1-1

Introduction to Operations Management

IntroductionOperations as a Competitive
Weapon

1-2

Introduction to Operations Management

Operations-A Process View

Inputs
Land
Labor
Capital

Transformation/
Conversion

Outputs
Goods
Services

process
Feedback

Control
Feedback

Feedback

1-3

Operations ManagementDefinition

Introduction to Operations Management

The operations function

Consists of all activities directly related
to producing goods or providing services
The management of systems or processes
that create goods and/or provide services

1-4

Introduction to Operations Management

Food Processor
Table 1.2

Inputs

Processing

Outputs

Raw Vegetables
Metal Sheets
Water
Energy
Labor
Building
Equipment

Cleaning
Making cans
Cutting
Cooking
Packing
Labeling

Canned
vegetables

1-5

Introduction to Operations Management

Hospital Process
Table 1.2

Inputs
Doctors, nurses
Hospital
Medical Supplies
Equipment
Laboratories

Processing

Outputs

Examination
Surgery
Monitoring
Medication
Therapy

Healthy
patients

1-6

Introduction to Operations Management

Manufacturing vs Service
Characteristic

Manufacturing Service

Output

Tangible

Customer contact

Low

High

Uniformity of input

High

Low

Labor content

Low

High

Uniformity of output

High

Low

Measurement of productivity

Easy

Difficult

Opportunity to correct
quality problems

High

Low

High

Intangible

1-7

Introduction to Operations Management

Goods and Services-Key Differences

1.Customer contact
2.Uniformity of input
3.Labor content of jobs
4.Uniformity of output
5.Measurement of productivity
6.Production and delivery
7.Quality assurance
8.Amount of inventory

1-8

Introduction to Operations Management

Business Operations Overlap

Operations

Marketing

Finance

1-9

Introduction to Operations Management

Adding Value-The Value Chain

The difference between the cost of inputs
and the value or price of outputs.
Value added
Inputs
Land
Labor
Capital

Transformation/
Conversion
process

Outputs
Goods
Services

Feedback

Control
Feedback

Feedback

1-10 Introduction to Operations Management

Operations-The Supply
Chain View

Customer
relationship
management

Supplier
relationship
process

Figure 1.4

Internal
processes

Copyright 2010 Pearson Education,

Inc. Publishing as Prentice Hall.

External customers

External suppliers

Support Processes

1-11 Introduction to Operations Management

Business Operations Overlap

Operations

Marketing

Corporate

1-12 Introduction to Operations Management

Flows in a Supply Chain

Information
Product
Funds

1-12

Customer

1-13 Introduction to Operations Management

Global Environment and

Challenges for Operations
Managers

Global Competition
Productivity Improvement-service
sector productivity gains much lower
in comparison with the
manufacturing sector
Rapid Technological Change
Ethical, Workforce Diversity and
Environmental Issues

1-14 Introduction to Operations Management

Operations Management Decisions

Strategic
Planning
Tactical

1-15 Introduction to Operations Management

Operations Management Tools and

Techniques
Forecasting
Lean Systems
Operations Research

1-16 Introduction to Operations Management

Lean Systems

1-17 Introduction to Operations Management

Lean SystemsCharacteristics

Pull method of work flow-a method in which customer demand activates

production of the service or item.
Quality at the Source-one approach is to use poka-yoke or a mistakeproofing method aimed at designing fail-safe systems that minimize
human error.
Small lot sizes/set up times.
Uniform workstation loads.-advance scheduling,differential pricing.
Standardized components and work methods-this increases repeatability..
Close supplier ties-frequent supplies,short lead time,high quality..
Flexible workforce-to help relieve bottlenecks as they arise without the
need for inventory buffers.
Line flows-OWMM and Group Technology methods.
Automation-ex. bank ATMs.
Five S-Sort,Straighten,Shine,Standardize,Sustain.
Preventive maintenance.

1-18 Introduction to Operations Management

Continuous improvement (kaizen)

using Lean Systems approach
Excess capacity or inventory hides
underlying problems with processes that
produce a service or a product
(synonymous to water surface hiding the
rocks).
Lean Systems provide the mechanism for
management to reveal the problems by
systematically lowering capacities or
inventories till the problems are exposed.

1-19 Introduction to Operations Management

Lean Systems-Mechanisms
The Kanban System-A Japanese system used to
control the flow of production through a factory.
Value Stream Mapping-A qualitative tool for
eliminating waste or muda that involves a
current state drawing,a future state drawing and
an implementation plan.
JIT II-The supplier is brought into the plant to be
an active member of the purchasing office of the
customer by way of an in-plant representative
of the supplier stationed full-time at the suppliers
expense..

