1. m a n a g e m e n t 2e H i t t / B l a c k / P o r t e r
Chapter 13:
Organizational Control
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2. Learning Objectives
After studying this chapter, you should be able to:
Define operations management and explain its importance within service and manufacturing firms
Describe key techniques and tools for enhancing product and service quality
Explain common means of ensuring appropriate product quantity
Discuss tools for managing the appropriate timing of inventory and finished product

3. Learning Objectives
Describe methods for enhancing productivity and efficiency
Explain the principle roles of effective supply chain management in the operations of organizations

4. Operations Management
Operations management: focuses on the conversion of resources into products and services
Old term: products and operations management (POM)
Modern term: operations management (OM)
Operations management is a specialized field of management focused on the conversion of resources into products and services.
In the past, the focus was largely on manufacturing, and the term production and operations management (POM) was used.
With the lines between a manufacturing firm versus what is strictly a service firm now blurred, the term operations management (OM) is a more generic one describing the activities related to producing both products and services.

5. Objectives of Operations Management
Managing product/service quality
Planning quantity and capacity
Timing product and services
Achieving the best possible cost
Operations management consists of four major objectives:
Managing product or service quality
Planning to make and deliver the right quantity and figuring capacity to do so
Timing products and services so that they get to the customer at the right time
Achieving the best possible cost while achieving the other three objectives
Subsequent slides will discuss each objective in more detail.

6. Managing Quality
Quality: a measure of how well a product or service performs its intended purpose, including:
How reliable it is
How easy it is to service or repair when it does break down
Quality is a measure of how well a product or service performs its intended purpose, including how reliable it is or conversely how often it breaks down and how easy it is to service or repair when it does break down.
Quality is used to measure both tangible goods, such as computers or cell phones, as well as the service attached to computers and cell phones.

7. Economic Impact of Higher Quality
Improved Quality
Higher
Margins
Higher Revenues
Lower Unit Costs
Lower
Warrantee Costs
Lower Repair, Rework, Scrap Costs
Higher Efficiency
Higher Customer Satisfaction
Positive
Word of Mouth
Repeat
Business
Exhibit 14.1 showcases the economic impact of higher quality, which ultimately results in repeat business.
Adapted from Exhibit 13.1

8. Total Quality Management (TQM)
TQM: a management philosophy that:
Focuses on continual improvement
Emphasizes quality inspection at all stages of the production or service output
Encompasses a commitment from employees at all levels
TQM, a buzzword of the 1980s and 1990s, has now become a common management philosophy. Most organizations – profit and nonprofit – utilize TQM in their normal operations and may not even call it TQM anymore.
The three main points about TQM are that it focuses on continual improvement, emphasizes quality control at all production stages, and depends on a high commitment from all employees.

9. Total Quality Management (TQM)
Important TQM concepts:
Statistical Process Control (SPC)
Continuous Process Improvement
There are several concepts that are important to the TQM philosophy, and they’re interrelated. The following slides focuses on each.
Six Sigma
Employee Empowerment

10. TQM Concepts: Continuous Process Improvement
Continuous process improvement: refers to both incremental and breakthrough improvements in the way an organization does business
Four key elements:
Objective
Design
Capabilities
Metrics
Continuous process improvement, also known as business process reengineering and kaizen in Japan, refers to both incremental and breakthrough improvements in the way an organization does business. It has four key elements:
Objective: This step focuses on determining what a process is to achieve. For example, a loan application process should result in determining whether or not a loan should be given to an individual.
Design: This step examines the critical sequences and seeks to maximize the objective while minimizing the number, complexity, and time required in the process.
Capabilities: This step determines the required capabilities for executing the design.
Infrastructure: This step focuses on the information and other infrastructure needed for supporting the design and capabilities to meet the objective.
Metrics: Finally, this step determines the key metrics that help monitor and determine how well the redesign is doing in meeting the objectives.

