)

What types of compensation and reward systems are best?

How can we better align work systems with long- range plans and objectives?

 

Organization

Is a hierarchical or team- based work structure better?

What structures are best suited for operations in different countries?

(What

structure?)

Should we train in-house or outsource?

Should we “flatten” the organization?

 

Lean Manufacturing

Strategy

 

How can we develop a learning organization in a globalized environment?

How can we best look at the organization across functional boundaries?

(How to manage growth?)

How to respond to customers’ special needs?

What information do we need to effectively manage growth?

The departmental mission will to a large extent depend on the nature of the product whether the organization is dealing with goods, services or contracts. Whatever the product, the department’s mission is judged on three major components:

1. Cost minimization,

2. Delivery reliability, and

3. Product quality

Equally if not more important, is the ability to manage humans in a way that is mutually satisfying to the subordinates, peers, and superiors and this involves getting the necessary things done. Effective operations managers must show commitment both to their employees and to the organization's objectives.

Workers expect good managers to be fair and impartial. In an era of downsizing and disintermediation, workers would like to feel that their manager is an effective advocate when it comes to advancing or protecting their jobs.

Box 1.3: New United Motor Manufacturing (NUMMI)

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Introduction to

Operation Management

Established in 1984 as a joint venture between General Motors Corp. and Toyota, New United Motor Manufacturing (NUMMI) took over the former General Motors plant. The plant, on 211 acres east of Interstate 880 and south of Fremont Boulevard, occupies about 5.3 million square feet. This was a 50-50 joint venture that produced Toyota Corollas and Chevrolet Novas.

Toyota's secrets aren't secret. Its production system, which stresses eliminating all wasted material and labour, has been written about in excruciating detail. NUMMI is proof of this. The plant, which had operated from 1963 to 1981, had been closed down as it was plagued by labour disputes. Toyota turned the plant around extra quick. They hired the best of the former workers and created teams of multi-skilled workers. Absenteeism dropped to less than 2 per cent compared to 20 per cent under the old management. Productivity at the plant rose to twice the average level at other GM plants. The Toyota managers achieved this improvement by focusing on five areas:

1. New products were designed for easy assembly and easy modification.

2. Production layout was organized by product needs.

3. Production flow was managed with little or no inventory.

4. Workers shared responsibility for quality.

5. Employees were encouraged to participate in nearly all decisions.

The system improvements did not come from technology investment; it was transformed by how the managers were able to integrate the different elements into a coherent operations strategy. Even without much automation, each worker was producing 63 cars a year by 1989, more than any other US plant and 40 per cent above the average at that time.

Twenty years later in 2004, the company sells 2.1 million vehicles in North America. Today, NUMMI continues to flourish as a company of 5,000 team members. With Toyota's engineering content, Toyota’s managers transformed an antiquated NUMMI assembly plant into GM’s most efficient factory using what is described as the “Toyota Way” – a corporate philosophy that empowers employees.

This advocacy role is often in conflict with another real corporate need the need to have team players that understand and are committed to the corporate mission. Resolving this conflict to everyone’s satisfaction is often an art. Operations Management is also the art of getting work done through people. Box 1.3 is a case where dramatic changes were obtained by the effective use of ‘software’ of operations.

The operations manager is also the supply chain manager/coordinator. In a manufacturing organization, for example, the manager must view the entire flow of goods and information within the supply chain, whether this falls within the corporation's legal boundaries or within that of suppliers and customers outside the organization.

The operations manager also has duties that involve cross-functional participation with the business processes in the other three core processes. The most important non-supply chain business process is the product innovation process. But activities involving human resource management, accounting, marketing, and R&D processes also are critical contributors to the operations manager’s effectiveness.

In fast paced business settings, since operations managers are amongst those closest to the customer, they can provide quick feedback to the strategic planning process regarding the changes in the market. Good operations managers are expected to manage existing business processes while helping get the firm ready for the future.

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Operations Management

1.7.1 Interface with O ther Functions

Well-designed manufacturing and service operations exploit a company’s distinctive competencies – the strengths unique to that company – to meet these needs. Such strengths might be a particularly skilled or creative workforce, strong distribution networks, or the ability to rapidly develop new products or quickly change production- output rates. A good operations manager will interface with other functions in order to exploit the competencies of the organization.

We can analyze the interface requirements from another angle also from the point of view of Operations Management’s processes. Generally, processes involve combinations of people, machines, tools, techniques, and materials in a systematic series of steps or actions.

The overall value chain extends from suppliers to customers. Inputs consist of the sources related to materials like capital, equipment, personnel, information, and energy used to produce the desired outputs. Inputs typically are selected by the operations function in association with other functions. Outputs are the final product whether of tangible goods or intangible services.

Some of the interfaces with other functional areas in the organization are described below:

Operations Management – Marketing Interface: Marketing is responsible for understanding customer needs, generating and maintaining demand for the firm's products, Marketing is responsible for understanding customer needs, generating and maintaining demand for the firm's products, ensuring customer satisfaction, and developing new markets and product potential. The firm's strategic positioning and its market segmentation decisions to a large extent determine the manufacturing and operations strategy.

In addition, marketing is the key information gatekeeper between operations and the product markets. Marketing determines the kind of product customer's value. This starts prior to product development, positioning, pricing, forecasting and promotions both before and after product launch. Interdisciplinary co-operation involving operations and marketing decisions go back over many decades.

Conflicts between operations and marketing in most organizations result from the lack of broad agreement on critical organizational decisions such as the width of the product line, the amount of time taken to deliver the product, and service or quality levels. The interface between these two functions offers wide leverage in most organizations increased understanding and trust between operations and marketing propels many organizations to higher levels of effectiveness.

Operations Management – Finance Interface: Capital equipment, cost-control policies, price-volume decisions and inventories constitute the interface with financial Capital equipment, cost-control policies, price-volume decisions and inventories constitute the interface with financial decision making. As acquisition and management of assets is an important part of decision making, finance and operations need to work together to understand the nature of technology used in operations and the practice-performance gap in their organization.

Tracking performance requires that the organization develops common, objective platforms for performance evaluation. Finance provides data on product and service costs that help managers evaluate operational performance. Operations managers should have knowledge of financial procedures, limits, and capabilities. The effectiveness of operational planning and budgeting is often driven by the level of co-operation between these two areas.

Operations Management – Design Interface: Shrinking product lifecycles have been adding to the demands on the product development process. This Shrinking product lifecycles have been adding to the demands on the product development process. This is especially true for industries that have a high clock-speed. Launching more new

products faster requires tight integration between the design and Operations Management functions. Initiatives such as simultaneous engineering and early supplier involvement in the product design process not only add to the role of operations but also improve the perception of value provided in the product and service concept design process.

In addition, process development and engineering is responsible for production methods necessary to make the products. This function has a great impact on operations. Therefore, co-operation between these three functions, i.e., process engineering, design and operations, leads to improved organizational performance.

Operations Management – Human Resource Interface: No plant manager anywhere would ignore the role of good people management in running an No plant manager anywhere would ignore the role of good people management in running an efficient operation. The human resource function includes operation's approaches such as continuous improvement and total quality that rely mainly on human inputs. Decisions about people and the organization of the operations function interact significantly with both structural and infrastructural decisions. Such issues are not unique to the operations function, however; they impact other functions and are dealt with more effectively through the human resource management function.

In services, the human resource focus is vital, as customer's perceptions of an organization are generally formed by their interaction with customer contact personnel, such as customer service representatives. As organizations increasingly opt for 'flextime', the operations function has to develop unique process configurations to accommodate employees with minimum disruption in the flow of work. Operations Management and Human Resource departments have to co-operate for recruiting and training employees, enhancing employee well-being and development, and fostering motivation that are vital to the success of management policies in practice.

