Lecture 9 2.1 Operations Management and Decision Making Learning Objectives After you complete this lecture, you will be familiar with the following concepts: • Operations Management and Decision-Making: An Introduction • Operations Management Process: A Decision-Making Focus • Operations Management and Decision Support Tools • Corporate Management, Operations Management, and Decision-Making Explained With the Help of the Business Running Case and the Business Simulation Operations Management and Decision-Making: An Introduction In the last segment of Lecture 4 we defined the business entity (corporation) as a system that is dynamic, discrete, relatively insulated from the business environment, with specific elements (transformation process, management process), input, output, tile, state, and feedback loops – see the figure, below. The focus in Lecture 9 is on the transformation process, also called production or operations process. Let's start with some basic definitions of categories related to this topic. What is operations management? 1 • Production is the process of creation of goods and services • Operations Management (hereinafter also OM) defined: activities that relate to the creation of goods and services through the transformation of inputs to outputs All organizations perform (are melting together) at least three of its main functions to create goods and services: • marketing, which generated demand • operations/production, which creates the product • finance and accounting, which tracks how well the organization is doing, pays the bills, and collects the money Why study operations management? 1. To learn how people organize themselves for productive enterprise 2. To learn how goods and services are produced 3. To understand what operations managers do 4. Because OM is a costly part of an organization What operations managers do: # 1 2 Key Decision Areas Issues Design of goods What good or service and services should we offer? How should we design these products? 2 Managing quality How do we define the quality? Who is responsible for quality? 3 Process and What process and what capacity design capacity will these products require? What equipment and technology is necessary for these processes? 4 Location strategy Where should we put the facility? On what criteria should we base the location decision? 5 Layout strategy How should we arrange the facility? How large must the facility be to meet our plans? 6 Human resources, How do we provide a job design, and reasonable work work measurement environment? How much can we expect our employee to produce? 7 Supply-chain Should we make or buy management this component? Who should be our suppliers and how can we integrate them into our strategy? 8 Inventory, material How much inventory of requirements each item should we planning, and JIT have? When do we reorder? 9 Intermediate and Are we better off keeping short-term people on the payroll scheduling during slowdowns? Which job do we perform next? 10 Maintenance How do we build reliability into our processes? Who is responsible for maintenance? About 40% of all jobs are in OM. Operations managers possess job titles such as • plant manager • quality manager • operations analyst We are focusing in this lecture on Process and Capacity Design (row 3 in table above) and more specifically on Capacity and Constraint Management.3 1 Here and below, based on Heizer J, Render B, Operations Management, 10e, Prentice Hall, 2011, Chapter 1 2 Heizer J, Render B, Operations Management, 10e, Prentice Hall, 2011, Table 1.2, p.7 3 Here and below, based on Heizer J, Render B, Operations Management, 10e, Prentice Hall, 2011, Chapter 7 2.3 Operations Management Process: A Decision-Making Focus Please review the diagram below before moving on in the lecture. 2.4 Integrating Operations' Strategies and Plans with the Company's Strategies and Resources Process Strategies Four Process Strategies: 1. Process Focus: A facility organized around processes to facilitate low-volume, high-variety production 2. Repetitive Process: A product-oriented production process that issues modules o Modules: Parts or components of a product previously prepared, often in a continues process 3. Product Focus: A facility organized around products; a product-oriented, highvolume, low-variety production 4. Mass Customization: Rapid, low-cost production that caters to constantly changing unique customer desires Comparison of process choices: • Build-To-Order: Produce to customer order rather than to a forecast • Postponement: The delay of any modifications or customizations to a product as long as possible in the production process • Crossover Chart: A chart of costs at the possible volumes for more than one process Process Analysis and Design • Flowchart: A drawing used to analyze movement of people or materials • Time-function mapping: (or process mapping) A flowchart with time added on the horizontal axis • Value-stream mapping: A tool that help managers understand how to add value in the flow of material and information through the entire production process • Process charts: Charts that use symbols to analyze the movement of people or material • Service blueprinting: A process-analysis technique that lends itself to a focus on the customer and the provider's interaction with the customer Selection of Equipment and Technology • The choice requires considering cost, quality, capacity, and flexibility • Flexibility: the ability to respond with little penalty in