Operations, Quality, and Productivity

Learning Outcomes Describe time-based competition and why it is important. Explain the differences among operations systems with respect to tangibility of products, levels of customer involvement, operations flexibility, and management of resources and technology. Discuss what is meant by “quality is a virtue of design.” Explain product, process, cellular, and fixed-position facility layouts in terms of their level of customer involvement and flexibility. Describe the similarities and differences among the planning sheet, Gantt chart, and PERT network. Explain the relationship among inventory control, just-in-time (JIT) inventory, and materials requirement planning (MRP). After studying this chapter, you should be able to:

Describe time-based competition and why it is important.

Explain the differences among operations systems with respect to tangibility of products, levels of customer involvement, operations flexibility, and management of resources and technology.

Discuss what is meant by “quality is a virtue of design.”

Explain product, process, cellular, and fixed-position facility layouts in terms of their level of customer involvement and flexibility.

Describe the similarities and differences among the planning sheet, Gantt chart, and PERT network.

Explain the relationship among inventory control, just-in-time (JIT) inventory, and materials requirement planning (MRP).

Learning Outcomes (cont’d) Explain how statistical process control (SPC) charts and the exception principle are used in quality control. Describe how to measure productivity and list three ways to increase it. Define the key terms listed at the end of the chapter. After studying this chapter, you should be able to:

Explain how statistical process control (SPC) charts and the exception principle are used in quality control.

Describe how to measure productivity and list three ways to increase it.

Define the key terms listed at the end of the chapter.

IDEAS ON MANAGEMENT at Frito Lay How would Frito-Lay’s operations systems be classified? How would Frito-Lay’s operations systems be described in terms of design? How does Frito-Lay manage its operations systems and supply chain? How does Frito-Lay control quality? What are Frito-Lay’s three top-selling products in the United States, and are its performance and productivity improving?

How would Frito-Lay’s operations systems be classified?

How would Frito-Lay’s operations systems be described in terms of design?

How does Frito-Lay manage its operations systems and supply chain?

How does Frito-Lay control quality?

What are Frito-Lay’s three top-selling products in the United States, and are its performance and productivity improving?

Time-Based Competition and Operations Time-Based Competition The use of strategies to increase the speed with which an organization goes from creativity to delivery. Throughput time The time an organization takes to turn a creative idea into an innovation, sell it, and deliver it. Operations The function concerned with transforming resource inputs into product outputs. Products A good, a service, or a combination of the two.

Time-Based Competition

The use of strategies to increase the speed with which an organization goes from creativity to delivery.

Throughput time

The time an organization takes to turn a creative idea into an innovation, sell it, and deliver it.

Operations

The function concerned with transforming resource inputs into product outputs.

Products

A good, a service, or a combination of the two.

Exhibit 14 – 1 ● How Operations Systems Are Classified, Designed, and Managed

Classifying Operations Systems Tangibility of Products Tangible Goods (e.g., computers, automobiles) Intangible Services (e.g., haircuts, dry cleaning) Mixed Goods and services (e.g., airlines)

Tangibility of Products

Tangible

Goods (e.g., computers, automobiles)

Intangible

Services (e.g., haircuts, dry cleaning)

Mixed

Goods and services (e.g., airlines)

Classifying Operations Systems (cont’d) Level of Customer Involvement Make-to-stock (MTS) Producing products with a common design and price in anticipation of demand. Customer involvement: low Assemble-to-order (ATO) Producing a standard product with some customized features. Customer involvement: moderate Make-to-order (MTO) Producing products after receipt of an order from a specific customer. Customer involvement: high

Level of Customer Involvement

Make-to-stock (MTS)

Producing products with a common design and price in anticipation of demand.

Customer involvement: low

Assemble-to-order (ATO)

Producing a standard product with some customized features.

Customer involvement: moderate

Make-to-order (MTO)

Producing products after receipt of an order from a specific customer.

Customer involvement: high

Operations Flexibility Operations Flexibility The amount of variety in the products an operation produces, which determines whether the products are produced continuously, repetitively, in batches, or individually in different volumes (amounts) and varieties (types). Continuous process operations (CPO) Produce outputs that are not in discrete units. Repetitive process operations (RPO) Produce outputs in an assembly-line structure. Batch process operations (BPO) Produce different outputs with the same resources.

Operations Flexibility

The amount of variety in the products an operation produces, which determines whether the products are produced continuously, repetitively, in batches, or individually in different volumes (amounts) and varieties (types).

Continuous process operations (CPO)

Produce outputs that are not in discrete units.

Repetitive process operations (RPO)

Produce outputs in an assembly-line structure.

Batch process operations (BPO)

Produce different outputs with the same resources.

Operations Flexibility (cont’d) Operations Flexibility (cont’d) Individual process operations (IPO) Produce output to customer specifications. Project process operations (PPO) Produce low-volume/high-variety outputs that take a relatively long time to complete.

