Chapter 10

Producing World
Class Goods and
Services

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Review: Mission & Strategy

Mission - where are
you going?

Organizations
purpose for being
Answers What do
we provide society?
Provides boundaries
and focus

Hard Rock Caf

Our Mission: To spread the spirit of Rock n
Roll by delivering an exceptional
entertainment and dining experience. We
are committed to being an important,
contributing member of our community and
offering the Hard Rock family a fun, healthy,
and nurturing work environment while
ensuring our long-term success.

Figure 2.2

Strategic Process to Achieve the

Mission
Organizations
Mission

Organizational
Strategy

Marketing
Strategy

Operation
Strategy

Finance
Strategy

CH 10: Operations Management

Learning Goals
Define Operations Management/Production and
explain what types of firms use it.

1.
1.
2.
3.

Discuss measurement of productivity

2.

in the service sector, and

tell how technology is leading to productivity gains in service
companies.

The 10 operations management strategic decisions

3.

4.

How operations contributes to the organizational strategy

Issues facing Canadian Operations
manufacturing vs service sectors,

Design, location, QC, etc

Explain the various manufacturing processes.

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Primary Operations Management

Issues

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What is Operations
Management?

Production is the creation of goods

& services
OM is the set of activities that
create value in the form of goods
and/or services by transforming
inputs into outputs

Operations Management
Inputs

Conversion
Process
Manufacturi
ng

UBs Dry
Cleaners

Service
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Outpu
t

Evolving Service Sector

More focus is needed on the service side

of the business to gain an competitive
advantage.
Service is all about creating a good
experience for the users of the service.
Service improves quality but quality
difficult to measure because dont have
inputs and outputs to compare.
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Productivity in Services and

Technology

The service industry has always

used technology to improve
customer satisfaction.
Interactive computer networks
available from banks, stockbrokers,
travel agents and information
providers of all kinds.
Internet sales in all categories.
Nickels 6e/Copyright 2007 McGraw-Hill
Ryerson

Ten Strategic OM Decisions

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Service and product design

Quality Management
Process and capacity design
Location
Layout design
Human resources and job design
Purchasing & Supply-chain management
Inventory
Production scheduling
Maintenance

Ten Strategic OM Decisions

1.

Service and product design

What does R&D do?

What goods or services should we
offer?
How should we design these products
and services?
CAD/CAM

Computer-Aided Manufacturing
(CAM)
Utilizing specialized computers
and program to control
manufacturing equipment
Often driven by the CAD system
http://www.centroidcnc.com/video_catalog.html

Legal and Ethical Standards

For Design
Federal Drug Administration
CSA www.csa.ca/
Transport Canada
http://www.tc.gc.ca/en/menu.htm
Childrens Product Safety Act

Ten Strategic OM Decisions

2. Quality Management

How do we define quality?

Who is responsible for quality?
What TQM systems are there?

6 sigma
ISO
SPC

What is Quality?
The totality of features and
characteristics of a product or
service that bears on its ability to
satisfy stated or implied needs
American Society for Quality

Costs of Quality
Prevention costs - reducing the potential for
defects
Appraisal costs - evaluating products, parts,
and services
Internal failure - producing defective parts or
service before delivery
External costs - defects discovered after
delivery

Determinants of Service Quality

Reliability
Responsiveness

Credibility
Security

Competence
Access

Understanding/
knowing the
customer
Tangibles

Courtesy
Communication

Ten OM Decisions
3.

Process and capacity design

What process and what capacity will
these products require?
What equipment and technology is
necessary for these processes?
What is Lean manufacturing?

Operations Management in the

Manufacturing Sector

Production Processes

Process focus manufacturing

Assembly Line process
Continuous/Product focus
Mass Customization

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Process Design Options

Variety of Products

High

Process-focused
JOB SHOPS
(Print shop, emergency
room, machine shop,
fine dining

Moderate

Repetitive
(modular) focus
ASSEMBLY LINE
(Cars, appliances,
TVs, fast-food
restaurants)

Low
Low

Moderate
Volume

Mass Customization
Customization at
high Volume
(Dell Computers PC)

Product focused
CONTINUOUS
(steel, beer,
paper, bread,
institutional
kitchen)
High

Lean Manufacturing
Use JIT techniques
Build systems that help
employees produce perfect parts
Reduce space requirements
Develop close relationships with
suppliers

Lean Systems
Educate suppliers/partners
Eliminate all but value-added
activities
Develop the workforce
Make jobs more challenging
Reduce the number of job
classes

Lean Manufacturing

Reduction of Waste

What is waste?

