BITS Pilani presentation

BITS Pilani
Pilani Campus
 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Operations Management
Operations and Productivity
Learning Objectives
❖ What Is Operations Management?
❖ Organizing to produce goods and services
❖ What Operations Managers Do
❖ The Heritage of Operations Management
❖ Goods and Services
❖ The Productivity Challenge
❖ Challenges in Operations Management
❖ Ethics, Social Responsibility, and Sustainability

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What Is Operations Management?
• Production: Creation of goods and services

• Operations Management (OM)

o the set of activities that create value in the form of goods and services by
transforming inputs (raw material, labour etc.) into outputs (finished products in
the form of goods and / or services)

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Organizing to Produce Goods and Services

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Essential Areas of Management

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Organizational Chart: Bank
To create goods and services, all organizations perform three functions

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Organizational Chart: Airline

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Organizational Chart: Manufacturing Firm

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The Supply Chain
The firm creates value for the customer through the three essential functions
• However, firms seldom create this value by themselves
o Focus on their “core competencies”* and rely on the supply chain to fill the gaps
– A (global) network of organizations and activities to supply goods and services
– The supply chain is expected to provide a competitive advantage

Farmer Syrup Bottler Distributor Retailer

producer

*CK Prahalad: Core competence is the collective learning in the organization

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What do Operations Managers Do?
The Ops Manager applies the management process to the decisions they make
• planning, organizing, staffing, leading and controlling

Strategic Decision Areas Chapters(S)

1. Design of goods and services 5
2. Managing quality 6
3. Process strategy & capacity strategy 7
4. Location strategy 8
5. Layout strategy 9
6. Human resources and job design 10
7. Supply-chain management 11
8. Inventory management 12, 14, 16
9. Scheduling 13, 15
10. Maintenance 17
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 The Strategic Decisions (1 of 3)
1. Design of goods and services (Chapter 5)
• Defines what is required
• Product design determines quality, sustainability* and human resources
2. Managing quality (Chapter 6)
• Determine the customer’s quality expectations
• Establish policies and procedures to achieve that quality
3. Process and capacity design (Chapter 7)
• How is a good or service produced?
• Commits management to specific technology, quality, resources, and investment
4. Location strategy (Chapter 8)
• Nearness to customers, suppliers, and talent
• Considering costs, infrastructure, logistics, and government
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The Strategic Decisions (2 of 3)
5. Layout strategy (Chapter 9)
• Integrate capacity needs, personnel levels, technology, and inventory
• Determine the efficient flow of materials, people, and information
6. Human resources and job design
• Recruit, motivate, and retain personnel with the required talent and skills
• Integral and expensive part of the total system design
7. Supply chain management (Chapter 11)
• Integrate supply chain into the firm’s strategy
• Determine what is to be purchased, from whom, and under what conditions
8. Inventory management (Chapters 12, 14)
• Inventory ordering and holding decisions
• Optimize considering costs, supplier capability, and production schedules
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The Strategic Decisions (3 of 3)
9. Scheduling (Chapter 13)
• Determine and implement intermediate and short-term schedules
• Utilize personnel and facilities while meeting customer demands
10. Maintenance (Chapter 17)
• Consider facility capacity, production demands, and personnel
• Maintain a reliable and stable process

Operations is also expected to

• Work with Finance to review budgets, revenue growth, and profitability
• Report on the functional area during Management Reviews

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 Common OM Jobs
Ops coordinator – Manage daily ops of a company and performs admin tasks
Ops analyst – Reviews policies, processes & procedures to locate areas of improvement
Ops supervisor – Ensures his/her department is functioning effectively, remaining
productive and submitting valuable work.
Ops manager – Oversees productivity and efficiency levels.
Project manager – Oversee and manage various projects within an organization
Ops engineer – Create reports on performance and systems. Identify ways to save
costs and implementing policies to keep employees safe in the workplace.
COO – Reports directly to the CEO. Work with Marketing and Sales to increase
revenues, and work with the operations teams to improve efficiency

[Link]

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The Heritage of OM
• Division of labor (Adam Smith 1776; Charles Babbage 1852)
• Standardized parts (Whitney 1800) (Originally conceived by a French gunsmith Honore Le Blanc)
• Scientific Management (Taylor 1881)
• Coordinated assembly line (Ford / Sorenson 1913)
• Gantt charts (Gantt 1916)
• Motion study (Frank and Lillian Gilbreth 1922)
• Quality control (Shewhart 1924; Deming 1950)
• Computer (Atanasoff 1938)
• CPM/PERT (DuPont 1957, Navy 1958)
• Material requirements planning (Orlicky 1960)
• Computer aided design (CAD 1970)
• Flexible manufacturing system (FMS 1975)
• Computer integrated manufacturing (1990)
• Globalization (1992)
• Internet (1995)
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Products & Services
Almost all services / goods are a mixture of a service and a tangible product
Product (ISO 9001/2015 Clause 3.7.6)
Output of an organization that can be produced without any interaction taking place
between the organization and the customer

Service (ISO 9001/2015 Clause 3.7.7)

Output of an organization with at least one activity necessarily performed between the
organization and the customer.