time, cost, or customer value Production Technology • Computer numerical control (CNC): Machinery with its own computer and memory • Automatic identification system (AIS): A system for transforming data into electronic form • Radio frequency identification (RFID): A wireless system in which integrated circuits with antennas send radio signals • Process control: The use of information technology to control a physical process • Vision systems: Systems that use video cameras and computer technology in inspection roles • Robot: A flexible machine with the ability to hold, move, or grab items • Automated storage and retrieval systems (ASRS): Computer-controlled warehouses that provide for the automatic placement of parts into and from designated places within a warehouse • Automated guided vehicle (AGV): Electronically guided and controlled cart used to move materials • Flexible manufacturing system (FMS): Automated work cell controlled by electronic signals from a common centralized computer facility • Computer-integrated manufacturing (CIM): A manufacturing system in which computer-aided design, FMS, inventory control, warehousing, and shipping are integrated Process Redesign • Process redesign defined: the fundamental rethinking of business processes to bring about dramatic improvements in performance • Focus on activities that cross functional lines Process Strategy and Sustainability (4 Rs) • Resources used by the production process • Recycling of production materials and product components • Regulations that apply • Reputation of the firm 2.5 Operations Opportunity Analysis Constraint Management4 • Capacity: The 'throughput', or number of units a facility can hold, receive, store, or produce in a period of time. Capacity Decisions often determine • i. Capital requirements and therefore a large portion of fixed costs ii. Whether demand will be satisfied or whether facilities will be idle Capacity planning: i. Long-range (> 1 year) – adding facilities and long-time equipment ii. Intermediate-range (3–18 months) – adding equipment, personnel, add shifts; subcontracting; building or using inventories iii. Short-range (< 3months) – scheduling job and people, and allocating machinery • Design capacity: The theoretical maximum output of a system in a given period, under ideal conditions. • Effective capacity: The capacity a firm can expect to achieve, given its product mix, methods of scheduling, maintenance, and standards of quality. • Utilization: Actual output as a percent of design capacity. • Efficiency: Actual output as a percent of effective capacity. Actual (or Expected) output = (Effective capacity) x (Efficiency) If Demand > Capacity: firms may increase prices, increase lead time, or discourage marginally profitable business If Capacity > Demand: firms may reduce prices, aggressive marketing, or accommodate the market via product changes • Capacity analysis: Determining throughput capacity of workstations or an entire production system. • Bottleneck: The limiting factor or constraint in a system • Process time: i. of a station. The time to produce a given number of units at that single workstation ii. • of a system. The time of the longest (slowest) process, the bottleneck Process cycle time: The time it takes for a product to go through the production process with the waiting – the longest path through the system. • Theory of constrains: A body of knowledge that deals with anything limiting an organization's ability to achieve its goals. • Break-even analysis: A means of finding the point (in dollars and units), at which costs equal revenue (total sales). Fixed costs: Costs that exist even if no units are produced. Variable costs: Costs for the production of the product that vary with the volume of units produced. Product Oriented Break-Even Analysis Break-Even [in units] =Break-Even [in units] = Total Fixed CostsPrice per Product−Variable Costs per ProductTotal Fixed CostsPrice per Product−Variable Costs per Product Break-Even [in costs] =Break-Even [in costs] = Total Fixed Costs1−Variable Costs per ProductSelling Price per ProductTotal Fixed Costs1−Variable Costs per ProductSelling Price per Product Group of Product (Brand) Oriented Break-Even Analysis Break-Even [in costs] =Break-Even [in costs] = Total Fixed Costs1−Total Variable CostsTotal SalesTotal Fixed Costs1−Total Variable CostsTotal Sales Reducing risk with incremental changes • Approaches to capacity explanation: i. Leading strategy: Management leads capacity in periodic increments ii. Lag strategy: Management lags (chases) demand iii. Straddle strategy: Management uses average capacity increments to straddle demand Note: Lag and straddle strategies delay capital expenditure. Applying expected monetary value (EMV) to capacity decisions • By assigning probability values to the various states of nature, we can make decisions that maximize the expected value of the alternatives Applying Investment Analysis to Strategy-Driven Investments • Net Present Value: A means of determining the discounted value of a series of future cash receipts • When making several investments, those with higher net present values are preferable to investments with lower net present values 4 Here and below, based on Heizer J, Render B, Operations Management, 10e, Prentice Hall, 2011, Chapter 7, Supplement 7 2.6 Developing Operations Management Programs The main purpose of the operations management programs is, based on the overall business strategy of the company, to describe and address all key decision areas and issues (discussed earlier in this lecture, see below) by offering the most rational way for the utilization of the corporate resources in the production and operations of the company. They are covered in greater details in two of our Boston University online graduate programs: 'Project Management' and 'Business Continuity'. # Key Decision Areas 1 Design of goods and services Issues What good or service should we offer? How should we design these products? 