Operations Management – Information Systems: Information systems provide, analyze, and co-ordinate the information needs of operations. The distributed processing Information systems provide, analyze, and co-ordinate the information needs of operations. The distributed processing environment and the growth and evolution of Enterprise Resource Planning (ERP) systems for the organization have a direct impact on operations. It allows organizations to generate relevant information and make appropriate information available when needed. The operational plans become the driver of all business planning including recruiting, cash flows, and marketing promotions. With Computer Integrated Manufacturing (CIM) systems IT plays a very important role.

In many organizations, similar activities are performed at different locations or at the same location by different people. Examples would be a manufacturer with plants spread out all over the world. However, knowledge is rarely, if ever, shared among employees performing similar jobs. Information technology provides an option for managing and sharing knowledge. It dramatically improves the task of managing knowledge. Advances in process automation allow firms to redefine their core processes and design better systems to accommodate the needs of product and service variety. E-commerce creates new demands for managing processes while also providing new opportunities for reconfiguring them. Much progress in information technologies is wasted if the operations function does not respond to the challenges created by the increased availability of information and knowledge.

This approach emphasizes cross-functional thinking and relates it to the context of overall activities of the organization. Operations Management measures the effectiveness of people, processes, and technology so that an enterprise can perform

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Introduction to

Operation Management

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Operations Management

better, faster, and with greater productivity. It provides customers with products and services; and supports corporate strategies by working with marketing, finance and human resource areas.

1.7.2 Operations Management’s Future Challenges

We know that change comes, but not when and how. December 26, 2004, saw the

greatest natural catastrophe of the last few hundred years. It drove this lesson home in

a most tragic way. Over 200,000 persons perished in the Tsunami. Tsunami, a word

that was not known before in many parts of the world, became a household word with an awe inspiring meaning.

It is not necessary to suffer a corporate tragedy in order to drive home the point that

one should be familiar with the challenges that one could face in the future. The following represent a brief projected perspective on what operations managers should look at when they think of the future. Some of these are the possible future challenges that Operations Management may have to face.

Marketplace Challenges

1. Market Fragmentation: Competitive advantage was historically based on mass-marketing and mass-manufacturing processes. However, this is now changing. Domestic customers increasingly want their goods and services “their way.” The challenge is even greater in marketing goods and services on a global scale. Organizations will need an increased ability to customize product for local markets.

2. Vocal Customers: Some customers become increasingly vocal-especially those with single-issue agendas. Environmental concerns will be voiced loudly. Recently a single memo from Greenpeace to Gerber’s Swiss parent led this baby-food firm to switch to organic inputs for its product. Similarly, new issues are cropping up like endangered rain forests, child labour, non-biodegradable polymers, etc. Privacy concerns will become commonplace as society more fully understands the extent to which they know “all about you.”

3. Customer-Supplier Relationship: The customer is increasingly becoming a partner-often unwillingly. This trend is particularly visible in the service industry. For example, restaurants will give you a beeper to tell you when you should come up to serve yourself. This is extending to manufacturing too. This trend is driven by competition; with new low-cost technologies enabling organizations to provide added value, and customers demanding value.

4. Disruptive Technologies: Customers, employees, and supply chain players will become increasingly wired-often via wireless technology. There are numerous possibilities; global positioning technology will spread quickly, which in turn will create some interesting employee control/privacy issues; three dimensional bar coding will greatly enhance the amount of information that can be stored on a product or workstation; digital image technology will create new norms of supervision and control; and wireless access to databases will become common. These are just a few of the possibilities.

Factors of Production Challenges

1. Process Design and Improvements: Many quality programs have process improvement as their core theme, and the key tactic is managing the innovation processes. Where do new ideas come from? How are they encouraged, nurtured, screened, and implemented? Process design poses similar challenges, but with fewer constraints on the eventual outcome. As there is a critical relationship

between operations and organizations, new process designs will emerge merging the physical flow system, social system, and information system into a self-consistent whole.

2. Employee Diversity: The job of managing an increasingly diverse workforce will become an even greater challenge. The Operations Management function will have to figure how to manage an increasingly diverse workforce.

3. Human Resource Scarcity: Businesses will find it increasingly difficult to hire and keep quality workers. While the number of skilled workers tends to increase, in an expanding economy, the increase will be insufficient. A shortage of hirable unskilled workers will continue to plague the service industry. The time has come to begin viewing employees as a renewable resource, and to keep them as long as one can.

4. Global Workforce: The location of work and workers will be dramatically impacted by communication technologies. The output of many service activities can be done by competent persons residing in lower cost areas of the world. General Electric moved many of its back office jobs to India, while Boeing is hiring Russian engineers to design products at its Moscow Engineering Centre. The Chairman of Hyundai Motors has gone on record that the Korean major in seriously working towards developing India as a global hub for their auto components.

5. Declining Raw Material Prices: In the late 1990s, the prices of certain electronic parts were declining at a rate of 1.5% a month. If this trend continues, deflation may be a real possibility. It will be a buyer's market that could drastically impact some supply chain management concepts.

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Introduction to

Operation Management

Technological Challenges

1. Technological Change: The challenge of investing in and mastering the right technologies is a major one. No firm has either the financial or the managerial resources to engage every new technology. Short product/process life spans mean that investing firms must recover investments even faster.

2. Bio-genetic: Synthetic and/or animal substitutes will become commonplace in the form of replacement body parts, foodstuffs, and drugs. On the plus side, advances in medical health may alleviate some of the more troublesome behavioural problems in the workplace.

3. Miniaturization: The size of products and processes will continue to become smaller. Nano-technology is creating a revolution; self-healing garments, tiny mechanical roto-rooters clean out our bodies, etc. More functions and remote-control capabilities will be added to the gadgets at home and office.

Societal Challenges

1. Environment: Technologies, to make products more earth friendly, will be developed. It is already being done to some degree in the product packaging area.

Firms need to realize that there is no way that most businesses will ever satisfy certain sectors of the environmental movement. Nor do most of their customers want to forego the conveniences of the products they require. The challenge to deal effectively with environmental “enthusiasts” will have to be tackled.

Operations Management 3. Financial Reporting: There will be fuller disclosure rules. This will require that a

firm's financial control system should have better and more timely inputs from operations possibly to stabilize short-term earnings. If that is not possible, operations managers will need to be able to alert top management whenever there are significant deviations from the announced financial projections.

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Geopolitical Challenges

1. China: Ever since Marco Polo, Western entrepreneurs have dreamt of selling millions of products to the world’s most populous nation. With a few minor exceptions, these dreams have remained unfulfilled. Initial sales often are quickly replaced with Chinese goods since the Chinese have proved themselves to be particularly adept in adopting new technologies. China's rising industrial base will result in major economic changes as it will not be willing to remain solely as the source of low-cost, labour-intensive products.

2. Japan: Even though Japan's economic problems seem intractable, it remains a formidable manufacturing threat. Toyota continues to extend its manufacturing advantage as it hones its ability to make vehicles desired by Americans—at the expense of Detroit’s Big Two’s market share. This will extend into other areas of business too.

3. India: With a GDP growth approximating 7 per cent, India is emerging as a potential economic power. The growth today is based on the availability of skilled labour. The country is progressing into higher value added products in areas such as software development, biotechnology and pharmaceuticals. However, in the long run, as a source of semi-skilled and unskilled labour, India will provide a competitive advantage in the global marketplace.

New research by the McKinsey Global Institute indicates that the introduction of foreign competition in IT, business-process outsourcing, and the automotive industry has forced Indian companies to revamp their operations and boost productivity, and some have become formidable global competitors. Thousands of new jobs have been created in these industries. Consumers benefit from lower prices, better quality, and from availability of a wider selection of products and services.

India has demonstrated to the world that the country is a credible off-shoring destination. There are legions of trained local workers, and the skills of Indian companies are established. Indian outsourcing firms now control over half of the intensely competitive global IT and back-office outsourcing market.

Now that China has been admitted to the WTO, India is losing low-cost jobs. However, with its bio-diversity, the country will be one of best sources of biological materials. Unfortunately, the country has not advanced sufficiently in its economic infrastructure which is the new area of focus of the Government. India can take full advantage of its competitive advantage, by greatly expanding its investment in human resources. If it continues to integrate itself into the global economy, India should provide intense competition in many areas to world class companies from the developed economies.