Operations Flexibility (cont’d)

Individual process operations (IPO)

Produce output to customer specifications.

Project process operations (PPO)

Produce low-volume/high-variety outputs that take a relatively long time to complete.

Resources and Technology Management Intensity Capital-intensive operations Machines do most of the work. Labor-intensive operations Human resources do most of the work. Managing Manufacturing Technology Automation Using machines to perform work. Computer-assisted manufacturing Computer-aided design (CAD) Computer-aided manufacturing (CAM) Computer-integrated manufacturing (CIM)

Intensity

Capital-intensive operations

Machines do most of the work.

Labor-intensive operations

Human resources do most of the work.

Managing Manufacturing Technology

Automation

Using machines to perform work.

Computer-assisted manufacturing

Computer-aided design (CAD)

Computer-aided manufacturing (CAM)

Computer-integrated manufacturing (CIM)

Exhibit 14 –2 ● Classifying Operating Systems

Designing Operations Systems Product Mix The number of product lines, the number of products offered within each line, and the mixture of goods and services within each line. Product Design New or improved product development. Quality Is a Virtue of Design Products designed with cross-functional team input have fewer operations (manufacturing) problems.

Product Mix

The number of product lines, the number of products offered within each line, and the mixture of goods and services within each line.

Product Design

New or improved product development.

Quality Is a Virtue of Design

Products designed with cross-functional team input have fewer operations (manufacturing) problems.

Exhibit 14 –3 ● Throughput Stages

Facility Layout Facilities The physical resources used in the operations process (e.g., machines, furniture, etc.). Facility Layout The spatial arrangement of physical resources relative to each other by: Product layout Process layout Cellular layout Fixed-position layout

Facilities

The physical resources used in the operations process (e.g., machines, furniture, etc.).

Facility Layout

The spatial arrangement of physical resources relative to each other by:

Product layout

Process layout

Cellular layout

Fixed-position layout

Exhibit 14 –4 ● Facility Layout

Exhibit 14 –4 ● Facility Layout (cont’d)

Facility Location Location The physical geographic site of facilities. Location Factors Cost Proximity to inputs, customers, and/or competitors Transportation Access to human resources Number of facilities

Location

The physical geographic site of facilities.

Location Factors

Cost

Proximity to inputs, customers, and/or competitors

Transportation

Access to human resources

Number of facilities

Join the Discussion Ethics & Social Responsibility Factory Conditions Is it ethical and socially responsible for Gap to revoke contracts, causing poor workers to lose their jobs? Is it ethical and socially responsible to Gap’s stockholders to pay higher labor costs than necessary, thus reducing profits and their dividends?

Factory Conditions

Is it ethical and socially responsible for Gap to revoke contracts, causing poor workers to lose their jobs?

Is it ethical and socially responsible to Gap’s stockholders to pay higher labor costs than necessary, thus reducing profits and their dividends?

Capacity Planning Capacity The amount of products an organization can produce within a given time period (daily, weekly, monthly, annually).

Capacity

The amount of products an organization can produce within a given time period (daily, weekly, monthly, annually).

Join the Discussion Ethics & Social Responsibility Oil Reserves Do you think Shell made an honest mistake, or did it intentionally overstate its reserves? What implications does this overstatement have for Shell’s capacity planning?

Oil Reserves

Do you think Shell made an honest mistake, or did it intentionally overstate its reserves?

What implications does this overstatement have for Shell’s capacity planning?

Managing Operations Systems and the Supply Chain Planning Schedules and Project Management Scheduling The process of listing activities that must be performed to accomplish an objective. The activities are listed in sequence, along with the time needed to complete each one. Routing The path and sequence of the transformation of a product into an output.

Planning Schedules and Project Management

Scheduling

The process of listing activities that must be performed to accomplish an objective.

The activities are listed in sequence, along with the time needed to complete each one.

Routing

The path and sequence of the transformation of a product into an output.

Managing Operations Systems and the Supply Chain (cont’d) Planning Schedules and Project Management (cont’d) Priority scheduling The continuing evaluation and reordering of the sequence in which products will be produced. Methods: First come–first served Earliest due date Shortest operating time

Planning Schedules and Project Management (cont’d)

Priority scheduling

The continuing evaluation and reordering of the sequence in which products will be produced.

Methods:

First come–first served

Earliest due date

Shortest operating time

Managing Operations Systems Planning Sheet States an objective and lists the sequence of activities required to meet the objective, when each activity will begin and end, and who will complete each activity. Gantt Chart Uses bars to graphically illustrate a schedule and progress toward the objective over a period of time. Is useful as both a planning and a control tool. Performance Evaluation and Review Technique (PERT) A network schedule that illustrates the dependence of activities.

