Operations Management

Intro to OM
● Operations Management = studies and improves the activities that create value in the
form of g/s
○ Operations = Set of activities that creates value in the form of g/s by
transforming inputs into outputs
○ Planning & execution of transforming of activities
○ Transformations
■ Physical = Manufacturing
■ Locational = Transportation
■ Exchange = Retail
■ Physiological = Health Care
■ Psychological = Entertainment
■ Informational = Call Center
○ G/S
■ Goods: Farming,Mining, Construction, Manufacturing…
■ Services: Transportation, Exchange, Entertainment, Communication
○ Performance Measure
■ Productivity = Output / Input
■ Single Factor Productivity = Output / Single Factor Input
■ Labour Productivity = Output / Labour Input
○ How to Improve Productivity
■ Output (↑) / Input (↓)
■ Technology, Labour Skills, Management Decision
○ Productivity Measures
■ Capital Productivity = Output / Capital Cost
■ Machine Productivity = # of pages printer per printer
■ Energy Productivity = Litre of water turned into ice / Kwh by freezer
○ Multi-Factor Productivity
■ Output / Input1 + Input2 + InputN
■ MFP = Output / Labour + Overhead
■ Marginal Cost = Input / Output
○ Not Captured by Productivity
■ Wait time
■ Quality
● Cost vs Quality
○ Low Cost “low” quality
○ High Cost “high” Quality
● Trade Off Cost & Quality
 ○ Develop a mission
■ Purpose
■ Provide boundaries & Focus
■ Make strategy consistent

Operations Strategy
● Operations Strategy = Coordinated set of operational policies, objectives and action
plans in order to fulfill your mission
○ Differentiation = Innovative Design, Customer experience
■ Uber vs Taxi
○ Cost Leadership = Low prod costs, effective use of resources
■ Walmart’s supply chain management
○ Response = Quickness, Reliability, Flexibility
■ Amazon Prime
● Why study OM?
○ OM as an essential Function in an Organization
■ Airline Example
● Operations
○ Ground Support equipment
○ Flight Operations
○ Management Science
● Finance / Accounting
○ Accounting
■ Payables, Receivables, General Ledger
○ Finance
■ Cash Control, Inter.Exchange
● Marketing
○ Traffic Admin
■ Reservations, Schedules, Tariffs
○ SSales, Advertising
○ Organizations save billions by being operationally efficient
○ OM helps save Lives
■ Lean methodology
● Reduce Wasteful Activities
○ Impact of OM
■ Activities in all areas (marketing, Finance, Accounting) Interrelated
● Modelling
○ Models = Simplified presentation of a real life object, scenario
○ Mathematical Models
■ Optimization Model
● Maximize profits -- Profit = Rev - Exp
 ■ Regression Model
● Sales = a - b X Price
■ Probabilistic Models
● Random Variables
● Histograms, distribution, prob density curve
● CLT
○ Methods to Solve Models
■ Critical path Method - PM
■ Bottleneck Analysis - Project Analysis
■ Simulation

Project Management
● Project = Finitre work with a clear goal that you’d like to bring to life
○ Books, Albums, Films,
○ Temporary Operations
○ Managing Projects
■ Planning (Before Project Starts)
● Define Project : Goals, Budget
● Work Breakdown Structure (WBS)
○ Divide project into tasks, divide tasks into subtasks…..
● Teams
● Resources
● Assign people to Tasks
■ Scheduling (A bit closer to the project start)
● Timeline
○ Schedule resources & deliverables
○ Gantt Chart
■ Columns: Time Periods ( Months, Weeks, Days)
■ Rows: Activities and in which periods they are perf
○ Critical Path Method CPM
■ Helps develop a reasonable timeline
■ 4 Pieces of Info
● Earliest Start Time (ES)
● Earliest Finish Time (EF)
● Latest Start Time (LS)
 ● Latest Finish Time (LF)

■ Forward Pass = Computes the ES and EF Times

● No Predecessors - ES = 0
● For all Nodes, EF = ES + Activity Duration
● Predecessors - ES = MAX (EF of all
predecessors)

■ Backward Pass = Computes the LS and LF Times

● Finish with a backward pass, after Forward
P
● Last Node (No Successors), LF = Project
Completion Time
● For all Nodes: LS = LF - Activity Duration
● Successors: LF = MIN (LS of all
Successors)
■ Slack (Idle) Time of an Activity
● Slack = Length of time an activity can be
delayed without delaying the entire project
○ LS - EF OR LF - ES = Slack
○ Any activity with slack = 0 is
CRITICAL (cannot be delayed)
■ Critical Path = Any path from 1st activity to the last
that has only critical activities
● If any critical activity is delayed, project will
be delayed
● Several Critical Paths may exist
○ Project Crashing = To shorten the duration of a project
■ 1. Find the crash cost / unit for each activity in
network
■ 2. Find Critical Path
 ■ 3. If there's only 1, select activity on this path
● That can be crashed
● Has smallest crash cost/ period
■ If there are multiple critical paths, select 1 activity
from each CP
● Each Selected activity can be crashed
● Total crash cost for rall selected activities is
the smallest
■ If desired completion date has been completed,
stop if not go back to step 2.