2 Managing quality How do we define the quality? Who is responsible for quality? 3 Process and capacity design What process and what capacity will these produ require? What equipment and technology is necessary for processes? 4 Location strategy Where should we put the facility? On what criteria should we base the location dec 5 Layout strategy How should we arrange the facility? How large must the facility be to meet our plans? 6 Human resources, job design, and work How do we provide a reasonable work environme measurement How much can we expect our employee to produ 7 Supply-chain management Should we make or buy this component? Who should be our suppliers and how can we int them into our strategy? 8 9 Inventory, material requirements How much inventory of each item should we have planning, and JIT When do we reorder? Intermediate and short-term scheduling Are we better off keeping people on the payroll d slowdowns? Which job do we perform next? 10 Maintenance How do we build reliability into our processes? Who is responsible for maintenance? 2.7 Implementing, Managing, and Control of the Operations Programs (Assessing the Process and Capability Design of the Company) The authors of the recommended for this lecture text are describing five of the many more existing and commonly used in the practice tools for the assessment of the process and capability design of the company5. Let's demonstrate how these tools are helping decision makers with the assistance of the 'value-stream mapping' (defined earlier in this lecture). The main objective here is to start with the customer and to follow the production process back to the suppliers, by analyzing the value-stream between the elements of the operations. This approach is taking into account not only the flow of the process, but also the management decisions and the management information systems that support the system – see Example 26 and Figure 7.67 (below). Exercise Using Figure 7.6 and based on the Business Running Case for AD715, describe the process of brewing and distributing of beer in the new BrewPub and analyze an opportunity for improvement in this process. 5 Heizer J, Render B, Operations Management, 10e, Prentice Hall, 2011, Chapter 7, pp. 259-261 6 Heizer J, Render B, Operations Management, 10e, Prentice Hall, 2011, Chapter 7, p. 260 7 Heizer J, Render B, Operations Management, 10e, Prentice Hall, 2011, Chapter 7, p. 261 2.8 Operations Management and Decision Support Tools As part of this course, in Week 3 students have been introduced to the concept of decision analysis and decision support tools with applications in the business. For the purpose of operations management decision makers on corporate, business, and functional levels of the company are applying the full spectrum of decision support tools – see the diagram, below. In this lecture we will discuss only some of these tools (other decision support tools have been already discussed in Lecture 5, Lecture 6, Lecture 7 and Lecture 8) and will demonstrate possible applications with the help of the running case and the business simulation package, specifically developed for this course (see the next section of the lecture). Also, to avoid unnecessary repetitions, we will discuss and demonstrate with examples only decision support tools not mentioned in Lectures 5 to 8. The examples are from the Business Simulation, Table '36-Mo-Fin-Pr' (36 Months Pro Forma Financial Statements), and table 'D-Analysis' (Decision Analysis). Break-Even Analysis As we already know (see the related definitions discussed earlier in this lecture), Break-Even [in costs] =Break-Even [in costs] = Total Fixed Costs1−Total Variable CostsTotal SalesTotal Fixed Costs1−Total Variable CostsTotal Sales Based on the information provided in the Business Running Case and the assumptions made in the simulation table 'Project-Start', the program is calculating the components of the 36 Months Pro Forma Financial Statements and is summarizing the results in a table called '36-Mo-Fin-Pr' – (Note: click the image below to view the full-sized diagram). The rows containing information for the values of the total fixed costs, variable costs, and selling price for the first planning year (called fiscal year 1, or FY-1) have been marked with red pointers. The program is using the monthly values for these three variables and is drawing the Break-Even Analysis Chart – see the diagram below. (Note: click the image below to view the full-sized diagram.) Total variable costs, total fixed costs, and total sales are shown as straight lines and are marked with different colors – light blue, dark blue and red: • total fixed costs are drawn as a horizontal line beginning at the dollar amount on the vertical axis, market as Total Revenue [in dollars]; • total variable costs are shown as an incrementally increasing line, originating at the intersection of total fixed costs on the vertical axis, and increasing with each change in sales per months, as we move to the right on the