What is Operations Management? The business function responsible for planning, coordinating, and controlling the resources needed to produce a company’s products and services
What is Operations Management? It is a management function Organization’s core function Every organization has OM function Service or Manufacturing For profit or Not for profit 3
What is Operations Management Role? OM Transforms inputs to outputs Inputs are resources such as People, Material, and Money Outputs are goods and services 5
OM’s Transformation Role To add value Increase product value at each stage Value added is the net increase between output product value and input material value Provide an efficient transformation Efficiency – perform activities well at lowest possible cost 7
Goods & Services Services Intangible product Product cannot be inventoried High customer contact Short response time Labor intensive Manufacturing Tangible product Product can be inventoried Low customer contact Longer response time Capital intensive 8
On the other hand… Both use technology Both have quality, productivity, & response issues Both must forecast demand Both will have capacity, layout, and location issues Both have customers, suppliers, scheduling and staffing issues Manufacturing often provides services Services often provides tangible goods 9
Hybrid organizations Some organizations are a blend of service/manufacturing/quasi-manufacturing Quasi-Manufacturing (QM) organizations QM characteristics include Low customer contact & Capital Intensive 10
Trends in OM Service sector growing to 50-80% of non-farm jobs- See Figure 1-4 Global competitiveness Demands for higher quality Huge technology changes Time based competition Work force diversity
OM Decisions All organizations are based on decisions Decisions follow a similar path First decisions very broad – Strategic decisions Strategic Decisions – set the direction for the entire company; they are broad in scope and long-term in nature Following decisions focus on specifics - Tactical decision 12
OM Decisions Tactical decisions focus on Specific day-to-day issues Resource needs, schedules, & quantities to produce Tactical decisions are very frequent Strategic decisions less frequent Tactical decisions must align with strategic decisions 13
OM Decisions 14
OM Across the Organization Most businesses are supported by the functions of operations, marketing, and finance The major functional areas must interact to achieve the organization goals 16
OM Across the Organization - continued Marketing is not fully capable of meeting customer needs if they do not understand what operations can produce Finance cannot judge the need for capital investments if they do not understand operations concepts and needs Information systems enables the information flow throughout the organization Human resources must understand job requirements and worker skills Accounting needs to consider inventory management, capacity information, and labor standards 17
Highlights OM is the business function that is responsible for managing and coordinating the resources needed to produce a company’s products and services. Its role of OM is to transform organizational inputs into company’s products or services outputs OM is responsible for a wide range of decisions, ranging from strategic to tactical. Organizations can be divided into manufacturing and service organizations, which differ in the tangibility of the product or service 18
Highlights - continued A number of historical milestones have shaped OM. Some of the more significant of these are the Industrial Revolution, scientific management, the human relations movement, management science, and the computer age OM is highly important function in today’s dynamic business environment. Among the trends with significant impact are just-in-time, TQM, reengineering, flexibility, time-based competition, SCM, global marketplace, and environmental issues OM works closely with all other business functions 19
Resource Management deals with the planning, execution, and control of all the resources that are used to produce goods or provide services in a value chain. Typical objectives of resource management are to: • Maximize profits and customer satisfaction, • Minimize costs, or • Maximize benefits to stakeholders. Resources include materials, equipment, facilities, information, technical knowledge and skills, and of course, people.
One framework for resource planning is divided into three levels: • Aggregate planning (Level 1), • Disaggregation (Level 2), and • Execution (Level 3). • Resource management for service-producing organizations generally does not require as many intermediate levels of planning (Level 2) as it does for goods-producing firms.
Exhibit 13.1 Framework for Resource Management Planning for Goods and Services
Aggregate planningis the development of a long-term output and resource plan in aggregate units of measure (see Exhibit 13.1). • These typically define output levels over a planning horizon of 1 to 2 years, focusing on product families or total capacity requirements. • Aggregate planning later translates into monthly or quarterly production plans, taking into account capacity limitations such as supply availability, equipment, and labor.
Level 2 planning, or disaggregation,is the process of translating aggregate plans into short-term operational plans that provide the basis for weekly and daily schedules and detailed resource requirements. • Level 3 focuses on execution,moving work from one workstation to another, assigning people to tasks, setting priorities for jobs, scheduling equipment, and controlling processes.
Exhibit 13.1 Framework for Resource Management Planning for Goods and Services
Disaggregating Service Plans • Most service organizations do not require as many levels of intermediate planning (Level 2) as goods-producing firms. • Level 1 and 2 planning are often combined in service businesses.