Check Your Progress 2

State whether the following statements are true or false:

1. Marketing is responsible for understanding customer needs, generating and maintaining demand for the firm’s products.

2. Marketing is the key operation gatekeeper between operations and the products markets.

3. Information systems do not provide, analyze and co-ordinate the information needs of operations.

4. India has demonstrated to the world that the country is a credible off- shoring destination.

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Introduction to

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1.8 EFFICIENCY AND EFFECTIVENESS

Performance measurement can be defined as the process of quantifying the efficiency and effectiveness of action.

A performance measure can be defined as a metric used to quantify the efficiency

and/or effectiveness of an action.

A performance measurement system can be defined as the set of metrics used to

quantify both the efficiency and effectiveness of actions.

These definitions highlight the fact that a performance measurement system can be analyzed both at the level of the system, and at the level of the individual performance measures which together constitute the system.

Efficiency or Performance Measurement System

Traditionally, businesses have used financially orientated performance measurement systems, relying on derivatives of measures, such as Return on Investment (ROI). By the time Johnson and Kaplan’s Relevance lost was published (1987) there was widespread dissatisfaction with these traditional, cost accounting based performance measurement systems, not least because they were seen to encourage short-termism and lacked strategic focus. Additionally they failed to provide data on quality, responsiveness or flexibility, encouraged local optimization, for example, manufacturing inventory to keep people and machines busy, encouraged managers to minimize the variances from standard rather than continually seek to improve, and failed to provide information on what customers wanted and what the competition was doing.

Many organizations are now actively involved in the process of reviewing their performance measurement systems, not simply to get a better means of monitoring performance, but also to enable them to: (1) assess health; (2) stimulate learning; and (3) improve communication.

1. Assessing Health: One of the primary roles of senior management in any organization is to keep track of whether the organization’s resources are being used in a way that will help it survive and prosper. Traditionally, financial measures of performance have been the tools used to do this, but increasingly senior managers are looking for a more rounded picture of the health of their businesses. As a result they are turning to measurement systems which combine the financial and non-financial dimension of performance. This trend is encapsulated by Kaplan and Norton’s (1992, 1994) balanced scorecard which is

32

Operations Management

based on the assumption that an organization’s measurement system should enable its managers to answer each of the following questions:

How do we look to our shareholders (financial perspective)?its managers to answer each of the following questions: What must we excel at (internal business

What must we excel at (internal business perspective)?How do we look to our shareholders (financial perspective)? How do our customers see us (customer

How do our customers see us (customer perspective)?What must we excel at (internal business perspective)? How can we continue to improve and create

How can we continue to improve and create value (innovation and learning perspective)?How do our customers see us (customer perspective)? 2. Stimulate Learning: Initially benchmarking was

2. Stimulate Learning: Initially benchmarking was primarily seen as a means of determining an organization’s competitive standing. More recently, however, the emphasis has shifted to benchmarking practices rather than performance. In large, multinational corporations, this concept has important implications, because within such organizations, there is scope to transfer knowledge or learning from one part of the business to another. Having comparable measures of performance in different parts of the business simplifies the process of identifying which knowledge could valuably be transferred.

3. Improve Communication: It has long been recognized that the effect of measurement is to stimulate action. The final way in which businesses are now seeking to use performance measures is as a means of communicating what they care about, thereby stimulating appropriate behaviours.

Individual Performance Measures

Information is needed to specify a performance measure. This can be incorporated in a ten-step procedure.

1.9 LET US SUM UP

This lesson discusses the historical background, definition and the basic concepts of Operations Management. We will also examine the responsibilities of the Operation Manager and Operations Management’s interface with other functions. In the last section, we will identify the future challenges that will impact this discipline.

Today’s consumers have high expectations, and these are on the rise everyday. Consumers demand an increasing variety of products with new and improved features that meet their changing needs; products that are defect-free, have high performance, are reliable and durable, and are easy to repair. They demand rapid and excellent service for the products they buy.

A focus on the issues central to operations management will soon carry us beyond

existing technologies and provide the catalyst for developing new ones. The set of

challenging problems is boundless, as is the upside potential in this new era.

Although ultimately it is the problems facing managers that will define objectives and techniques, there are already visible broad outlines of potentially new and exciting developments. These include agile production and mass customisation which will enable firms to make products better, cheaper, and faster than their competitors and facilitate innovation and increased product variety. Nonetheless, transforming

operations from stable, rigid systems to operations that support agility will continue to

be a difficult challenge.

1.10 LESSON END ACTIVITIES

33

Introduction to

Operation Management

1. Students should select at least two organizations they are familiar with. One of these organizations should be involved in providing a tangible product and the other an intangible product. They should draw out the transformation process to the inputs and show what the outputs are, and what is involved in the transformation process. How is value added?

2. Explain the important issues with transformation. Take a hospital, say Apollo Hospital, and explain the conversions taking place. What are the hospital’s overall objectives of the operations systems and how does the hospital achieve it?

1.11 KEYWORDS

Clock-speed: It is an important attribute for it defines how fast a firm, or parts of a firm, must respond to change, to competitive threats, and other organizational challenges.

Scientific Management: It was a set of principles postulated by Frederick Winslow Taylor. The principles of scientific management were: scientific laws govern work, so scientific methods can be used to analyze work; workers are different, so match workers to their job and then train them thoroughly; use employee self-interest to motivate and separate the responsibilities of workers and managers.

Time and Motion Study: It is an analysis of the operations required to produce a manufactured article in a factory, with the aim of increasing efficiency. Each operation is studied minutely and analyzed in order to eliminate unnecessary motions and thus reduce production time and raise output, which increases ‘productivity’.

Operations Research (OR): Operations research is the application of scientific methods to improve the effectiveness of operations, decisions and management, by means, such as analyzing data, creating mathematical models and proposing innovative approaches.

Operations Management constitutes all activities that an organization conducts in order to deliver value to its customers. It’s the set of processes that transforms either materials or information into a product or service.

Goods: These are tangible items that are usually produced in one location and purchased in another. They can be transferred from one place to another and stored for purchase by a consumer at a later time.

Services: Services are intangible products that are consumed as they are created. Direct customer contact is a key characteristic of services.

1.12 QUESTIONS FOR DISCUSSION

1. Why do you need to accept that Operations Management should be viewed as a system? What is the systems view of Operations Management? What are the subsystems within the operations function and what is their salience?

2. Define operations processes and explain its key components. What challenges do operations managers face in managing processes?

3. Operations management has been analysed by three schools of thought. Outline the basic differences in their perspectives.

34

Operations Management

Check Your Progress: Model Answers CYP 1 1. False 2. False 3. True 4. False
Check Your Progress: Model Answers
CYP 1
1. False
2. False
3. True
4. False
5. False
CYP 2
1. True
2. True
3. False
4. True

1.13 SUGGESTED READINGS

Upendra Kachru, Productions and Operations Management, Excel Books, New Delhi.

Everest E Adam & Albert, Productions and Operations Management, PHI Publications, IVth Ed.

Joseph G. Monks, Operations Management (Theory & Problems), McGraw Hill Intl.

S.N. Chary, Productions and Operations Management, TMH Publications.

Chunawala and Patil, Productions and Operations Management, Himalaya.