11. Quality Control Charts
Exhibit 13.2 shows different quality control charts and how a manager might interpret them.
Adapted from Exhibit 13.2

12. TQM Concepts: Six Sigma
Six Sigma: a disciplined, data-driven approach for eliminating defects and enhancing quality with an orientation toward the impact such improvements will have on the customer
Quality is improved two ways:
DMAIC process (define, measure, analyze, improve, control)
DMADV process (define, measure, analyze, design, verify)
Six Sigma is a disciplined, data-driven approach for eliminating defects and enhancing quality with an orientation toward the impact such improvements will have on the customer. Statistically, Six Sigma is represented by a % reliability.
With the six sigma approach, quality ways:
DMAIC process (define, measure, analyze, improve, control) is focused on existing processes that fall below the specification and how to improve them.
DMADV process (define, measure, analyze, design, verify) is focused on the development of new processes

13. TQM Concepts: Employee Empowerment
By empowering employees, organizations will:
Engage the expertise of employees
Allow them to feel responsible for quality
Allow managers to understand and communicate the TQM vision
Employee empowerment was discussed in chapter 9 and is revisited here as an important TQM concept.

14. Planning Quantity and Capacity
Capacity planning: determining how much a firm should be able to produce of a product or service
Design capacity is the maximum capacity that can be attained under ideal conditions, organizations usually run at their effective capacities instead
Effective capacity is the percent of design capacity actually expected
Planning quantity and capacity is the second objective of operations management. A simple formula explains how to achieve effective capacity (the percent of design capacity actually achieved): effective capacity is equal to the expected design divided by the design capacity.
Design capacity is the maximum capacity that can be attained under ideal conditions, organizations usually run at their effective capacities instead.
Effective capacity is the percent of design capacity actually expected.
Effective
Capacity
Expected Design
Design Capacity =

15. Planning Quantity and Capacity
Other important concepts:
Materials requirement planning (MRP): getting right materials to right place at right time
Economic order quantity (EOQ): ordering economical quantity of product while minimizing costs
ABC analysis: which inventory items require most attention
Other concepts important to planning quantity and capacity are:
Materials requirement planning (MRP): a system of getting the right materials to the right place at the right time. MRP is a sophisticated computer system that utilizes information from a company’s master production schedule and inventory database. The system produces schedules that identify the required raw materials, parts, and assemblies the firm needs during each specified time period.
Economic order quantity (EOQ): a system used to determine the most economical quantity of products to order so that total inventory costs are minimized. The next slide illustrates EOQ.
ABC analysis provides information about which inventory items require the most attention.

16. Economic Order Quantity
This exhibit illustrates how economic order quantity (EOQ) works. EOQ is the quantity that should be ordered, based on ordering costs and carrying (or holding) costs.
Adapted from Exhibit 13.3

17. Timing Products and Services
Delivery of products and services must be timed well to avoid both out-of-stocks and excess inventory
Three important concepts:
Just-in-time (JIT) systems
Gantt charts
PERT and CPM charts
A third objective of operations management is the timing of the flow of inventory and delivery of products and services meet customers’ requirements. Not getting products and services to customers when they want them (often termed stock outs) can be as or more costly. In addition, carrying excess inventory can be costly. There has to be a balance between having too much product and not enough product.
Three concepts/tools important to timing are:
Just-in-time systems
Gantt charts
Pert charts
Each is discussed in the next few slides.

18. Timing Products and Services: Just-in-Time (JIT) System
Objective: produce product or service only as needed with only the necessary materials, equipment, and employee time that will add value
Benefits:
Reduces inventory levels (and lowers carrying cost of inventory)
Improves productivity
Increases customer satisfaction
The objective of the JIT system is to produce the product or service only as needed with only the necessary materials, equipment, and employee time that will add value to the product or service.
The key benefits of the JIT system are:
Reducing inventory levels to only the parts or supplies that are needed at the time and thus lowering the holding or carrying cost of inventory
Improving productivity and quality by reducing labor and equipment time
Increasing customer satisfaction by decreasing the time required to make and deliver the product or service

19. Timing Products and Services: Gantt Charts
May
June
July
Aug
Sep
Oct
Nov
Contact clients
Obtain contract specs
Submit bid
Receive feedback
Revise bid
Submit revised bid
Final approval or rejection
Complete bid review
Gantt Charts are nonmathematical graphical representations of projects. They are useful for determining what specific activities should be included to complete a project on time. They are especially important because they help managers monitor the progress of projects and are most often used for projects that have a manageable number of activities.
The slide shows an example of a Gantt chart, which was also shown in the chapter on planning.