Examples
• Washing machine Vs Laundry service
• Car Vs Car Insurance

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Differences Between Goods and Services
CHARACTERISTICS OF SERVICES CHARACTERISTICS OF GOODS
Intangible: Ride in an airline seat Tangible: The seat itself
Produced and consumed simultaneously: Product can usually be kept in inventory
A haircut is consumed as it is produced (Beauty care products)
Unique: Your investments and medical care are unique Similar products produced (iPods)

High customer interaction: Often what the customer is paying for Limited customer involvement in production
Consulting
Inconsistent product definition: Product standardized (iPhone)
Auto Insurance changes with age and type of car
Often knowledge based & hard to automate: Standard tangible product: Automation may be feasible
Legal, education, Medical services
Services dispersed: Product typically produced at a fixed facility
Service may occur at retail store, local office, house call, or via internet.
Quality may be hard to evaluate: Many quality aspects products are easy to evaluate
Consulting, education, and medical services Strength of a bolt
Reselling is unusual: Musical concert or medical care Product often has some residual value

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Productivity Challenge
Productivity is the ratio of outputs (goods and services) divided by the inputs
(resources such as labour and capital)

The objective is to improve productivity!

• Improving productivity means improving efficiency
• (Efficient Vs Effective)

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Improving Productivity at Starbucks
A team of analysts continually looks for ways to shave time. Some improvements:
Stop requiring signatures on credit card purchases Saved 8 seconds per transaction
under $25
Change the size of the ice scoop Saved 14 seconds per drink
New espresso machines Saved 12 seconds per shot

Operations improvements have helped Starbucks increase yearly revenue per outlet
by $250,000 to $1,000,000.
Productivity improved by about 4.5% for the year
Outline Process
Chart?

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Productivity Variables
Labor
• 3 key variables for improved labor productivity:
o Appropriate education
o Health and
o Overheads that make labor available, such as transportation and sanitation.
Capital
• Capital investment provides tools that increase productivity
Management
Responsible for
• Application of knowledge and technology to make improvements
• Effectively using labor and capital to increase productivity.
This accounts for over half of the annual increase in productivity (US 2015 data).

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Productivity
Productivity = (Units produced) / (Input used)

• Represents output relative to input

• Only through productivity increases can our standard of living improve
• Measure of process improvement

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Productivity Calculations
Labour Productivity: = (Units produced) / (Labour-hours used)
• One resource input  single-factor productivity

Multifactor Productivity = Output / (Labor + Material + Energy + Capital + …)

• Also known as total factor productivity
• Output and inputs are often expressed in cash (Rupees)
• Multiple resource inputs  multi-factor productivity

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Example
Old System: New System:
Staff of 4 works 8 hrs/day Staff of 4 works 8 hrs/day
Produces 8 titles/day Produces 14 titles/day
Payroll cost = $640/day Payroll cost = $640/day
Overhead = $400/day Overhead = $800/day

Old System
8 tiles per day
• Labour productivity = = 0.25 tiles per labour − hr
32 labour−hrs

8 tiles per day

• Multifactor productivity = = 0.0077 tiles per $
$640+400

New System
14 tiles per day
Labour productivity = = 0.4375 tiles per labour − hr
32 labour−hrs

14 tiles per day

Multifactor productivity = = 0.0097 tiles per $
$640+800
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Measurement Problems
Multifactor-productivity measures provide better info about the trade-offs among factors
but … measurement problems
Some of these measurement problems are:
• Quality may change while the quantity of inputs and outputs remains constant
o Quality of output (tiles)
• External elements may cause an increase or decrease in productivity
o Erratic Vs stable power supply
• Precise units of measure may be lacking
o If different units are making different grades of the product
Economy car Vs Luxury car; GP and patients

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 Productivity in the Service Sector
Productivity improvement in services is difficult because:
1. Typically labor intensive
2. Frequently focused on unique individual attributes or desires
3. Often an intellectual task performed by professionals
4. Often difficult to mechanize and automate
5. Often difficult to evaluate for quality

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Productivity at Taco Bell
Improvements: Results:
• Revised the menu • Preparation time cut to 8 seconds
• Designed meals for easy preparation • Management span of control increased from 5 to 30
• Shifted some preparation to suppliers • In-store labour cut by 15 hours/day
• Efficient layout and automation • Floor space reduced by more than 50%
• Training and employee empowerment • Average 164 seconds/customer from drive-up to pull-out
• New water- and energy-saving grills
• Water- and energy-savings grills conserve
o 300 million gallons of water and 200 million KwH of
electricity each year
• Green-inspired cooking method saves 5,800 restaurants
$17 million per year