Adam & Ebert, Production and Operations Management – Concepts, Models and Behavior, Prentice Hall of India, 1992

Bradley Gale, Managing Customer Value: Creating Quality and Service that Customers can see, Free Press, NY, 1994

Buffa and Sarin, Modern Production/Operations Management, John Wiley & Sons,

1994

Clayton Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail,” HBS Press, 1997

Chase, Jacobs, Aquilano, Operations Management for Competitive Advantage, Tata McGraw Hill, Delhi, 2004

Krajewski and Ritzman, Operations Management, Strategy and Analysis, Pearson Education, 2002

Melnyk, S. and D. Denzler, Operations Management: A Value Driven Approach; McGraw Hill, 1996

Vonderembse, Mark, White, Gregory, Operations Management, Concepts, Methods and Strategies, John Wiley & Sons, 2004

LESSON 2 TYPES OF PRODUCTION SYSTEMS CONTENTS 2.0 Aims and Objectives 2.1 Introduction 2.2 Production

LESSON

2

TYPES OF PRODUCTION SYSTEMS

CONTENTS

2.0 Aims and Objectives

2.1 Introduction

2.2 Production Systems

2.3 Types of Production Systems

2.3.1 Project

2.3.2 Job Shop

2.3.3 Batch Production (Disconnected Line)

2.3.4 Assembly Line

2.3.5 Continuous Flow

2.3.6 Cell Manufacturing (Group Technology)

2.3.7 Flexible Manufacturing Systems (FMS)

2.4 Production System and its Environment

2.5 Let us Sum up

2.6 Lesson End Activity

2.7 Keywords

2.8 Questions for Discussion

2.9 Suggested Readings

2.0 AIMS AND OBJECTIVES

After studying this lesson, you will be able to:

Explain different types of production systemsOBJECTIVES After studying this lesson, you will be able to: Know about manufacturing strategies and the

Know about manufacturing strategies and the contingency framework that links production system to manufacturing strategies. production system to manufacturing strategies.

35

Types of Production Systems

to manufacturing strategies. 35 Types of Production Systems 2.1 INTRODUCTION The study here suggests a set

2.1 INTRODUCTION

The study here suggests a set of potential profiles for different types of production systems and manufacturing strategies and deals with the contingency framework that links production systems to manufacturing strategies. Specifically, an explicit conceptual link is drawn between “generic manufacturing strategy” that uses two dimensions of strategy (cost efficiency and differentiation) and the complementary production system typology in manufacturing that uses technical complexity and technical flexibility. Proposed production systems are “intermittent production

36

Operations Management

system”, “continuous production system”, “concurrent production system”, and “degenerate production system”. The study have also expands the area of interest to focus on the development of methods and measures of each technology dimension that can be validated in some way.

Thus, this lesson provides an integrated framework, clarifies and combines the terms and concepts related to manufacturing strategies based on the results of business strategy research and new manufacturing technology.

2.2 PRODUCTION SYSTEMS

Production systems play a very important role in achieving organizational excellence. But lack of proper planning, co-ordination and control often affects the capabilities of these systems because of which these systems are not utilized fully and effectively leading to many undesirable situations forcing many organizations to become less competitive. A number of organizations worldwide have achieved and sustained excellence by effective production management.

What is Effective Production Management?

Effective production management involves understanding of the characteristics of various types of production systems, identification of the dynamics of the different phases of the management process, realizing the potential of different analytical tools, learning the nuances of the implementation of these tools, visualizing the impact of various uncertain situations and developing the ability to react under various scenarios to achieve consistently excellent business results. There are evidences to show how a number of organizations achieved world-class status by effective management of their production systems. These organizations achieved superior quality, higher productivity, perfect delivery performance, overall customer satisfaction and enterprise excellence all with lower cost.

The important issues arise here are related to What, Why and How of Production Management. Also, to identify the basic problems in industries involved in production of goods, understand various approaches available to analyze these problems, learn various solution procedures for these problems handle real life situations with confidence and adjust to future changes in production systems. It should be endeavored to enhance their confidence through practice sessions comprising of exercises and cases of different success stories, addressing issues related to how to reduce cost, improve quality, enhance delivery reliability and improve all round productivity performance effectively.

Check Your Progress 1

State whether the following statements are true or false:

1. Effective production management involves the understanding of the characteristics of various types of production systems.

2. There are evidences to show that how a number of organizations achieved world status by effective management of their production system.

3. A production system refers to how an organisation organizes material flow using different process technologies.

4. Production system does not play an effective role in achieving the organizational excellence.

2.3 TYPES OF PRODUCTION SYSTEMS

37

Types of Production Systems

A production system refers to how an organization organizes material flow using

different process technologies. There are five major types of production systems that have been generally identified. Though these will be discussed in greater detail later, they are described below:

2.3.1 Project

These are generally one-off projects. It is based on extensive customisation that is suited to the customer's need. Many construction projects, project management contracts, shipbuilding and civil engineering projects fall in this category.

For example, Larson and Toubro’s main business is executing projects. Much of the work is carried out at site rather than in a factory. All equipment, tools, materials, labour, etc., are placed at the site itself. Infosys sends its teams to the customer's facilities to install, test, and customize its software.

2.3.2 Job Shop

Job shop production is characterized by processing of small batches of a large number

of different products, most of which require a different set or sequence of processing

steps. Production equipment is mostly general purpose to meet specific customer orders. Highly skilled labour is needed to handle the processes, as the variety and product range are generally very high.

Commercial printing firms, machine shops, and die, jigs and fixture making, etc., are examples of this type of structure. Thomson Press operates on the basis of specific customer orders; Tools and Equipment makes jigs and fixtures as per the design and

requirements of its clientele. Tata Consultancy Services (TCS) produce different types

of software, based and customized to each client’s requirements.

2.3.3 Batch Production (Disconnected Line)

Production is in discrete parts that are repeated at regular intervals. Essentially, it is somewhat like a standardized job shop. Such a structure is generally employed for relatively stable line of products, each of which is produced in medium volume, either

to customer order or for inventory. The process has the ability to switch over from one

product to another with relative ease. Though mostly general-purpose machine are used, they are supported with specially designed jigs and fixtures. The skill level of labour is high but not critical.

Examples include equipment like X-ray machines, earth moving and material handling equipment, electronic devices, etc. Wipro GE manufactures medical

equipment and ECIL manufactures mainframe computers using batch production. This

is also applicable to many small-scale enterprises or many chemical processes, etc.,

e.g., Oracle or People Soft produce CDs with standard software in batch productions depending on the demand.

2.3.4 Assembly Line

An assembly line is a mass production process. On assembly line, production follows

in a predetermined sequence of steps, which are continuous rather than discrete. The

product moves from workstation to workstation at a controlled rate, following the sequence needed to build the product. The product variety is low and special purpose tools and equipment is normally employed. When other processes are employed in a line fashion along with assembly, it is commonly referred to as a production line.

Operations Management Examples include automobiles, appliances like washing machines, televisions, etc.

Maruti makes cars on an assembly production line; ECIL makes electronic components and McDonald’s its burgers using the same concept.

38

2.3.5 Continuous Flow

Continuous production is common in the food processing industry, and in industries involving undifferentiated materials such as petroleum and chemicals. Most bulk products are manufactured using continuous flow production. Generally, on-line control and continuous system monitoring is needed. Such processes are usually highly automated and, in effect, constitute one integrated machine. Shutdowns and start-ups are very expensive in this production mode, and need to be avoided.

The Reliance Petrochemical complex at Patalganga and the Thermal Power Plants operated by NTPC are examples of this type.

2.3.6 Cell Manufacturing (Group Technology)

A cell is a self-sufficient unit, in which all operations required to make components or

complete products can be carried out. It is like a mini-factory within the factory, which is managed by a cell team. TI Cycles reorganized its manufacturing into cells to serve other operations. Thus cell manufacturing creates a client-server relationship

between the different components of the production system.

Cell layouts can be U-shaped or a segment of a line (a product or sub-assembly stage) allowing a self-organizing, multi-skilled group of fewer people to manage the operation. Shorter processing times, better team attention to quality problems, reduction of work in progress, lower handling costs and simpler scheduling can be

achieved. Built in spare plant capacity (redundancy) or providing additional machines

to a cell can accommodate small changes or fluctuations in demand and bring benefits.