Planning Sheet

States an objective and lists the sequence of activities required to meet the objective, when each activity will begin and end, and who will complete each activity.

Gantt Chart

Uses bars to graphically illustrate a schedule and progress toward the objective over a period of time.

Is useful as both a planning and a control tool.

Performance Evaluation and Review Technique (PERT)

A network schedule that illustrates the dependence of activities.

Exhibit 14 –5 ● Planning Sheet

Exhibit 14 –6 ● Gantt Chart (Orders by Week) * Indicates today’s date—the first day of the third week of May. Ends of bars indicate scheduled starting and ending dates of project. The shaded part of the bar indicates the part of the project completed to date, while the blank space to the end of the bar indicates work still to be completed. The GE project is done. The IBM project is right on schedule and should be completed this week. The GM project is behind schedule and should be completed during the fourth week in May. The AT&T project is ahead of schedule and should be completed during the first week of June.

Developing a PERT Network 1. List all the activities/events that must be completed to reach the specific objective. 2. Determine the time it will take to complete each activity/event. 3. Arrange the tasks on the diagram in the sequence in which they must be completed. 4. Determine the critical path.

Exhibit 14 –7 ● PERT Network

Exhibit 14 –8 ● Inventory Control within the Systems Process Just-in-Time Inventory: An inventory method in which necessary parts and raw materials are delivered shortly before they are needed.

Materials Requirements Planning Materials Requirements Planning (MRP) A system that integrates operations and inventory control with complex ordering and scheduling. Enterprise Resource Planning (ERP) Collects, processes, and provides information about a firm’s entire enterprise.

Materials Requirements Planning (MRP)

A system that integrates operations and inventory control with complex ordering and scheduling.

Enterprise Resource Planning (ERP)

Collects, processes, and provides information about a firm’s entire enterprise.

Materials Requirements Planning (cont’d) Economic Order Quantity (EOQ) The optimal quantity of a product to order, determined on the basis of a mathematical model. EOQ example:

Economic Order Quantity (EOQ)

The optimal quantity of a product to order, determined on the basis of a mathematical model.

EOQ example:

Supply Chain Management Supply Chain Management The process of coordinating all activities involved in producing a product and delivering it to the customer. To provide high-quality products at lowest cost: Forecast demand for a product. Plan and manage supply and demand. Acquire materials (inputs). Schedule and produce the product. Warehouse. Control inventory. Distribute the product. Deliver the product. Provide customer service.

Supply Chain Management

The process of coordinating all activities involved in producing a product and delivering it to the customer.

To provide high-quality products at lowest cost:

Forecast demand for a product.

Plan and manage supply and demand.

Acquire materials (inputs).

Schedule and produce the product.

Warehouse.

Control inventory.

Distribute the product.

Deliver the product.

Provide customer service.

Quality Control Quality Control The process of ensuring that all types of inventory meet standards. Quality Assurance Means “building in” quality; not attempting to “inspect it in.” International Standards Organization (ISO) Certifies organizations that meet set quality standards (ISO 9000). Six Sigma Higher levels of quality at lower costs.

Quality Control

The process of ensuring that all types of inventory meet standards.

Quality Assurance

Means “building in” quality; not attempting to “inspect it in.”

International Standards Organization (ISO)

Certifies organizations that meet set quality standards (ISO 9000).

Six Sigma

Higher levels of quality at lower costs.

Join the Discussion Ethics & Social Responsibility Social Accountability International Should global multinationals eliminate sweatshops by having SA8000-certified facilities? Should global multinationals require all their suppliers to get SA8000 certification? How might working toward SA8000 certification affect cost, revenues, and profits?

Social Accountability International

Should global multinationals eliminate sweatshops by having SA8000-certified facilities?

Should global multinationals require all their suppliers to get SA8000 certification?

How might working toward SA8000 certification affect cost, revenues, and profits?

Exhibit 14 –9 ● Five Rules of Customer Human Relations

Total Quality Management (TQM) TQM Principles Focus on delivering customer value. Continually improve systems and processes. Focus on managing processes rather than people. Use teams to continually improve. TQM vs. Quality Control TQM is broader in organizational scope. Quality is determined by customers’ acceptance, not by internally-set standards. The focus is on continuous improvement.

TQM Principles

Focus on delivering customer value.

Continually improve systems and processes.

Focus on managing processes rather than people.

Use teams to continually improve.

TQM vs. Quality Control

TQM is broader in organizational scope.

Quality is determined by customers’ acceptance, not by internally-set standards.

The focus is on continuous improvement.

Statistical Quality Control Statistical Quality Control (SPC) A process control method that uses statistical tests of probability in determining if product quality is within an acceptable standard range.

Statistical Quality Control (SPC)

A process control method that uses statistical tests of probability in determining if product quality is within an acceptable standard range.

