Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited. PowerPoint Presentation by Thomas M c Kaig, Ryerson University Operations Management and Management Control Systems 12

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Looking Ahead After studying this chapter, you should be able to: 1. Discuss the nature of the operations process for both products and services. 2.Describe the need for management control systems. 3.Explain the key elements of total quality management (TQM) programs. 4.Explain how reengineering and other methods of work improvement can increase productivity and make a firm more competitive. 5.Discuss the importance of purchasing and the nature of key purchasing policies. 6.Describe ways to control inventory and minimize inventory costs.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited The Operations Process The Nature of the Operations Process  Operations management The planning and control of the operations process Involves acquiring inputs and overseeing their transformation in products and services

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited The Operations Process Inputs Operations Outputs DesigningProcessingTreatingStoringAdvising FabricatingRefiningAssemblingShippingInstructing Clothing Baked goods Paint Dry cleaning Appliance repair Automobile painting Products Services Money Labour EquipmentInformationEnergy Raw Materials Examples: Figure 12-1

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Manufacturing versus Service Manufacturing Versus Service Operations  Productivity is more easily measured in manufacturing than service operations  Quality is more difficult to establish in service than manufacturing operations.  Customers are more involved in service than manufacturing operations.  Manufacturing can produce goods for inventory; service operations cannot store or bank services.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Types of Manufacturing Job Shops  Operations characterized by short production runs of small quantities of unique items. Repetitive Manufacturing  Operations in which long production runs are used to produce a large quantity of a standardized product. Batch Manufacturing  An intermediate form involving more variety in volume and products than job shops and less than repetitive manufacturing.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Planning and Scheduling and Maintenance Operations Planning and Scheduling  Attempting to achieve the orderly, sequential flow of products to market. Production operations Service operations Plant Maintenance  The role of maintenance To correct equipment malfunctions and prevent breakdowns  Types of maintenance Preventive maintenance Corrective maintenance

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited The Control Cycle Control Cycle  A period of time over which an activity is planned, measured, corrected, and re-planned Variance  The difference between planned forecast activity and actual activity

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited The Control Cycle Illustrated Figure 12-2

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Successful Quality Management Supportive Organizational Culture Appropriate Tools and Techniques Focus on Customers Essential Elements of Successful Quality Management

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Total Quality Management and Quality Goals of Operations Management Total Quality Management (TQM)  An aggressive, all-encompassing management approach to providing high-quality products and services. Quality  The features of a product or service that enable it to satisfy customers’ needs.  A perception of the customer as to the suitability of the product or service of a firm.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Customer Focus on Quality Management Customer Expectations  Quality is the extent to which a product or service satisfies customer’s needs and expectations. Product quality Service quality Product and service quality combinations  “ The customer is the focal point of quality efforts.” Customer Feedback  Customers are the eyes and ears of the business for quality matters.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Benchmarking and TQM Benchmarking  The process of studying the products, services, and practices of other firms and using the insights gained to improve quality internally. Continuous Quality Improvement  A constant and dedicated effort to improve quality.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Tools and Techniques of TQM Employee Participation  Employee performance is a critical quality variable.  Quality circle A group of employees who meet regularly to discuss quality-related problems.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Tools and Techniques of TQM The Inspection Process  The examination of a product to determine whether it meets quality standards.  Inspection standard A specification of a desired quality level and allowable tolerances.  Attribute inspection The determination of product acceptability based on whether it will or will not work.  Variable inspection The determination of product acceptability based on a variable such as weight or length.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Statistical Methods of Quality Control Acceptance Sampling  The use of a random, representative portion to determine the acceptability of an entire lot. Statistical Process Control  The use of statistical methods to assess quality during the operations process. Control Chart  A graphic illustration of the limits used in statistical process control.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited International Certification for Quality Management ISO 9000  The standards governing international certification of a firm’s quality management procedures.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Quality Management in Service Businesses Six factors positively influence customers’ perception of service quality 1.Being on target 2.Care and Concern 3.Spontaneity 4.Problem Solving 5.Follow up 6.Recovery