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Seven Wastes
Overproduction
Queues
Transportation
Inventory
Motion
Over-processing
Defective product

Ten OM Decisions
4. Location
Where should we put the facility?
On what criteria should we base the
location decision?

Factors That Affect Location

Decisions
Labor Productivity
Exchange Rates and Currency Risks
Costs
Political Risk, Values, and Culture
Proximity to Markets
Proximity to Suppliers
Proximity to Competitors (Clustering)

Ten OM Decisions
5.

Layout design

How should we arrange the facility and

material flow?
How large must the facility be to meet
our plan?

Typical Layout Design

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Ten OM Decisions
6.

Human resources and job design

How do we provide a reasonable work

environment?
How much can we expect our employees
to produce?

HR & Employee Empowerment

Getting employees involved in product
and process improvements
85% of quality problems are due to process and
material

Techniques

Build communication networks that include employees

Develop open, supportive supervisors
Move responsibility to employees
Build a high-morale organization
Create formal team structures

Ten OM Decisions
7.

Purchasing & Supply-chain

management

Should we make or buy this component?

Supply Chain Management

The Supply Chain is the sequence of

firms that focus on getting the right
amount of the right products to the
right place at the right time at the
lowest possible cost.
Supply Chain Management is the
integration and organization of
information and logistics activities
across firms in the supply chain.
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Ten OM Decisions
8.

Inventory

How much (The EOQ),

When? ROP
JIT

Record Accuracy
Accurate records are a critical
ingredient in production and
inventory systems
Allows organization to focus on
what is needed
Necessary to make precise decisions
about ordering, scheduling, and
shipping
Incoming and outgoing record
keeping must be accurate
Stockrooms should be secure

Inventory:
Holding, and Setup Costs
Holding costs - the costs of
holding or carrying inventory
over time
Setup costs - cost to prepare a
machine or process for
manufacturing an order (also
ordering it)
Flexible manufacturing

Holding Costs
Category
Housing costs (including rent or
depreciation, operating costs, taxes,
insurance)

Cost (and Range)

as a Percent of
Inventory Value

6% (3 - 10%)

Material handling costs (equipment lease or

depreciation, power, operating cost)

3% (1 - 3.5%)

Labor cost

3% (3 - 5%)

Investment costs (borrowing costs, taxes,

and insurance on inventory)
Pilferage, space, and obsolescence
Overall carrying cost

11% (6 - 24%)
3% (2 - 5%)
26%
Table 12.1

Reduce Setup Times

Initial Setup Time

Step 1

90 min

Separate setup into preparation and actual

setup, doing as much as possible while the
machine/process is operating
(save 30 minutes)

Step 2

Move material closer and

improve material handling
(save 20 minutes)

Step 3

Standardize and
improve tooling
(save 15 minutes)

Step 4
Step 5
Figure 16.4

Use one-touch system to eliminate

adjustments (save 10 minutes)
Training operators and standardizing
work procedures (save 2 minutes)
Repeat cycle until subminute
setup is achieved

60 min

45 min

25 min
15 min
13 min

EOQ Model
Objective is to minimize total
costs
Curve for total
cost of holding
and setup

Annual cost

Minimum
total cost
Holding cost
curve
Setup (or order)
cost curve

Optimal
order
quantity

Order quantity

Just-In-Time (JIT) Example

Work in process
inventory level
(hides problems)

Unreliable
Vendors

Scrap

Capacity
Imbalances

Just-In-Time (JIT) Example

Reducing inventory reveals
problems so they can be solved

Unreliable
Vendors

Scrap

Capacity
Imbalances

Ten OM Decisions (End of lect)

9.

Production scheduling

MRP,
MRP(II), &
ERP

Modern
Production Techniques
o

Materials Requirement Planning (MRP)

o

Computer based operation system that uses

sales forecasts to ensure that needed parts
and material are available at the right time
and place.

Enterprise Resource Planning

o

Computer application that enables multiple

firms to manage all operation on the basis of
a single integrated set of corporate data.

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Enterprise Resource Planning

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Ten OM Decisions
10.

Maintenance

Who is responsible for maintenance?

When do we do maintenance?

Summary
1)

2)

3)

4)

Operations Management transforms resource into goods

and services and is used by firms in both the manufacturing
and the service sectors.
Functions involved in both the manufacturing and service
sectors includes ten strategic decisions will improve the
productivity of companies
Service productivity is difficult to measure but technology is
enabling firms to realize gains in this sector.
Manufacturing processes physically or chemically change
materials.

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Ryerson