Statistical Quality Control Steps 1. Set a range that includes the highest and lowest levels of acceptable quality, with the desired standard in the middle. 2. Determine the sampling technique and the frequency of measuring performance. 3. Measure performance and plot it on an SPC chart. 4. Use the exception principle and do nothing if performance is within range, but take corrective action if it is out of control limits.

Exhibit 14 – 10 ● Statistical Process Control Chart for 16-Ounce Bags of Lay’s Potato Chips Trend

Contributions by Quality Gurus Walter Shewhart Introduced concurrent controls in manufacturing. W. Edwards Deming Linked improved quality to improved productivity. Deming Prize Joseph M. Juran Developed the Pareto principle ( 80–20 rule ). Armand V. Feigenbaum Advocated TQM to cut costs and improve quality. Philip B. Crosby “ Quality is free” versus the costs of poor quality Genichi Taguchi Advocated designing quality into each product. Steven Kerr “ You get what you reward ”

Walter Shewhart

Introduced concurrent controls in manufacturing.

W. Edwards Deming

Linked improved quality to improved productivity.

Deming Prize

Joseph M. Juran

Developed the Pareto principle ( 80–20 rule ).

Armand V. Feigenbaum

Advocated TQM to cut costs and improve quality.

Philip B. Crosby

“ Quality is free” versus the costs of poor quality

Genichi Taguchi

Advocated designing quality into each product.

Steven Kerr

“ You get what you reward ”

Productivity Productivity A performance measure relating outputs to inputs. Units produced, labor hours per unit, number of workers, the cost of labor, the cost of material, machine hours, etc. Measuring Productivity Select a base period of time. Determine outputs for time period. Determine the cost of inputs. Divide the number of outputs by the inputs to determine the productivity rate.

Productivity

A performance measure relating outputs to inputs.

Units produced, labor hours per unit, number of workers, the cost of labor, the cost of material, machine hours, etc.

Measuring Productivity

Select a base period of time.

Determine outputs for time period.

Determine the cost of inputs.

Divide the number of outputs by the inputs to determine the productivity rate.

Productivity (cont’d) Calculating Productivity Percentage Changes Determine the productivity rate for the base period. Determine the productivity rate for the current period. Subtract the base standard productivity rate from the current productivity rate. If the difference is positive, productivity has increased; if negative, productivity has decreased. Divide the difference by the base standard productivity rate to calculate the percentage of change.

Calculating Productivity Percentage Changes

Determine the productivity rate for the base period.

Determine the productivity rate for the current period.

Subtract the base standard productivity rate from the current productivity rate.

If the difference is positive, productivity has increased; if negative, productivity has decreased.

Divide the difference by the base standard productivity rate to calculate the percentage of change.

Productivity (cont’d) Production versus Productivity It is possible to increase production but decrease productivity. It is important to calculate productivity rather than just production output. If you measure only output production and it increases, you can be fooled into thinking you are doing a better job when in reality you are doing a worse job.

Production versus Productivity

It is possible to increase production but decrease productivity.

It is important to calculate productivity rather than just production output. If you measure only output production and it increases, you can be fooled into thinking you are doing a better job when in reality you are doing a worse job.

Productivity (cont’d) Ways to Increase Productivity: Increase the value of the outputs but maintain the value of the inputs. (  O  I) Maintain the value of the outputs but decrease the value of the inputs. (  O  I) Increase the value of the outputs but decrease the value of the inputs. (  O  I)

Ways to Increase Productivity:

Increase the value of the outputs but maintain the value of the inputs.

(  O  I)

Maintain the value of the outputs but decrease the value of the inputs.

(  O  I)

Increase the value of the outputs but decrease the value of the inputs.

(  O  I)

Exhibit 14 – 11 ● Functional Area Ratios

Exhibit 14 – 11 ● Functional Area Ratios (cont’d)

Exhibit 14 – 12 ● The Balanced Scorecard Source: Based on Robert Kaplan and David Norton, “Using the Balanced Scorecard as a Strategic Management System,” Harvard Business Review, January-February 1996, pp. 75–85.

Exhibit 14 – 13 ● Futura Industries’ Balanced Scorecard

KEY TERMS time-based competition operations product customer involvement operations flexibility technology facility layout capacity routing priority scheduling planning sheet Gantt chart PERT critical path inventory inventory control just-in-time (JIT) inventory materials requirement planning (MRP) supply chain management quality control International Standards Organization (ISO) statistical process control (SPC) productivity

time-based competition

operations

product

customer involvement

operations flexibility

technology

facility layout

capacity

routing

priority scheduling

planning sheet

Gantt chart

PERT

critical path

inventory

inventory control

just-in-time (JIT) inventory

materials requirement planning (MRP)

supply chain management

quality control

International Standards Organization (ISO)

statistical process control (SPC)

productivity