1-20 Introduction to Operations Management

The Seven types of Waste or Muda

Waste

Definition

1. Overproduction

Manufacturing an item before it is needed.

2. Inappropriate
Processing

Using expensive high precision equipment when simpler

machines would suffice.

3. Waiting

Wasteful time of people incurred when product is not being

moved or processed.

4. Transportation

Excessive movement and material handling of product between

processes.

5. Motion

Unnecessary effort related to the ergonomics of bending,

stretching, reaching, lifting, and walking.

6. Inventory

Excess inventory hides problems on the shop floor, consumes

space, increases lead times, and inhibits communication.

7.

Quality defects result in rework and scrap, and add wasteful

costs to the system in the form of lost capacity, rescheduling
effort, increased inspection, and loss of customer good will.

Defects

1-21 Introduction to Operations Management

Operations Research

1-22 Introduction to Operations Management

What is Operations
Research?

Operations Research is the scientific

approach to execute decision making,
which consists of:
The art of mathematical modeling of
complex situations
The science of the development of
solution techniques used to solve
these models
The ability to effectively communicate
the results to the decision maker
22

1-23 Introduction to Operations Management

Operations Research Models

Deterministic Models

Stochastic Models

Linear Programming

Discrete-Time Markov Chains

Network Optimization

Continuous-Time Markov Chains

Integer Programming

Queuing Theory (waiting lines)

Nonlinear Programming Decision Analysis

Inventory Models

Game Theory
Inventory models
Simulation
23

1-24 Introduction to Operations Management

Forecasting

1-25 Introduction to Operations Management

FORECAST:
A statement about the future
Used to help managers
Plan the system
Plan the use of the system

1-26 Introduction to Operations Management

Forecast Uses
Plan the system
Generally involves long-range plans related to:
Types of products and services to offer
Facility and equipment levels
Facility location

Plan the use of the system

Generally involves short- and medium-range plans
related to:
Inventory management
Workforce levels
Purchasing
Budgeting

1-27 Introduction to Operations Management

Common Features
Assumes causal system
past ==> future
Forecasts rarely perfect because of randomness
Forecasts more accurate for
groups vs. individuals
I see that you will
get an A this quarter.
Forecast accuracy decreases
as time horizon increases

1-28 Introduction to Operations Management

Elements of a Good Forecast

Timely

Reliable

i
n
ea

ng

l
u
f

e
it v
c
e
ff
e
t
s
Co

Accurate

Written

y
s
Ea

to

e
s
u

1-29 Introduction to Operations Management

Steps in the Forecasting Process

The forecast

Step 6 Monitor the forecast

Step 5 Make the forecast
Step 4 Gather and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast

1-30 Introduction to Operations Management

Types of Forecasts
Judgmental - uses subjective inputs (qualitative)
Time series - uses historical data assuming the
future will be like the past (quantitative)
Associative models - uses explanatory variables
to predict the future

1-31 Introduction to Operations Management

Judgmental Forecasts
(Qualitative)

Consumer surveys
Delphi method
Executive opinions
Opinions of managers and staff

Sales force.

1-32 Introduction to Operations Management

Time Series Forecasts

Trend - long-term movement in data

Seasonality - short-term regular
variations in data
Cycle wavelike variations of more
than one years duration
Irregular variations - caused by
unusual circumstances
Random variations (Stable)- caused
by chance

1-33 Introduction to Operations Management

Forecast Variations

Figure 3.1
Irregular
variation
Random
variation

Trend

Cycles
90
89
88
Seasonal variations

1-34 Introduction to Operations Management

Time Series Forecasts-Methods

Naive
Averaging
Trend
Seasonality
Exponential smoothing

1-35 Introduction to Operations Management

Naive Method
Uh, give me a minute....
We sold 250 wheels last
week.... Now, next week
we should sell....
The forecast for any period equals
the previous periods actual value.

1-36 Introduction to Operations Management

Nave Method

Simple to use
Virtually no cost
Quick and easy to prepare
Data analysis is nonexistent
Easily understandable
Cannot provide high accuracy
Can be a standard for accuracy

1-37 Introduction to Operations Management

Nave Method

Stable time series data

Seasonal variations
Next value in a series will equal the previous value
in a comparable period

Data with trends

F(t) = A(t-1) + (A(t-1) A(t-2))

1-38 Introduction to Operations Management

Averaging Method

Simple moving average

Weighted moving average

1-39 Introduction to Operations Management

Moving Averages

Simple Moving average A technique

that averages a number of recent actual
values, updated as new values become
n
available.