● Sequence Activities
○ Network Model
■ Every Activity is represented by a node (Circle)
■ An arrow from one activity to another represents
the flow of activities
● Immediate precedence activities
○ Last activities that are required to
perform a task
● MUST PERFORM ACTIVITY A BEFORE B
■ Convention
● Start Node and End Node
■ Controlling
● PERT = Program Evaluation Review Technique
○ Models the randomness of time
○ 3 Estimate Approach
■ Optimistic = Everything goes according to plan
■ Pessimistic = Assumes very unfavorable conditions
■ Most Likely Time = Most Realistic Estimate
○ Uncertain Times
■ Mean Completion Time = t = a + 4m + b / 6
■ Variance = σ^2=((b-a)/6)^2
● B = pessimistic time
● A = optimistic time
● M = most likely time
●
 Process Analysis
● Process = Repeated operations that convert inputs into outputs
○ Process Focus Strategy- JOB SHOP = HOSPITAL / RESTAURANT
■ Similar activities grouped together
■ Products follow different paths
■ High Variety = Low Volume
■ Broadly Skilled Operators (General Purpose)
■ Make-to-Order
● PROS: Flexibility, Customization
● CONS: Difficult to Schedule, Low utilization, Slow Flow, High
Variable cost, High work in progress,
■ Many Inputs = Many Diff Outputs
○ Product Focused Strategy = GASOLINE
■ Facilities organized by product
■ Continuous Production
■ High Volume - Low Variety
■ Specialized equipment
● PROS: Low VC, Fast Flow, Easier prod scheduling & control
○ High Equipment Utilization
○ Low WIP
● CONS: Low Flexibility & High FC
■ Few Inputs = Output variation in size/shape/characteristics
○ Repetitive = CARS, HOME APPLIANCES
■ Assembly Lines
■ Characterized by modules
● Parts / assemblies are made before
■ Balance b/w volume and variety
■ Raw Material inputs = Modules combined for many outputs
○ Mass Customization = DELL COMPUTER / NIKE SHOES
■ Rapid, low cost production to satisfy unique customer desire
■ Flexibility & Efficiency
■ Can be hard
● How to Describe Production/Service Process?
○ Flowchart
○ Time-Function Mapping
■ Adds time to flowchart
■ Helps identify and eliminate waste
■ Process Improvement
 ○ Value Stream Mapping VSM
■ Identifies value-adding activities in the process
■ Start with customer but also includes supplier
■ Accounts for the management decisions
○ Service Blueprint
■ Analyzes process with high service content
■ Focuses on interactions b/w provider and customer
■ Poka-Yoke = A foolproof technique ensuring the production of good uit
and provision of good service every time
○ Process Chart
■ Uses symbols to indicate activities
■ Includes times for each activity & distance for transportation
■ Identifies value-adding activities and waste
● Transportation, inspection, delay & storage
● How to Measure a Process?
○ Capacity
■ Max number of units a process can output in a given period of time
● Ex: 200 customers/ day
■ Design Capacity = Max theoretical output in a given time under ideal
conditions
■ Effective Capacity = Capacity a firm expect to achieve given current
operation constraints
○ Utilization = % of designed capacity achieved
■ Utilization = actual output / design capacity
■ Efficiency = actual output / effective capacity
○ Flow Rate (Throughout Rate)
○ Process Time
○ Process Cycle Time (Flow Time)
○ Capability
● How to Analyze a Process?
○ Identifying the flow unit
■ Cars, furniture, customer orders
○ Measuring the process performance
■ Capacity, utilization, process time...
○ Improving the process performance
■ Can we produce Faster?
○ Analyzing a single-station Process
■ Process Time = Time unit spends at the station
● Capacity = m / process time
○ M = # of resources used at station
■ Process Cycle Time (Flow Time) = Time for a unit to go through the entire
empty system
● Process Cycle Time = Process Time
■ Actual Output Rate = Min (Input Rate, Capacity)
 ■ GANTT Chart
○ Analyzing a multi-station Process
■ Process Time of a station = time to process a unit at the station
■ Process Cycle Time (Flow Time) = Time for a unit to go through an entire
empty system
■ Process Time of the System = Process time of the slowest link in the
serial system
○ Identifying the “Constraint”
■ Bottleneck Station = Weakest Link of the System
● Station with the lowest capacity or longest process time
■ Process Time of the System = Process Time of Bottleneck
■ Capacity of System = Capacity of Bottleneck
■ Output Rate of System = Output of Station / Capacity of Station
○ Multi Station Process with Parallel Stations / Lines
■ Adding a station / worker at the right place
■ Single out Two Lines
○ Key Idea = Match Capacity with Demand
■ Too Much Capacity = Expensive
■ Too Little Capacity = Loses Customers
● Managing Capacity = Add Facilities or add Personnel or
subcontract or schedule jobs
■ Managing Demand
● Too Much Demand
○ Short Term Solution: Discourage Demand (raise price)
○ Long Term Solution: Increase Capacity in the long term
● Too Little Demand
○ Stimulate Demand ( Reduce Price, aggress marketing)
● Seasonal Demand
● Theory of Constraints
○ How to Increase Capacity
■ Identify Bottleneck
■ Add More resources to the bottleneck
○ Steps
■ Identify the constraint
■ Develop a plan for overcoming the constraints
■ Focus resources on accomplishing step 2
■ Reduce the effects of constraints by offloading work / expanding
capability
■ Once overcome, go back to step 1 & find new constraint
○ Principles of Bottleneck Management
■ Release work order to the system at the pace of the bottleneck
■ Lost time at the bottleneck represents lost time in the whole system
■ Increasing capacity on non-bottleneck station is a mirage
 ■ Increasing Capacity of a bottleneck = increase in capacity of the whole
system
● Analyzing Processes with Multiple Types of Flow Units
○ When Diff Types of Services are provided
○ To find bottleneck and capacities, assume the input rate is very large
○ Process Time of System = 1 / Capacity Rate