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Competitive Strength Through Improved Productivity The Importance of Improving Productivity  Productivity is the efficiency with which inputs are transformed into outputs.  Productivity is more difficult to increase in service industries than in manufacturing sectors. …continued

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Competitive Strength Through Improved Productivity Reengineering for Improved Productivity  Reengineering A fundamental restructuring to improve the operations process. Asking “Why?” is important in the reengineering process. …continued

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Operations Analysis  Laws of motion economy Arranging work in the most cost-effective and efficient manner possible. Methods of Work Measurement  Motion Study An analysis of all the motions a worker makes to complete a given job.  Time Study A determination of the average time, it takes to complete Competitive Strength Through Improved Productivity

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Purchasing Policies and Practices Purchasing  The process of obtaining materials, equipment, and services from outside. The Importance of Purchasing  The process of acquiring quality raw material inputs affects: The timely and consistent production of quality products. Retailer sales of finished products to customers. The costs of products, their profitability and their selling prices.

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Make or Buy Decisions Purchasing Practices and Profitability  Making or buying A firm’s choice between producing and purchasing component parts for its products.  Reasons for making: Increased utilization of plant capacity Assurance of supply of critical components Maintaining secrecy in designs and processes Saving on transportation costs and supplier profits Closer coordination and control of overall process Higher quality components for inputs

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Outsourcing and Reasons for Buying Purchasing Practices and Profitability  Outsourcing Purchasing products or services that are outside the firm’s area of competitive advantage.  Reasons for Buying Supplier’s part/service is cheaper and/or higher quality Investment savings on space, personnel, equipment Greater flexibility in matching supply and demand Increased focus on production of core product/service No risk of equipment obsolescence

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Sources of Supply Diversifying sources of supply  Reasons for having a sole supplier Outstanding supplier quality Quantity discounts for volume purchases Single orders too small to divide among suppliers Quality of supplier-customer relationship  Reasons for having multiple suppliers Choice of best quality, price, and service Supplier competes for business Insurance against input interruptions

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Relationships with Suppliers Relationships with suppliers  Selecting suppliers Price and quality Location and delivery reliability Services offered—credit, product support, promotion Building good relationships with suppliers  Purchasing practices Pay bills promptly Be courteous to sales representatives Avoid abrupt cancellations of orders Maintain a professional relationship

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Strategic Alliances Developing Strategic Alliances  Strategic alliance is an organizational relationship that links two independent business entities in a common endeavour. Involves close coordination of buyers and sellers to: Reduce product introduction lead time Improve product quality Engage in joint problem solving Make joint adjustments to market conditions Involve the supplier early in product development

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Inventory Management and Operations Inventory Cost Control  Economic order quantity (EOQ) The quantity to purchase in order to minimize total inventory costs. Total inventory costs Total ordering costs Total carrying costs =+

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Objectives of Inventory Management Ensuring Continuous Operations Maximizing Sales Protecting Assets Minimizing Inventory Investment Figure 12-3

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Graphic Portrayal of the Economic Order Quantity EOQ Total Costs Ordering Costs Carrying Costs Order Quantity (Units) Cost ($) Figure 12-4

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Inventory Management and Operations ABC Inventory Analysis  A system of classifying items in inventory by relative value  Category A (close/continuous control) High-value or critical production component items  Category B (moderate control) Less costly, secondary importance items  Category C (periodic control) Low-cost and noncritical items …continued4

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Inventory Management and Operations Just-In-Time Inventory (JIT) System, also Kanban  A method of reducing inventory level to an absolute minimum. New items arrive at the same time that the last inventory item is placed in service  JIT promotes: Closer coordination with suppliers Consistent quality production Lower safety stock levels …continued

Chapter 12 Copyright © 2003 by Nelson, a division of Thomson Canada Limited Inventory Management and Operations Inventory Record-Keeping Systems  Physical inventory system A method that provides for periodic counting of items in inventory  Cycle counting A system of counting different segments of the physical inventory at different times during the year.  Perpetual inventory A method for keeping a running record of inventory.