MAn =

i
i=1
n

Weighted moving average More recent

values in a series are given more weight
in computing the forecast.

1-40 Introduction to Operations Management

Simple Moving Average

Actual

47
45
43

MA5

41
39
37

MA3

35
1

8
n

MAn =

i
i=1
n

10 11 12

1-41 Introduction to Operations Management

Equation
Ft

Ft = a + bt

Ft = Forecast for period t

t = Specified number of time periods
a = Value of Ft at t = 0
b = Slope of the line

0 1 2 3 4 5

1-42 Introduction to Operations Management

Calculating a and b
n (ty) - t y
b =
n t 2 - ( t) 2

y - b t
a =
n

1-43 Introduction to Operations Management

Linear Trend Equation Example

t
W eek
1
2
3
4
5
t = 15
2
( t) = 2 2 5

t
1
4
9
16
25
t

= 55

y
S a le s
150
157
162
166
177

ty
150
314
486
664
885

y = 812

ty = 2 4 9 9

1-44 Introduction to Operations Management

Linear Trend Calculation

5 (2499) - 15(812)
12495-12180
b =
=
= 6.3
5(55) - 225
275 -225

812 - 6.3(15)
a =
= 143.5
5

y = 143.5 + 6.3t

1-45 Introduction to Operations Management

Seasonality

Multiplicative Model
Demand=Trend x Seasonality
(Seasonal Index)
Seasonality is the percentage of
average (or trend) amount

1-46 Introduction to Operations Management

Exponential Smoothing

Next forecast=(Actual)+(1- )
(Previous forecast)
is the Smoothing Constant

1-47 Introduction to Operations Management

Associative Forecasting

Predictor variables and variables of interest

Simple Linear Regression linear variation
between the two variables
Correlation coefficient r gives an indication
of the strength of relationship between the
two
variables.
http://en.wikipedia.org/wiki/Pearson_produc
t-moment_correlation_coefficient
r2>0.8 good prediction;<0.25 poor
prediction

1-48 Introduction to Operations Management

Forecast Accuracy

Error - difference between actual value and

predicted value
Mean Absolute Deviation (MAD)

Average absolute error

Mean Squared Error (MSE)

Average of squared error

Mean Absolute Percent Error (MAPE)

Average absolute percent error

1-49 Introduction to Operations Management

MAD, MSE, and MAPE

MAD

Actual

forecast
n

MSE

forecast)

( Actual

n -1

MAPE =

Actual

forecast / Actual*100)
n

1-50 Introduction to Operations Management

Example 10

Period
1
2
3
4
5
6
7
8

MAD=
MSE=
MAPE=

Actual
217
213
216
210
213
219
216
212

2.75
10.86
1.28

Forecast
215
216
215
214
211
214
217
216

(A-F)
2
-3
1
-4
2
5
-1
-4
-2

|A-F|
2
3
1
4
2
5
1
4
22

(A-F)^2
4
9
1
16
4
25
1
16
76

(|A-F|/Actual)*100
0.92
1.41
0.46
1.90
0.94
2.28
0.46
1.89
10.26

1-51 Introduction to Operations Management

Controlling the Forecast

Control chart
Tracking signal

1-52 Introduction to Operations Management

Control chart

Control chart
A visual tool for monitoring forecast errors
Used to detect non-randomness in errors

Control limits:
UCL=0+zMSE;LCL=0-zMSE (z
typically=2 or 3)
Forecasting errors are in control if
All errors are within the control limits
No patterns, such as trends are present

1-53 Introduction to Operations Management

Tracking Signal

Tracking signal
Ratio of cumulative error to MAD

(Actual-forecast)

Tracking signal =
MAD

Bias Persistent tendency for forecasts to be

Greater or less than actual values.
Value of zero would be ideal for Tracking signal.
Limits of +/-4 or +/- 5are often used for a range of
acceptable values of the tracking signal.

1-54 Introduction to Operations Management

Sources of Forecast errors

Model may be inadequate

Irregular variations
Incorrect use of forecasting
technique

Choosing a Forecasting
Technique

1-55 Introduction to Operations Management

No single technique works in every

situation
Two most important factors
Cost
Accuracy

Other factors include the availability of:

Historical data
Computers
Time needed to gather and analyze the data
Forecast horizon