Quality Management
● Quality = Degree of Excellence
● QUALITY DEFINITION by the ASQ
○ Totality of features/characteristics of a product/service that bears on its
ability to satisfy stated / implied needs.***
○ High Quality Products
■ Desirable Attributes
■ Based on customer’s demand
○ Low Quality
■ Lack of Attributes that customers want
○ 2 Perspectives of Quality
■ User-Centric = quality focused on what customers want
● Good performance, more features, timely customer service
■ Product-Centric = Quality focused on the product characteristics
● Specific attributes that can be measured
■ Manufacturing-Centric = Quality focused on the production process
● Conformance to standards, output meets design, few defects
● Quality Standards
○ International Quality Standards are prominent
■ Standard = set of common procedures and metrics that assure both
customers and suppliers that a level of quality is being adhered to
● HACCP = For Food Processors
● Lack of Quality can be costly!
○ Prevention Costs = How to reduce potential defects
○ Appraisal Costs = Costs related to testing, inspection
○ Internal Failure = Costs related to reword, scrap, downtime
○ External Costs = Loss of Goodwill, Returned Goods, Liabilities
● Murphy’s Law = Anything that can go wrong will eventually go wrong
○ Make production process right the first time, before it goes wrong for the
customer later
● Total Quality Management TQM
○ Encompasses entire organization: supplier, wholesaler, customer
○ Commitment by management to have continuing, company-wide drive towards
excellence in ALL aspects that important to customer
○ Key Components
■ Continuous Improvement - KAIZAN
● Continuously analyze and improve all processes in company
○ Apply PCDA by Walter Shewhart
■ Plan - Identify the process to improve and plan
■ Do - test the plan
■ Check - is the plan working?
■ Act - if the plan works, implement it
■ Six Sigma
● Conceptual Definition = To reduce defect to lower costs, save time
& improve customer satisfaction
● Statistical Definition = No More than 3.4 defects per million
○ 99.9966% of the time, quality is within limits defined by
management
○ Output from a process is a random variable
■ Three Sigma Program
● Probability (mean - SD <Normal Random
Variable < mean + SD) = X
● Defect Rate = 1 - X
■ Six Sigma Program
● Prob (mean - sd <norm random
var<mean+sd)
● Steps DMAIC
○ Define - identify areas to improve
○ Measure - measure work and collect
data
○ Analyze - data
○ Improve - Determine steps needed
for quality improvement &
transparency
○ Control - Control new process
■ Employee Empowerment
● Getting all employees involved in the improvement of
products/processes
○ Explain importance of initiative
○ Be role model
○ Authorize teams make decisions
○ Provide positive enviro
○ Recognize efforts - even unsuccessful
○ Reward success
■ Benchmarking
● Demonstrated standards, best practices to use as perf standards
■ Just-in-time (Lean Manufacturing)
● Developed by Toyota 1960s
 ● Make process more efficient by
○ reducing its complexity
○ Identifying and eliminating sources of waste
● Principles
○ Customer defines value
○ Customer initiates production (make-to-order)
○ Empower people who add value
○ Total cost = performance metric
■ Taguchi Concepts
● Quality Robustness = Makes prod process less sensitive to
adverse effects
● Quality Loss Function - L = D^2 C
○ L = Loss to society
○ D = Distance from target
○ C = Unit penalty cost of deviation from target
● Target-Oriented Quality
○ Target Oriented Quality = more product in best category
■ Brings products toward target value
○ Conformance Oriented Quality = keeps products within 3
SD
■ Knowledge of TQM Tools
● Check Sheets
● Scatter Diagrams
● Cause-and-effect diagrams AKA Fish-Bone Chart
○ Identifies process elements (causes) that might affect an
outcome
● Pareto Charts
○ Identify problems or defects in descending order of
occurrence
● Flowcharts = describes steps to complete process
● Histograms - Distribution showing frequency of occurences
● Process and Control Charts
○ Criticism of TQM
■ May result in gap b/w amount of quality implemented and how much is
really necessary
■ May not be tied to:
● Market Performance
● Overall Profitability
● Customer Satisfaction
○ Obstacles
■ What customers want? = Incredibly difficult to ascertain
■ No Company Wide Definition of Quality
■ Internal Resistance to Company-wide changes
■ Not in-tune with customer needs
 ■ Strong Hierarchical work culture
■ Ensuing suppliers are providing high-quality products
■ Company standard vs suppliers standard