20. Timing Products and Services: PERT/CPM Charts
Prepare
permits
Obtain
permits
Start
Develop
plans
Select
contractor
Construction
Open
store
The program evaluation and review technique (PERT) and the critical path method (CPM) are useful tools for scheduling, monitoring, and controlling the timing of large, complex projects such as the expansion of a freeway system or the construction of a store.
The slide shows a very simplified version of a PERT chart using the building of a retail store as an example.
The “critical path” - longest time path for the project – is represented in red. In this project, the critical path is the construction of the store, which is the most critical activity that must happen.
Tenant
approval
Move into
store

21. Achieving the Best Cost
Productivity measures how well an organization is using its resources (inputs) to produce goods and services (outputs)
Productivity
Output
Input =
The fourth objective of operations management is achieving the best cost. This involves productivity, which is defined in the slide. Basically, productivity equals output divided by input.
To ensure that students understand what inputs and outputs are, have them give examples of:
Inputs (resources such as capital, labor, raw materials used in production, etc.); example for a restaurant includes ingredients for making entrees and the skill/labor involved in cooking entrees.
Outputs (the finished goods or services); example for a restaurant is the finished entrée.

22. Service Productivity Differences by Country
Pieces of Mail Delivered per Person Employed
Number of Calls Made per Person Employed
France
37.5
17.4
Germany
21.1
19.1
Netherlands
51.5
22.3
Canada
92.4
122.6
United States
100.0
Exhibit 14.4 shows how service productivity differs by specific countries in the postal and telecommunications industries. While people in the U.S. may complain about lack of efficiency, the U.S. has among the most productive workers in these industries of the developed world.
Adapted from Exhibit 13.4

23. Achieving the Best Cost: Work Standard
Work standard: amount of time it should take for a trained employee to complete a specific activity or process
Two work measurement techniques:
Time and motion studies
Review each activity in detail so that unnecessary steps are eliminated
Work sampling
Take a sample of workers and calculate percentage of time spent on each activity during a working day or shift
Part of achieving the best cost is setting up work standards, as defined in the slide. There are two popular work measurement techniques:
Time and motion studies, in which managers review each activity in detail so that unnecessary steps are eliminated; and
Work sampling, in which managers take a sample of workers and calculate percentage of time spent on each activity during a working day or shift.

24. Achieving the Best Cost: Production Processes
Four different production processes:
Continuous flow production
Assembly-line processes
Small batch processes
Job shops
The nature of production processes also determines the economies of scale and cost. The four types of production processes are:
Continuous flow production is characterized by inputs that are transformed into outputs in an uninterrupted stream. Examples: chemical plants, refineries, integrated steel mills.
Assembly line processes are characterized by a series of workstations at which individual steps in the assembly of a product are carried out by workers or machines as the product is moved along. Examples: cars, computers, and cameras.
Small batch processes are used to produce exactly that—small batches of products or services. Example: university classes.
Job shops are characterized by production processes that focus on the creation of small groups of products (as small as one) with features that are typically different from one job to the next. Example: High-end tailors.

25. Production Types and Trade Offs
Continuous
Flow
Low
Assembly
Line
Small
Batch
Flexibility
Exhibit 14.5 illustrates the tradeoff between flexibility (or customization) offered by each of the four basic production types and its ability to capture economies of scale.
Job
Shop
High
High
Economies of Scale
Low
Adapted from Exhibit 13.5

26. Achieving the Best Cost: Technology
Computer-aided design (CAD) and computer-aided engineering (CAE)
Rapid prototyping
Computer-aided manufacturing (CAM)
Designing for manufacturing (DFM)
As in many other areas of management, technology is used to help firms achieve the best cost. A few of the technological concepts and tools are:
Computer-aided design (CAD) and computer-aided engineering (CAE): computerized processes for designing new products, making modifications to existing products, and testing prototypes or models of products that can operate separately from a flexible manufacturing system or can be an important part of its design and ongoing operations.
Rapid prototyping: a technique known as stereolithography to build three-dimensional models out of plastic
Computer-aided manufacturing (CAM): the use of computers to direct manufacturing processes.
Designing for manufacturing (DFM): the process of designing products to both maximize their functionality for customers and to maximize their ease of production and minimize their associated costs.