2.3.7 Flexible Manufacturing Systems (FMS)

A flexible manufacturing system generally consists of a number of CNC machine

tools and a materials handling system that is controlled by one or more dedicated computers. A typical flexible manufacturing system can completely process the members of one or more part families on a continuing basis without human intervention. FMS brings flexibility to manufacturing so that a part can be produced when the market requires it. The system is flexible enough to suit changing market conditions and product type without buying other equipment.

Computer-aided manufacture and control enables to set up time on machines or minimize changeover procedures. Computers control machines so that they can respond to pre-programmed instructions. Parts or components are designed using Computer Aided Design software (CAD) and the data from design specification provides the input to generate instructions to computer-controlled machines. Due to this, the production of frequent, small batches is possible and machine availability can be better scheduled in response to customer orders and unit production costs can be kept low.

A production line assembling cars, e.g., Maruti, can switch from producing large

batches of one model of car to another model with a different shape and arrangement

of sub-assemblies within minutes and multi-skilled workers can re-configure their work stations with required materials.

Check Your Progress 2

State whether the following statements are true or false:

1. Cycle time is the average time between start and completing a job.

2. Lead time is the interval between the start and end of an activity or series of activities.

3. A good plant layout looks nice and attractive but cannot bring about increase in productivity.

4. Corporate policies related to quality of production are an external factor since quality is an industry specific matter.

5. The process of conversion of materials into finished product comprises two inspections.

39

Types of Production Systems

2.4 PRODUCTION SYSTEM AND ITS ENVIRONMENT

The production system is one of the major components of an organization. Production is “affected by” and “has an” impact on other divisions of the organization. As said above, the production is the heart of an organization and it coordinates all other divisions of the organization. The diagram given below shows that production coordinates finance, marketing, materials management and human resource divisions. The figure 2.1 also shows that the various divisions have interaction with outside agencies such as: finance has interaction with capital management, material management has interaction with vendors, HRM with labour force and marketing with customers.

HRM with labour force and marketing with customers. Figure 2.1: Customer Orientation in Production and

Figure 2.1: Customer Orientation in Production and Operations

Internal factors affecting production:

1. Engineering: Product Quality

2. Research and Development: Product Development

40

Operations Management

External factors affecting production:

1. Government

2. Competition

3. Technology

4. Economic Conditions

2.5 LET US SUM UP

The world's markets and industry structures are in flux because the global forces at work are lowering the barriers to interaction. As interaction costs fall around the world, new economies of specialization, scale, and scope are being created— innovative companies have an abundance of opportunities to earn high rewards for the risks taken. Factories of the future are already in the making. FMS, CAD and CAM are cornerstones of the factory of the future.

2.6 LESSON END ACTIVITY

Students are expected to demonstrate an understanding of the principles involved in outsourcing processes. Based on this understanding, on why outsourcing has become so important today, he should try to explain the statement.

2.7 KEYWORDS

Flexible Manufacturing System: It is a manufacturing system that consists of a number of CNC machine tools and a materials handling system that is controlled by one or more dedicated computers.

Manufacturing Flexibility: It is the ability of a manufacturing system to respond, at a reasonable cost and at an appropriate speed, to planned and unanticipated changes in external and internal environments.

Mix Flexibility: The ability of a system to present a wide range of products or variants with fast set ups.

Changeover Flexibility: The ability of an OM system to introduce a large variety of major design change quickly within existing facilities.

Modification Flexibility: The ability of the transformation process to implement minor product design changes, quite possibly after the product has been delivered.

Volume Flexibility: The ability of the transformation process to profitably accommodate variations in production quantities. Systems with high fixed costs beget inflexibility since the firm will always be striving to maintain high utilization rates.

2.8 QUESTIONS FOR DISCUSSION

1. Describe the basic features of the five major process types and give an example of each type in (a) food business, (b) health care, and (c) manufacturing.

2. Draw out the process diagrams of any two of the above.

3. “Companies are focusing on the things they do best and outsourcing all other functions to trusted partners.” Explain this statement with examples from Indian Industry.

4. What is the difference between high-contact and low-contact systems? Provide some examples. Would a hotel such as Holiday Inn be classified as a high-contact operation if a customer on a business trip spends 8 of the 16 hours on the trip sleeping in the hotel?

service

5. How

does

customer

contact

affect

the

operations

strategy

of

a

organization?

41

Types of Production Systems

6. What implications do high-contact and low-contact systems have for efficiency, quality, flexibility, and dependability? Use the example of HMOs pressuring hospitals to reduce the average length of stay in order to reduce the cost of operations.

Check Your Progress: Model Answers CYP 1 1. True 2. True 3. True 4. False
Check Your Progress: Model Answers
CYP 1
1. True
2. True
3. True
4. False
CYP 2
1. True
2. True
3. False
4. False
5. True

2.9 SUGGESTED READINGS

Upendra Kachru, Productions and Operations Management, Excel Books, New Delhi.

Everest E Adam & Albert, Productions and Operations Management, PHI Publications, IVth Ed.

Joseph G. Monks, Operations Management (Theory & Problems), McGraw Hill Intl.

S.N. Chary, Productions and Operations Management, TMH Publications.

Chunawala and Patil, Productions and Operations Management, Himalaya.

Adam & Ebert, Production and Operations Management – Concepts, Models and Behavior, Prentice Hall of India, 1992

Bradley Gale, Managing Customer Value: Creating Quality and Service that Customers can see, Free Press, NY, 1994

Buffa and Sarin, Modern Production/Operations Management, John Wiley & Sons,

1994

Clayton Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail,” HBS Press, 1997

Chase, Jacobs, Aquilano, Operations Management for Competitive Advantage, Tata McGraw Hill, Delhi, 2004

42

Operations Management

Krajewski and Ritzman, Operations Management, Strategy and Analysis, Pearson Education, 2002

Melnyk, S. and D. Denzler, Operations Management: A Value Driven Approach; McGraw Hill, 1996

Vonderembse, Mark, White, Gregory, Operations Management, Concepts, Methods and Strategies, John Wiley & Sons, 2004

UNIT II

43

Product and Product Design

44

Operations Management

LESSON 3 PRODUCT AND PRODUCT DESIGN CONTENTS 3.0 Aims and Objectives   3.1 Introduction 3.2

LESSON

3

PRODUCT AND PRODUCT DESIGN

CONTENTS

3.0 Aims and Objectives

 

3.1 Introduction

3.2 Typology of Products

 

3.3 Product Development Process

3.3.1 Clarification of the Task

3.3.2 Concept Generation

3.3.3 Embodiment Design

3.3.4 Detailed Engineering Design

3.3.5 Physical Evaluation

3.3.6 Speed of Product Development

3.4 Product Design and Architecture

3.4.1 Product Architecture

3.4.2 Engineering Economy

3.4.3 Measuring Costs and Identifying Waste

3.4.4 Design for Manufacturability (DFM)

3.4.5 DFX – Design for ‘X’

3.4.6 End Product and Parts Standardization

3.4.7 Modular Designs

3.5 Product Development in Services

3.6 Product Development Strategies

3.6.1 Internal Development

3.6.2 Reverse Engineering

3.6.3 Collaborative Development and Contracted Out R&D

3.6.4 Joint Ventures

3.6.5 Producer-customer

3.6.6 Manufacturing Sub-contracting

3.7 Types of Production System

3.7.1 Job Shop Production

3.7.2 Batch Production

Contd…

45

Product and Product Design

of Production System 3.7.1 Job Shop Production 3.7.2 Batch Production Contd… 45 Product and Product Design

46

3.7.3 Mass Production

Operations Management

3.7.4 Continuous Production

3.8 Let us Sum up

3.9 Lesson End Activity

3.10 Keywords

3.11 Questions for Discussion

3.12 Suggested Readings

3.0 AIMS AND OBJECTIVES

After studying this lesson, you will be able to:

Describe the topology of productsOBJECTIVES After studying this lesson, you will be able to: Know the operation management in manufacturing

Know the operation management in manufacturing and service sectoryou will be able to: Describe the topology of products Explain the design in the context

Explain the design in the context of operations managementthe operation management in manufacturing and service sector Identify the objectives of the design activity Know

Identify the objectives of the design activityExplain the design in the context of operations management Know the types of production system Analyse

Know the types of production systemmanagement Identify the objectives of the design activity Analyse the importance of product design and architecture

Analyse the importance of product design and architectureof the design activity Know the types of production system Learn about the product development strategies.