horizontal axis (time axis); • total costs are equal total fixed costs plus total variable costs and are increasing with each change in sales per months • the value of the total sales starts from the first day of the first month with zero, and changes for each month of operations (factors affecting the total sales function can be change in quantities sold, or price fluctuations, or quality issues, or related). The Break-Even Point (BEP) occurs where the total sales equals total costs. In our example (see below) BEP occurs in the tenth month of operation (10.67 = 10 months and 20 days, where 20 days = 30 days per month x 0.67 = 20.1 days), when the company forecast for total sales is $291,141. What If Analysis We calculated the BEP for the group of all four products, called BRAND 1. As per our running case and the business simulation, the products from the family of BRAND 1 are called: 'Pilsner All-Malt' Draft Beer, 'Bavarian Lager All-Malt' Draft Beer, 'Pilsner AllMalt' Beer in Kegs, and 'Bavarian Lager All-Malt' Beer in Kegs. With the help of the What If Analysis (introduced to you in Lecture 6) we can make changes on product level and see how these changes are affecting the BEP (time in months and days, and total sales) for BRAND 1. On the diagram below you can see three 'What If' scenarios: 1. What is the BEP if the total fixed costs are increased and/or decreased while the selling price and the variable costs per products remain the same? 2. What is the BEP if the selling prices per products are increased and/or decreased while the total fixed costs and the variable costs per products remain the same? 3. What is the BEP if the variable costs per products are increased and/or decreased while the total fixed costs and the selling prices per products remain the same? Lecture 10 - Innovation Management and Decision Making 3.1 Innovation Management and Decision Making Learning Objectives After you complete this lecture, you will be familiar with the following concepts: • Innovation Management and Decision-Making: An Introduction • Innovation Management Process: A Decision-Making Focus • Case Example: IBM in the 21st Century – The Coming of the Globally Integrated Enterprises • Innovation Management and Decision Support Tools • Corporate Management, Innovation Management, and Decision-Making Explained With the Help of the Business Running Case and the Business Simulation 3.2.1 Innovation Management and Decision Making: An Introduction Management decision making with regard to embracing a potential invention or innovation can be made on an individual, a group or an organizational level and often involves a great deal of judgmental decision making since the availability of data, particularly for a new invention or innovation, is often nonexistent. Frequently, the decisions to move forward with the development of an innovation is made on a subjective or "gut" non-rational level where a visionary is able to see a potential "hit" based on experience or instinct rather than on a rational computational and financial basis and an understanding of clear risks regarding the likelihood of success. For example, the ability of Apple Computer to continue to develop leading edge products in a very competitive market is a tribute to the ability and decision making of top management to develop a fundamental concept in an open decision making environment. On the other hand, a lack of vision can often result in a judgmental decision that declines to embrace a potentially great product or concept. For example as mentioned in Module 1, the case of Western Electric Company's lack of vision in the late 1800's led to the missed opportunity of a lifetime; the chance to develop and capitalize on the telephone. In this lecture, we will discuss decision making with regard to product, process and service innovation which revolve around the key question of whether a company should decide to build or not to build a new product, or undertake a new production or service process. The applicability of advancing technology in the realm of invention, innovation and diffusion as impacting decision making by first describing these different but related processes, and then applying various scenarios to our cases. Invention To begin with, the most basic element of technological advance is invention, which is defined by McConnell & Brue as "the first discovery of a product or process through the use of imagination, ingenious thinking and experimentation and the first proof that it will work". Invention is often described as a process but the product is also called an invention. For example, the first prototype of the telephone and the automobile are inventions. An invention is usually based on scientific knowledge and is the product of individuals either working alone or as part of corporate or university teams. Inventions are also protected and fostered through government issued patents which fosters the environment in which additional inventions can take place. Innovation Innovation is technological change that relies directly on invention. While invention is the "first discovery and proof of workability", innovation is "the first successful commercial introduction of a new product, the first use of a new method or the creation of a new form of business enterprise". It is also often defined as the 'process of introducing a new idea, or inventing/creating something which has not yet been discovered or developed by the market. Innovation is often divided into product, process