27. Instrument-Panel Improvements Achieved Via DFM
Previous Instrument Panel
DFM Instrument Panel
Part Count
74 pieces
9 pieces
Fabrication Time
305 Hours
20 Hours
Assembly Time
149 Hours
8 Hours
Installation Time
153 Hours
Total Time
697 Hours
181 Hours
Weight
3.00 Kilograms
2.74 Kilograms
Cost
74% Reduction
Exhibit 14.6 shows how DFM (designing for manufacturing) can reduce costs without impacting quality. The chart summarizes the results of improvements made by McDonnell Douglas in its aircraft component assemblies. Overall, there was a 74% cost reduction achieved with the DFM instrument panel.
Adapted from Exhibit 13.6

28. Managing the Supply Chain
Supply chain is:
Coordinated system of resources, information, activities, people, and organizations
Involved in moving a product or service from raw materials to components
Into a finished product or service
Delivered to the end customer
Suppliers
Manufacturer
Distributor
Retailer
Managing the supply chain is a critical component of operations management. The supply chain may consist of various organizations that help move a product from raw materials/components into a finished good or service and into the hands of the final customer. A basic supply chain is illustrated in the slide.
Customer

29. Dell’s Supply Chain Activity or Component Organization(s) Location
Phone Order
Dell
25 centers around the world, including the United States, the Philippines, and India
Assembly
Limerick, Ireland; Xiamen, China; Eldorado do Sul, Brazil; Nashville Tennessee; Austin, Texas; Penang, Malaysia
Notebook design
(ODM) Original Design Manufacturer
United States
Taiwan
Microprocessor
Intel
Philippines, Costa Rica, Malaysia, China
Memory
Samsung
Nanya
Infineon
Elpida
Korea
Germany
Japan
Graphics Card
MSI
Foxconn
China
Cooling Fan
CCI
Auras
This slide and the next three show the complexity of the supply chain and all the coordination involved in making a Dell laptop computer. The chart provides a list of the key activities, locations, and organizations involved from the time you might call in an order and receive the computer at your home.
Adapted from Exhibit 13.7

30. Dell’s Supply Chain (cont.)
Activity or Component
Organization(s)
Location
Motherboard
Samsung
Quanta
Compal
Wistron
Korea
Taiwanese (China factory)
Taiwan
Keyboard
Alps
Sunrex
Darfon
Japanese (China factory)
LCD Display
LG Philips
Toshiba
Chi Mei Optoelectronics
Hannstar Display
AU Optronics
Japan
Wireless Card
Agere
Arrow
Askey
Gemtek
USI
United States (China factory)
United States (Malaysia factory)
China
Adapted from Exhibit 13.7

31. Dell’s Supply Chain (cont.)
Activity or Component
Organization(s)
Location
Modem
Asustek
Liteon
Foxconn
Taiwanese (China factory)
China
Battery
Motorola
SDI
Simplo
United States (Malaysia factory)
Korea
Taiwan
Hard Drive
Segate
Hitachi
Fujitsu
Toshiba
United States (Singapore factory)
Japanese (Thailand factory)
Japanese (Philippines factory)
CD/DVD Drive
Samsung
NEC
Teac
Korean (Indonesia or Philippine factory)
Japanese (China or Malaysia factory)
Japanese (Indonesia, China or Malaysia factory)
Adapted from Exhibit 13.7

32. Dell’s Supply Chain (cont.)
Activity or Component
Organization(s)
Location
Power Adapter
Delta
Liteon
Samsung
Mobility
Thailand
Taiwan
Korea
United States (China factory)
Power Cord
Volex
United Kingdom (China, Malaysia, or India factory)
Memory Stick
M-System
Smart Modular
Israel
United States (Malaysia factory)
Adapted from Exhibit 13.7

33. Managing the Supply Chain: Using Technology
Electronic data interchange (EDI): the integration and real-time exchange of supply chain information that allows supply chain managers to manage complicated relationships and processes
Web-based systems
Technology is useful in helping managers to manage the supply chain. A couple of examples of technology are:
Electronic data interchange (EDI) is the integration and, in many cases, real-time exchange of supply chain information that allows supply chain managers to manage complicated relationships and processes.
A number of Web-based systems

34. Supplier Relationships
Exhibit 13.8 summarizes the differences between an adversarial relationship and a partnership with a supplier.
Adapted from Exhibit 13.8

35. Managing the Supply Chain: Reverse Supply Chain
Reverse supply chain: activities needed to retrieve a used product from a customer and either reuse it or dispose of it
Activities include:
Acquiring the used products
Managing reverse logistics to get the products to the company
Inspecting the product
Determining the disposition (destruction or reuse)
Distributing and selling refurbished products
Regulations may require certain types of businesses to manage the reverse supply chain to help in recycling efforts. The reverse supply chain relates to the activities needed to retrieve a used product from a customer and either reuse it or dispose of it.
Activities involved in reverse supply chain management are listed in the slide.