Learn about the product development strategies.Analyse the importance of product design and architecture 3.1 INTRODUCTION Product decisions often make or break

3.1 INTRODUCTION

Product decisions often make or break companies. Studies indicate that nearly two out of three new products fail after launch. In addition, companies in many sectors are under continual pressure to speed up the pace of product development – even to adapt products that are still in the pipeline to the demands of a constantly changing marketplace. This lesson will discuss product design and process selection, which are crucial areas in operations management.

3.2 TYPOLOGY OF PRODUCTS

Operations Management is fundamental to an organization’s achievement of its mission and competitive goals. It is involved in creating value in the products. Products can be tangible or intangible. Tangible products are called ‘goods’, while

intangible products include ‘services’ and ‘contracts’. These are collectively referred

to as products.

Effective Operations Management

Effective Operations Management is critical for organizations that provide goods as well as to organizations that provide services and contracts. A firm’s success or failure can depend on how it manages operations on a daily basis.

Goods are tangible items that are usually produced in one location and purchased in

another. They can be transferred from one place to another and stored for purchase by

a consumer at a later time. Examples of goods are products such as cars, washing machines, televisions, and packaged foods, etc.

Services are intangible products that are consumed as they are created. Services now dominate the economies of most industrialized nations. Service organizations include

hotels, hospitals, law offices, educational institutions, and public utilities. They provide such services as a restful and satisfying vacation, responsive healthcare, legal defense, knowledge enrichment, and safe drinking water.

Services also include ‘back-office’ support for internal customers of an organization, such as IT support, training, and legal services. Services take place in direct contact between a customer and representatives of the service function.

Customer contact is a key characteristic of services. A high quality of customer contact is characteristic of a good service organization. This is vital to retain current customers as well as for attracting new ones. Most service organizations though they seldom carry finished inventory do have supporting inventory. Hospitals keep drugs, surgical supplies, emergency supplies and equipment spares; Banks have forms, cheque books, and other supplies.

Contracts are business exchanges in which neither services nor goods are transferred; instead, there is an implicit understanding between the customer and the provider that goods and services will be provided on an ‘as needed’ basis. With a contract, the customer pays a fee and then is entitled to a manufactured goods or services. Many goods and services are now evolving into contracts.

Historically, manufacturing organizations have operated tertiary and often secondary activities on contracts. Today, increasingly, many businesses are moving to contract based transactions. For example, Internet and Applications Service Providers (ASPs); security organizations; maintenance, healthcare and many other businesses design their operations based on contracts.

Service and contracts require more attention and better planning than manufacturing. A manufacturing defect can always be reworked before dispatch. Service, however, occurs in the presence of the service provider, making it difficult to manage capacity and control quality since inventory cannot be stored and inspected prior to the service encounter. Contractual transactions can be even more complicated. The complication arises because it is difficult to enhance capacity overnight and all customers may choose to exercise their options at the same time.

Many recent thinkers have suggested that most manufacturing firms are better off thinking of their output in terms of the service bundle they provide to the customer. For example, Mercedes has announced that it is developing a system that will connect the car’s software via the Internet to a customer assistance center. This system will be able to detect, diagnose and repair the problem.

Another example is Xerox. It has ‘redefined’ its product as facilitating communications rather than just selling copy machines. In its strategy to be the ‘Document Company’, Xerox now offers products that can copy handwritten documents, convert them to electronic form, and e-mail them. Such products have allowed Xerox to increase the services related to document management in its output bundle. This type of transition creates significant challenges for Operations Management.

Today, increasingly organizations are trying to grow their presence in the market and earn a competitive edge over competition by mixing goods, services and contracts. This brings in a number of permutations and combination, significantly changing the landscape of operations.

47

Product and Product Design

48

Table 3.1: Comparison among Goods, Services and Contracts

Operations Management

Operations

Goods

Services

Contracts

Factors

Value

Value is provided by physical processing during manufacturing.

Value is provided by availability of the service, leading to sensory or psychological satisfaction.

Value is provided by the promise (guarantee) of availability of a product or service when the contract is exercised.

Tangibility

Goods are tangible; specifications are easily defined; and goods can be inspected for quality.

Services are intangible; operational characteristics are difficult to specify; and services cannot be inspected for quality prior to consumption.

Intangibility is often accompanied by an absence of customer presence for long periods of time.

Process

Manufacturing can be isolated from the customer and designed for efficiency.

The service process must be designed to occur in the presence of the customer.

The process must be designed to accommodate batches and surges in demand.

design

Inventory

Products can be stored for later consumption.

Services are consumed as they are created.

Many operations can be conducted “off-line”, or not in the presence of the customer.

Capacity

Manufacturing capacity can be designed for average demand.

Capacity must be designed for maximum demand.

Capacity must be flexible to accommodate periods of low and high demand.

Quality

Manufacturing processes can achieve a high level of precision and repeatability.

Consistency of human performance is more difficult to maintain; customer perceptions are subjective.

Quality is perceived only when the option is exercised, and may be influenced by time and availability.

Location

Facilities can be located to minimize operations and transportation costs.

Service facilities must be located near the customer.

Centralization and economies of scale are more likely.

Table 3.1 summarizes some key differences and operational consequences among goods, services, and contracts across several factors that shape operational decisions in organizations.

3.3 PRODUCT DEVELOPMENT PROCESS

49

Product and Product Design

3.3 PRODUCT DEVELOPMENT PROCESS 49 Product and Product Design Figure 3.1: New Product Development Process Product

Figure 3.1: New Product Development Process

Product development includes a number of processes in identifiable stages. These are shown in Figure 3.1. The steps are as follows:

3.3.1 Clarification of the Task

The search for ideas starts based on the ‘new product’ strategy. The ideas that fit in with the strategy have to be identified. The customer needs need to be determined. This should provide pointers towards the functional requirements of the product.

Simultaneously, the organization should be evaluating its resources and time schedules to identify and specify constraints.

50

Operations Management

Based on this exercise the general specifications of the product or service are drawn up.

The product idea must demonstrate that it fulfills some consumer need, and that existing products do not already fulfill.

3.3.2 Concept Generation

The specifications are the basis for concept generation. At the concept level, the organization should identify essential problems and propose the function structure of the product or service. This should generate proposals and solution principles that are combined and refined into concept variants.

The concept should be evaluated against technical and economic data. If the results are found satisfactory, the concept has reached the stage for screening.

Screening is a management process. Each idea is analyzed and its risks and potential are scrutinized, both technically and business wise. Those having potential are identified. Most of the ideas are killed or die at the screening level.

The business analysis includes preliminary market analysis, creating alternative concepts for the product, clarifying operational requirements, establishing design criteria and their priorities, and estimating logistic requirements for producing, distributing and maintaining the product in the market.

3.3.3 Embodiment Design

The ideas, after they have cleared screening, are developed in their preliminary configuration and an introductory analysis is conducted.

The best preliminary design(s) are:

(a)

Selected and refined.

(b)

Evaluated against technical and economic criteria.

(c)

The preliminary design(s) are refined and the configuration completed.

Detailed analysis is conducted of refined design(s). The design is reviewed for errors, manufacturability and cost. The preliminary design and alternate designs are evaluated according to critical parameters to determine the design support that will be required including analytical testing, experimentation, and physical modeling. Based on the results and trade-offs, the conceptual design is firmed up.

This is followed by:

(a)

Preparation of preliminary parts list, and

(b)

Fabrication design for the basic elements of the conceptual design.

This completes the stage of firming up the definitive design of the new product or service.