and service innovation. Within each of these categories, innovation can be of three types: • an extreme or radical innovation which involves a breakthrough product, process or service, • distinctive innovation in which substantial improvements in the existing product, process or service have been made, and • incremental innovation where small improvements to an existing product, process or service have been made. The process of extreme innovation involves a major change in the existing process, product or service to meet a change in consumer demand, or could involve taking an entirely new approach. Distinctive and incremental innovation involves making small improvements and additions to existing products, processes and services. The aim of such innovations is to increase efficiency through higher quality, reduced time and lowered costs. Product innovation involves new and improved products and services while process innovation involves new and improved production or distribution methods. Unlike inventions, innovations cannot be patented, but they often have a profound impact on competition. For example, innovations in hardware retailing such as Home Depot, have threatened smaller, more traditional hardware stores. On the positive side, the benefits of innovation, most economists believe, far outweigh the negatives. Innovation can have the effect of spurring research and development, such as in the cases of Reynolds aluminum cans, Hewlett-Packard calculators and others. Therefore, innovation occurs when a change in the product, process or service results in a better solution for an existing need. Innovation has become the key growth driver behind the evolution of civilization across the globe. Innovation has become the basis for business survival and development. Historically, the process of innovation was largely unpredictable and unmanageable, and no formalized innovation process was in existence up through the early 1900s. Traditionally, companies believed innovation was an expensive activity, with a payback period in the long run. Hence, companies failed to retain their interest in it for the required period of time and often abandoned innovation projects midway. In organizations that did maintain interest, most innovations were restricted to new products that were largely the efforts of development by corporate research and development (R&D) departments, such as AT&T's Bell Labs, IBM's Watson Research Center or RCA's Sarnoff Labs or by academic researchers and individuals. Diffusion Finally, the spread of an innovation to other countries or markets through imitation or copying is diffusion. To take advantage of new profit potential or slow the decline of profits in existing products, firms often copy previously made successful innovations. After McDonald's successfully introduced the fast-food burger, Berger King, Wendy's and other firms soon followed that idea. In other cases such as these, innovation has led to widespread imitation, or diffusion. With definitions of these terms, we next explore the nature of product and service design which are frequently all about invention and innovation. Product and service design follow naturally from invention and innovation. These aspects represent the tangible high production outcomes of the previous discussion. 3.2.2 The Nature of Product and Service Design Product and Service Design Product and service design are the creation or enhancement of an organization's product or service. The benefits of designing, or redesigning, the products a firm will manufacture and market, are considerable. Possibly the most obvious is control. Control of the design process means that a firm can decide upon and adopt whatever design strategies for their products best suit them. Demand-increasing features can be built-in, costs can be controlled to make the price as attractive as possible, and profits will be maximized. Reasons for Product or Service Design • Be Competitive • Increase business growth & profits • Avoid downsizing with development of new products • Improve product quality • Achieve cost reductions in labor or materials Product quality has, over the last few decades, become one of the most important elements in the differentiation of a firm's product offering from that of the competition. Deming, Juran, Baldrich and a host of others brought product quality to forefront of corporate thinking. All stressed the importance of designing quality into the product, not finding the mistakes that faulty design had allowed. Product and service design combined with proper decision making can improve competitiveness. Every advantage must be explored and exploited in a marketplace. Designing a product to meet and beat the competition is not just good business it is good sense. Product and Service Design Strategy The major decision making factors for the design of the product and service strategy of a company are: • Cost • Quality • Time-to-market • Customer satisfaction • Competitive advantage • Other product design decision making considerations Cost and customer satisfaction have been already discussed in Lecture 7. Quality: Designing a product that will meet or exceed a customer's expectations for performance. Time-to-market: Shortening the development time of a product to speed it to market before the competition. Competitive Advantage: Designing a product that enters a market with features that immediately place it ahead of the competition. Product Design Decision Making Considerations • Product Life Cycles • Standardization – designing for mass customization • Reliability • Concurrent Engineering • Computer-aided Design • Re-manufacturing 3.2.3 Product and Technology Life Cycles In Lecture 7, as part of the discussion how companies are developing strategic marketing programs, we discussed the importance of product and service decisions and the role of the product life cycle1 (and the sales history of the product over time) approach in this decision making process – see the diagram, below. It is also important to discuss the life cycle of a product or service in the context of the evolution of the markets and the demands and the trends and the life cycles of the technology, typical for the products or industry of interest. The graph below presents these connections as a triple life cycle "Demand – Technology – Product". Using the car industry as an example we can make the following interpretation of the graph. A car manufacturer is: • Analyzing the current trends and is making forecasts for the market size and the characteristics of the cars (from customer prospective); • Creating requirements for the technological infrastructure needed for the manufacturing process for the time of the demand cycle (e.g. next five years), • Asking the research and development departments of the company to design a family of products, considering the advantages and the limitations of the technological cycle(s) and the market demand. 1 Day, J, Analysis for Strategic Marketing Decisions, 1986, Carnegie Learning, Inc. 3.2.4 Forecasting Forecasting or forecasts are concerned with approaches to determining the future outcomes of events that can't be observed now. Usually forecasts are presented in form of a statement (and often are also called prediction, estimation, projection, or prognosis). The statement can be conditional ("the event may happen if…") and/or limited in the time ("the estimations for the next three months are…"). The research on forecasting comes from many disciplines and is well described and monitored2. To determine the future performance potential of the business organization in each of its area of interest, managers are using characteristics and determinants of the characteristics, such as: Characteristics Growth Determinants of the characteristics Demand stage Market size Buying power Trade barriers Profitability Buying habits Competitive structure Competitive intensity Distribution system Government regulations Turbulence Economic Technological Socio-political Success Retention of key R&D personnel factors Reducing supply-chain costs Enhancing quality of services (… and many more) Forecasting performance in turbulent environments is a very difficult and serious business. Very often the forecasts are based on a combination of analytical techniques and methods, purposely selected and applied with the goal to capture nonlinearity, complexity, and unpredictability of future environments. These methods can be structured in three groups3: 1. Forecasting (business, economic, demographic, sociological, or technological) techniques, designed to develop future trends, or identify significant probable future variables and events o Extrapolation o Multiple regression o Curve fitting o Scenarios o Corrected extrapolation o Delphy o Asymmetric analysis o Threats/opportunities analysis 2. Modeling techniques, designed to construct a model of reality which can be manipulated by the decision maker to produce different futures by changing inputs and relationships among the variables within the model o Input – Output o Econometric o System dynamics o Stochastic 3. Examination of the impact of the results from the forecasting or modeling on the firm 2 3 o Impact analysis o Cross-impact analysis o Deductive analysis (project pattern) o Force field analysis Some of the organizations and journals in the field of forecasting: • International Institute of Forecasters • International Journal of Forecasting • Journal of Forecasting • Foresight – The International Journal of Applied Forecasting According to Ansoff, I., McDonnell, E, Implanting Strategic Management, Prentice Hall, 1990, pp.55 - 59 3.2.5 Standardization In addition to product life cycles, product designers must also decide whether to consider standardization in their initial design work decision making. Consumers have a level of expectation for certain products that are used on a regular basis. These products are expected to be the same in terms of aesthetics and quality. It is also expect that, since these products are the same and are manufactured in volume, the savings in cost of production will result in a lower price than would be expected for a more customized product. Consumers also believe that needs are unique and there is a choice from among a variety of products to fulfill that unique need. Product designers consider the first scenario as standardization, designing low-cost and low-priced products that will be manufactured in volume. The second scenario describes a need for mass customization-producing products that have the benefits (cost, price, volume manufacture) and yet present the consumer with enough variety to meet their perceived uniqueness. Among the best examples of these two design considerations are the standardized product design of the "Over 99 Billion Served" McDonald's Burgers compared to the design of Burger King's "Have it your way" continuing campaign for mass customization.
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