Process Capability & Statistical Process Control

● How to Measure Quality

○ Whether processes are capable in terms of quality despite randomness:
■ Process Capability Ratio (Cp) = finds distance b/w upper lower limits =
< 6SD
● Cp = Upper Specf Limit - Lower Specf Limit / 6SD
○ Cp - is always positive**
○ Capable = Cp≥1
■ Process Capability Index (Cpk) = find distance b/w mean and each
specification limits is smaller or larger than 3SD
○ Cpk = min{( UL- Process Mean/3SD), (Process mean -
LL/3SD)
○ Capable = Cpk≥1

● Upper and Lower Specification Limit = Points beyond which the

output is assumed to be defective (g/s)
● Output is acceptable when within the upper and lower
specification limits
● Statistical Process Control SPC = Technique to ensure that processes conform to
standards
○ Process Variability = All process exhibit variations
■ Natural Variations = Common Causes - Distribution stays the same
● Inherent in all processes
● Predictable probabilistically
 ● Distribution of natural variation is stable over time
■ Assignable Variations = Special Causes - Distribution is unstable
● Relatively strong changes OUTSIDE THE PATTERN
● Assignable = underlying causes can be discovered and corrected
● How to detect Assignable Variation?
○ Control Chart to detect assignable variation
■ Mean checked by X-Chart
■ Range checked by R-Chart
○ Constructing a Control Chart
■ X-Chart
● Measure process by taking samples & find
sample means
● Plot the sample means
● Calculate mean of sample means
● Construct UL & LL
○ Pick a confidence level 1-a ( 95.45%
or 99.73%)
○ Find the corresponding z value
■ Z = 2 if 1-a = 95.45 %
■ Z = 3 if 1-a = 99.73%
■ UCL=x + ̿ z σ/√n
■ LCL=x -̿ z σ/√n
○
■ SPC is Hypothesis Testing
● Prob(mean - 3SD ≦ X(bar) ≦ mean + 3SD)
= 99.73%
● If Null Hypothesis is true = sample mean
x(bar) is b/w LCL and UCL
● IF sample mean X(bar) falls outside the LCL
& UCL, then NULL HYPOTHESIS IS
REJECTED
■ If we don't know SD
● SD measures variability just like RANGE
● Range = difference b/w largest & smallest
item

● X(barbar) = Mean of the sample means

● R (bar) = Average of range in m samples
● A2 = Factor to be found in lookup table
○ Corresponds to sample size n
■ R-CHART
 ● Calculate range of each sample
● Calculate average range
● Find upper D4 and Lower D3 from TABLE
○ UCL = D4 x R(bar)
○ LCL = D3 X R(bar)
○ Using Mean & Range Charts Together
■ Measure the Process
■ Compute X(bar) and R(bar)
■ Graph the sample means and ranges
■ Construct UCL and LCL for both
■ Investigate points that are out of control
■ Collect additional samples and REDO
● X-Chart Detects Shift in central Tendency
● X-Chart cannot detect increase in
dispersion
● R-Chart cannot detect change in mean
● R-chart detects increase in dispersion
● P-Chart - Is the probability of defects stable?
○ For each sample, measure the fraction of defective items
■ Sample 1 has 6 defect in 100 observations = 6/100
■ Choose Z
● Z = 2 for 99.45% CI
● Z = 3 for 99.73% CI
■ Calculate Mean & SD:

■ SET UCL & LCL:

● Patterns in Control Charts

○ One plot out
above or below =
investigate because
process is out of
control
○ Trends in
either direction =
investigate cause of
progressive change
○ Two plots ver close to each other = investigate cause
○ Run of 5 above central line = investigate for cause
○ Plots right at the upper or lower control limit = erratic
behaviour investigate