3.3.4 Detailed Engineering Design

This stage involves engineering a detailed definition of the product, including its components, materials, sizes, shapes, etc. The product design is:

(a)

Analyzed,

(b)

Experimented upon, and

(c)

Data collected to determine if the design meets the design objectives.

Trade-offs is inevitable in the optimal design, since objectives often conflict with each other.

The final design, whether computer generated or compiled manually, includes drawings, specifications and other documentations necessary to form the basis of product and process development.

Since the 1960s, when GM and IBM began work to develop a system of Computer Aided Design (CAD); it has become a commonly used tool. Originally, CAD was envisaged as a sophisticated drafting system. Today, final analysis and verification is conducted through computer analysis and simulations. Complete detail drawings and production documents are then generated.

Prototypes are used to establish the detailed engineering design before the details are finalized. In some cases, especially in defense related products or products whose unit value is extremely high, prototypes are often virtual prototypes.

In 1986, I was a member of a team from India that was invited to Brazil to witness the demonstration of an armored vehicle. When we arrived in Sao Palo, we expected to see the physical testing on the vehicle to demonstrate its capabilities. Instead, we were taken to the main computer center of the firm and the entire sequence of attack and defense, and its consequences were played out on the computer. Sitting in the laboratory we were able to assess the damage to the vehicle, the parts that had failed and the impact on the body armor.

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Product and Product Design

the impact on the body armor. 51 Product and Product Design Figure 3.2: Product Design Cycle
the impact on the body armor. 51 Product and Product Design Figure 3.2: Product Design Cycle

Figure 3.2: Product Design Cycle

3.3.5 Physical Evaluation

Concurrently with the development of detailed engineering design, physical evaluation is carried out. This includes:

(a)

Fabricating a working prototype of the product.

(b)

Testing and evaluation to confirm that it represents the solution.

Very often, the duration of this stage can be reduced if certain tasks done simultaneously by the organization fully utilizing the benefits of cross-functional thinking.

Computer simulations often precede physical evaluation. In currently available CAD systems, the designer can view the part in any orientation, any scale or any cross section. The parts and the product can be seen in three dimensions, rotated, moved,

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and the response to different stress patterns seen visually on the computer screen, without building a physical prototype.

3.3.6 Speed of Product Development

With a new regime of patents and legal protection against copying ideas, designs, or products — there have been changes in the approach to new product development. Organizations are more concerned about being the first to develop an idea or design a product so that the can protect their markets.

Being able to design, develop, and introduce a new product quickly is a major competitive advantage and it gives a firm fast to market capabilities.

There are two types of fast to market activities:

1.

Fast to customization: The first activity is being able to develop products to meet the specific needs of a customer. This is called fast to customization. Producing such a product with the participation of the customer, may give a firm a competitive advantage.

2.

Fast to design: The second type relates to developing products to meet the needs of a cluster of customers. Fast to design product innovation can be used in MTS, ATO, and MTO market orientations. For example, Nokia introduced cell phones that incorporate cameras. Seeing that there was a cluster of customers for this product all manufacturers now offer this product. Nokia has a first movers lead in this market.

In

other situations, being fast to market may not be less important. It depends on how

quickly a product’s design becomes stale. Mercedes-Benz traditionally had customers

that valued good design more than a model year.

For some products, being fast to market may not be in your firm’s best interest.

A creative advertising executive always makes his clients wait a week or two, even

though he thought of the copy for the ad in a day. Likewise, if a gourmet restaurant that serves your meal five minutes after you order, you know that they must be using a microwave oven. If they make you wait for 30 minutes, then the same judgment cannot be made.

Another important type of product innovation involves refining or rejuvenating products within the existing product line. For some companies, this is an annual event, such as is the case with the automotive industry.

Major redesigns in the automobile industry can take years and costs billions. This becomes a catch-22 situation as it costs so much to develop new models, auto companies often try to sell as many copies of the new product as possible, even if it takes four or five years. But the older a car’s design gets, the greater the chance that it will lose market share to competitors with fresher models. And worse yet, if it takes five years to develop a new model and a company wants to sell that model for another five years, then it must project what the customers’ preferences are likely to be ten years from now. This is a challenge.

Check Your Progress 1

Fill in the blanks:

1. ………………………… is a key characteristic of services.

2. Service and contracts require more attention and better planning than ……………

3. Screening is a ………………… process.

3.4 PRODUCT DESIGN AND ARCHITECTURE

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Product and Product Design

The first step in developing a new product strategy is that the organizations should decide their target customers, what they value, and the likely size of the market of their interest. These are key inputs to make product architecture decisions.

3.4.1 Product Architecture

It should establish three things:

1. Specify the functional capabilities of the product, its features, and post-sale servicing needs.

2. Specify the capabilities of the product delivery system and post-sale support that the customer expects and determine the ability of the organization to provide for these, and

3. Specify the roles and risks each player within the supply chain will assume.

For businesses that make to stock or assemble to order, the business process that develops a product’s architecture must deal with a number of design issues, such as:

Can a ‘make to stock’ product meet the core needs of target customers?must deal with a number of design issues, such as: Can a ‘make to stock’ product

Can a ‘make to stock’ product with a flexible set of optional functional modules satisfy the mix variety demanded by the buyers who want ‘assemble to order’ products? satisfy the mix variety demanded by the buyers who want ‘assemble to order’ products?

How can product designers divide the functions of the product among separate modules effectively and how should the modules interface with each other? modules effectively and how should the modules interface with each other?

How much ‘technical risk’ can the design take?and how should the modules interface with each other? What should be in-house development and what

What should be in-house development and what should be contracted out?other? How much ‘technical risk’ can the design take? These are product design decisions that fall

These are product design decisions that fall beyond what was called a line of visibility in the service area and product’s customer. But within the firm, they have important effects, not only on product quality, but also on the resources needed to effectively perform the development process.

Good product architecture can help designers develop products capable of providing the firm with a competitive advantage. If being cost competitive is the strategy, engineering economy should be a major consideration. If being fast to market or fast to product is a strategic goal, then the ability to achieve these ends starts with good product architecture.

3.4.2 Engineering Economy

Engineering economy is the discipline concerned with the economic aspects of engineering. It involves the systematic evaluation of the costs and benefits of proposed technical projects. In reality, any engineering project must be not only physically realizable but also economically feasible.

For example, Maruti Udyog had decided that the weight of the Maruti 800 was a critical requirement of the design. How do you choose between plastic composite and steel sheet stock for the auto body panel?

The choice of material will dictate the manufacturing process for the body panel as well as manufacturing costs. Some may argue that because the composite body panels will be stronger and lighter, it is a better choice. However, there was not much of a market for expensive cars. Maruti was looking for a car that would be low cost so that it could tap the higher end of the two-wheeler users.

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It also had to take to account that:

(a)

The customer may not believe that plastics will provide a stronger body option than steel panels, and may not be willing to pay more, and

(b)

A maintenance man may not believe that it is easy to repair composites, and therefore repair and maintenance will cost more.

One might suggest that the above arguments are ridiculously simplistic and that common sense would dictate choosing steel sheets for the framing material. Although the scenario is an exaggeration, it reinforces the idea that the economic factors of a design weigh heavily in the design process, and that engineering economy is an integral part of that process, regardless of the engineering discipline.

The focus on economic cost and engineering costs of new product development has great importance. Each different technical solution to a problem constitutes an alternative. Each alternative requires different level of resources to build and causes different levels of resource to be expended. Thus trade-offs must be made during the design of engineered systems. Engineering economy selects the best alternative based on design for the theme.

Why do this at all?selects the best alternative based on design for the theme. Why do this now? Why do

Why do this now?based on design for the theme. Why do this at all? Why do it this way?

Why do it this way?design for the theme. Why do this at all? Why do this now? An engineering cost

An engineering cost analysis, in its simplest form, may be no more than a spreadsheet listing the phases found in the product concept through product realization cycles on one axis and identifying the many functional areas, costs, or even software tools on the other.

In its second-generation form, engineering cost analysis software will approximate the costs associated with each phase of the product development–realization cycle.