Disaggregating Service Plans • One way to think of disaggregation in services is to go from aggregate planning (Levels 1 and 2) to front line resource (staff) capacity and scheduling decisions (Level 3). Manufacturers use and need an intermediate level of planning (Level 2), where work-in-process and subassemblies reside.
Aggregate planning is most challenging when demand fluctuates over time. • Managers have a variety of options in developing aggregate plans in the face of fluctuating demand: • Demand management • Production-rate changes • Workforce changes • Inventory smoothing • Facilities, equipment, and transportation
Aggregate Planning Decisions and Strategies • Demand Management: • Cooperation between marketing and manufacturing to create more feasible aggregate demands. • Production-Rate Changes: • Utilizing overtime/undertime, subcontracting during peak months. • Workforce Changes: • Hiring and firing employees—often not a feasible alternative.
Aggregate Planning Decisions and Strategies • Inventory Changes: • Building inventories or carrying back orders. • Facilities, Equipment, and Transportation: • Typically a long-term investment, although companies can rent equipment for peak seasons.
Aggregate Planning for Golden Beverages: Golden Beverages makes two major products—Old Fashioned and Foamy Delite root beers. The company operates a continuous flow factory and has a fluctuating forecast, with seasonal peaks in the summer and winter holiday season. Golden utilizes a level production strategy,planning for the same production rate in each time period. An alterative to level production is a chase demand strategy,setting the production rate equal to the demand in each time period.
Exhibit 13.4 Level Aggregate Production Plan for Golden Beverages
Exhibit 13.5 Chase Demand Strategy for Golden Beverages
Disaggregation in Manufacturing • Disaggregation (Level 2) provides the link between aggregate plans developed at Level 1 and detailed execution at Level 3 (see Exhibit 13.6). • This provides the basis for detailed purchasing and production schedules for all of the components that comprise the finished good or support service delivery. • There are three major components for disaggregating aggregate plans into Level 2 plans. • Master production scheduling (MPS) • Materials requirements planning (MRP) • Capacity requirements planning (CRP)
Exhibit 13.6 Disaggregation Framework for Manufacturing Plans and Schedules
Disaggregation in Manufacturing • Master Production Schedule (MPS) • A master production schedule (MPS)is a statement of how many finished items are to be produced and when they are to be produced. • Typically developed for weekly time periods over a 6- to 12-month horizon.
Eight-Week Master Production Schedule Example Exhibit 13.7
Disaggregation in Manufacturing • Materials Requirements Planning (MRP) • Materials Requirements Planning (MRP) is a forward-looking, demand-based approach for planning the production of manufactured goods and ordering materials and components to minimize unnecessary inventories and reduce costs. • The output of an MRP system is a schedule for obtaining raw materials and purchased parts, a detailed schedule for manufacturing and controlling inventories, and financial information that drives cash flow, budget, and financial needs.
Three Major Concepts of MRP Systems • Dependent demandisdemand that is directly related to the demand of other SKUs and can be calculated without needing to be forecasted. Demand for materials needed to produce finished goods is dependent on the number of finished goods planned. • Time phasing: all dependent demand requirements do not need to be ordered at the same time, but rather are time-phased as necessary. • Lot sizingisthe process of determining the appropriate amount and timing of ordering to reduce costs.
Example of a Bill of Material and Dependent Demand Exhibit 13.8
Dependent Demand Calculations Exhibit 13.9
MRP explosionis the process of using the logic of dependent demand to calculate the quantity and timing of orders for all subassemblies and components that go into and support the production of finished goods. • Lot sizingis the process of determining the appropriate amount and timing of ordering to reduce costs. • There are three common lot sizing methods for MRP: • Lot-for-lot (LFL) • Fixed order quantity (FOQ) • Periodic order quantity (POQ) • Each of these is illustrated in the following examples.
Bill of Material Exhibit 13.10 Production of a single product (A), which requires the components B, C, and D.
Item Inventory File; Example MPS Exhibits 13.11, 13.12
MRP Record for Item C Using the Lot-for-Lot (LFL) Rule Exhibit 13.13 An ordering schedule that covers the gross requirements for each week is called lot-for-lot (LFL).
Item B Fixed Order Quantity (FOQ) Lot Sizing MRP Record Exhibit 13.14 The fixed order quantity rule (FOQ)uses a fixed order size for every order or production run.
Item D Fixed Period Quantity (POQ) Lot Sizing and MRP Record Exhibit 13.15 The periodic order quantity (POQ)orders a quantity equal to the gross requirement quantity in one or more predetermined time periods minus the projected on-hand quantity of the previous time period.
Exhibit 13.16 Summary of MRP Explosion for Bill of Material in Exhibit in 13.10