In its ultimate form, the engineering cost analysis will include and improve upon all of systems engineering's current discrete event optimization functions; but, more importantly, it will extend forward in time to include accurate estimates for various design, material, and process selection options. In some instances, it may also include the determination of the optimum product concept to satisfy the intended customers' needs and cost constraints.

Figure 3.3 provides a glimpse into the various inter-connections within the operations function that need to taken into account in a properly designed engineering cost analysis.

 

Equipment

Information

Tooling

 

Raw Materials

Raw Materials    
   

Labor

Labor Manufacturing System    

Manufacturing System

   
Labor Manufacturing System    

Purchased

Components

Components      
     
 

Energy

Suppliers

Services

Waste

Waste

Finished Goods

Figure 3.3: Second Generation Engineering Cost Analysis

As a rule of thumb, 70 percent of the cost of the product or service is firmed up by the time the conceptual design has been completed. By the time the system definition is completed 80 percent of the cost is finalized and 90 percent of the cost is firmed up before production. For example, the geometrical shape of a part or assembly determines the subsequent manufacturing processes by which it may be manufactured. This, in turn, limits the materials to just those few that are suitable for those processes.

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Product and Product Design

suitable for those processes. 55 Product and Product Design Source: M Lilienthal, Defence Modelling and Simulation

Source: M Lilienthal, Defence Modelling and Simulation Office, “Observations on the use of Modelling and Simulation,” 2003.

Figure 3.4: Locking of Product Costs and Design

The impact of the design process on costs is shown in Figure 3.4. It shows how costs are firmed up and it will be seen that “the majority of cost reduction opportunities are lost prior to the actual production.”

These decisions are difficult because there is no guarantee for success. Two out of three new products fail after launch. Therefore, the key observations on product development recommended by the expert committee on ‘Bridging Design and Manufacturing’ setup by the national research Council, U.S.A., after a series of hearings from industry, in February 2003, should be of great interest:

Continue the early collaborative exploration of the largest possible space across the lifecycle, including manufacturing, logistics, time-phased requirements, and technology insertion. technology insertion.

Perform assessments based on modeling and simulation early in the development cycle – alternative system designs built, tested and operated in the computer before critical decisions are locked in and manufacturing begins. before critical decisions are locked in and manufacturing begins.

Wait to develop designs until requirements are understood.critical decisions are locked in and manufacturing begins. Requirements are the key. Balance them early. Once

Requirements are the key. Balance them early.Wait to develop designs until requirements are understood. Once the design is drawn, the cost and

Once the design is drawn, the cost and weight are set.understood. Requirements are the key. Balance them early. No amount of analysis can help a bad

No amount of analysis can help a bad design get stronger or cheaper.are understood. Requirements are the key. Balance them early. Once the design is drawn, the cost

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Operations Management Remember that 80 percent of a product's cost is determined by the number of parts,

assembly technique, manufacturing processes, tooling approach, materials, and tolerances.

3.4.3 Measuring Costs and Identifying Waste

Operations Management is interested in enhancing value. Cost reductions often translate directly into increases in value if they outweigh changes in performance. Like the other inputs to the value equation, the costs are composed of a variety of different elements. For example, the costs relevant to the purchase decision could include one or more of several categories:

Acquisition cost: The purchase price of a car, for instance

Repair costs: The cost of replacing a broken part

Maintenance costs: The cost of oil changes and tune-ups

Operating costs: The cost of gas and tires

Salvage/resale costs: The cost recovered upon selling a car

Disposal costs: The cost of disposing of a wrecked car

Furthermore, managers can break down costs to express them quantitatively or qualitatively.

A major problem in many corporate accounting systems has been that overhead costs are precisely applied to the products that they support. Effective performance measurement requires each product to bear its fair share of all costs incurred to create, make, sell, and service. Direct costs pose no major problem; managers simply record all of the labor, materials, and other resources used by a product. However, assigning overhead costs becomes more difficult. Unlike direct costs, these costs seldom vary with changes in output.

“Marketers know well that people like to buy things cheaply, but they do not like cheap things.” This statement describes both the major attraction and the problem of emphasizing cost as the firm's major source of value.

Customers want at least the same performance for a lower cost, not simply less for less. A cost driven approach to value treats performance as a given and focuses on reducing cost. For example, this approach has been successful in Bajaj Auto. It has been successful in inculcating a concept in its workforce of lower costs means better quality.

The firm should be able to measure customer satisfaction, to evaluate customer service costs. It is cheaper to keep a good customer happy than to win one of your competitor’s good customers. Customer satisfaction can be measured by the use of the concept of Lifetime Value of a Customer, which is an estimate of the stream of income a firm can expect to receive from a satisfied good customer. This is a useful concept in that, like value, it forces all within a system to focus on keeping customers satisfied and coming back.

Operations management system must examine both the product it is selling and the processes it uses to deliver and service the product, to achieve this objective. It should identify product features that customers do not value highly or processes or parts of processes that contribute unnecessarily to cost. Activities that do not add value are waste, if they are not support activities. Unnecessary product features that don’t add value are waste – these need to be eliminated.

Using a waste reduction approach helps reduce the excessive emphasis on cost reduction. Cost reduction programs that ignore the negative effects on lead-time,

flexibility and quality will not enhance a firm’s competitiveness in the long run. For example, a firm that uses cheaper material that reduces quality to lower cost may save money in the short term. However, over the long haul they reduce the ability of the firm to deliver a product consumers value. They may buy the product once, but not thereafter.

Design-to-cost: Factor costs, scale effects, and productivity differentials should not be the only criteria for design decisions. Perhaps the greatest of all scope for improvement lies in design-to-cost. This means cost is taken as a basis for the final design decision.

This technique requires the organization to have experience in systems optimization and good knowledge of the manufacturing processes involved. Often the supplier has this knowledge. For example, the amount of costly platinum needed for an automotive catalytic converter used by BMW was considerably reduced when a supplier’s experience in flow optimization was applied at an early stage of development.

Exchanges of experience between manufacturer and supplier often bring to light unexpected opportunities for making improvements. One German manufacturer sent a standard part to Japan for redesign and a comparative quotation, and initially had its expectations confirmed: the Japanese supplier could deliver around 30 percent cheaper.

The German manufacturer was surprised at the second attempt, when it sent a much more complex part for development. The Japanese supplier was some 18 percent more expensive than the company itself, despite the redesign. A closer look at the Japanese supplier’s redesign explained the results. On its own, the complex part offered hardly any optimization opportunities, being interconnected with too many other components.

By optimizing the total system – redesign and fresh development of all the components, the Japanese supplier revealed the full potential for cost reduction. Once the costs of the optimization had been properly allocated to the total system, the Japanese alternative proved to be more cost-effective in the long term than in-house development had been.

3.4.4 Design for Manufacturability (DFM)

The design of a system or product involves the principal task of evolving a form that can support the functions required by the system or product. The design must be optimized with regard to cost, technical requirements and value considerations of the customer. The challenge is to use resources wisely.

This has given rise to a number of techniques and created a number of tools that are being practiced in industry, focused to provide the greatest value of the product to the consumer and optimize the production process and capacity. Amongst the best known amongst these is the Design for Manufacturability (DFM) technique and Design for ‘X’ (DFX), which is a special case of DFM.

DFM is the process of designing a product for efficient production maintaining the highest level of quality. It is intended to avoid more complex and expensive product designs to simplify assembly operations.

The flowchart for the DFM process is given in Figure 3.5. Some guidelines to determine whether the design is good enough are given below:

1. Minimize the number of parts

2. Develop a modular design

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Product and Product Design

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4.

Avoid separate fasteners

5.

Eliminate adjustments

6.

Design for top-down assembly

7.

Design for minimum handling

8.

Avoid tools

9.

Minimize sub-assemblies

10.

Use standard parts when possible

11.

Simplify operations

12.

Design for efficient and adequate testing

13.

Use repeatable and understood processes

14.

Analyze failures

15.