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 Challenges in OM
• Globalization
o Global markets and Global production
• Supply-chain partnering
o Shorter product life cycles, demanding customers, and fast changes in
technology, materials, and processes require supply-chain partners to be in tune
• Sustainability
o Green products and packaging for ecological sustainability
• Rapid product development
o Demanding customers & shorter product life cycles
• Mass customization
o Product designs and flexible production processes to cater to global markets
• Lean operations
o A well-run operation, where the customer is satisfied, employees are respected,
and waste does not exist
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Ethics, Social Responsibility, and Sustainability

• Develop and produce safe, high-quality green products

• Train, retrain, and motivate employees in a safe workplace
• Honour stakeholder commitments

Stakeholders: Those with a vested interest in an organization, including customers, distributors, suppliers, owners, lenders,
employees, and community members
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 Pioneers

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Eli Whitney
▶ Born 1765; died 1825
▶ In 1798, received government contract to make 10,000 muskets
▶ Showed that machine tools could make standardized parts to exact specifications
▶ Musket parts could be used in any musket

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Frederick W. Taylor
▶ Born 1856; died 1915
▶ Known as ‘father of scientific management’
▶ In 1881, as chief engineer for Midvale Steel, studied how tasks were done
▶ Began first motion and time studies
▶ Created efficiency principles

Taylor’s Principles
Management Should Take More Responsibility for:
1. Matching employees to right job
2. Providing the proper training
3. Providing proper work methods and tools
4. Establishing legitimate incentives for work to be accomplished
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Frank and Lillian Gilbreth
▶ Frank (1868-1924); Lillian (1878-1972)
▶ Husband and wife engineering team
▶ Further developed work measurement methods
▶ Book and Movie: “Cheaper by the Dozen,” “Bells on Their Toes”

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Henry Ford
▶ Born 1863; died 1947
▶ In 1903, created Ford Motor Company
▶ In 1913, first used moving assembly line to make Model T
▶ Unfinished product moved by conveyor past work station
▶ Paid workers very well for 1911
($5/day!)

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W. Edwards Deming
▶ Born 1900; died 1993
▶ Engineer and physicist
▶ Credited with teaching Japan quality control methods in post-WW2
▶ Used statistics to analyze process
▶ His methods involve workers in decisions

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Test Yourself
❖ Solved problems: 1.1, 1.2
❖ Consider the organization charts given in the first chapter for three organizations
depicting the functions of an organization. Develop a similar figure for your
organization

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Takeaway
❖ What Is Operations Management?
❖ What Operations Managers Do
❖ The Heritage of Operations Management
❖ Goods and Services
❖ The Productivity Challenge
❖ Challenges in Operations Management
❖ Ethics, Social Responsibility, and Sustainability
❖ Ethics, Social Responsibility, and Sustainability

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 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Thank you!!
 BITS Pilani presentation

BITS Pilani
Pilani Campus
 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Operations Management
Operations Strategy
Learning Objectives
❖ Management Concepts
❖ Absolute / Comparative / Competitive Advantage
❖ Core competence
❖ Mission and strategy
❖ Developing Missions
❖ Three conceptual ways to achieve the mission
❖ Differentiation, Cost leadership, Response
❖ Developing Strategies
❖ Translate the conceptual ways into tasks that generate customer value
❖ Perspectives to consider
❖ Key success factors and core competencies
❖ Global Strategies
❖ Four global operations strategy options
❖ Factor rating to evaluate outsource providers

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HS Talks
Log into [Link]
• Login Via Organization
• Select Birla Inst of Tech & Science, Pilani – WILP
• Register yourself with your BITS ID

• Once you have logged in

• Scroll down and select The Business and Management Collection
• In the search bar on top, type Southwest Airlines and American Airlines
• You will see: Southwest Airlines and American Airlines: aligning operations with
strategy by Prof. Jan A. Van Mieghem – Kellogg School of Management
• Its less than 7 minutes long
• View and I hope I can respond if you require any clarification
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Absolute / Comparative / Competitive Advantage
• Adam Smith (1776): Entities should specialize in the goods they can produce most
efficiently and trade for any products they can't produce as well
• David Ricardo (1817): Comparative advantage

• Absolute advantage: Ability to produce more or better goods than others

• Comparative advantage: Ability to produce goods and services at a lower
opportunity cost compared to the competition, not necessarily at a greater volume
or quality
• Competitive advantage: Factors that allow an entity to produce goods or services
more cheaply or of better quality or more variety or quicker than its rivals
o A unique advantage over competitors

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Theory of Comparative Advantage
• If an external provider can perform activities more productively than the purchasing
firm, then the external provider should do the work
• Purchasing firm focuses on core competencies
• Drives outsourcing and the search for supply chain partners
o If the external provider can perform some activity more productively than the
firm, then the external provider should do the work.
o This allows the firm to focus on what it does best—its core competencies.

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Absolute Vs Comparative Advantage: Example
Consider a lawyer and the secretary.
• The lawyer is better at producing legal services and is also a faster typist.
The lawyer produces $175/hour in legal services and $25/hour in secretarial duties
The secretary produces $0/hour in legal services and $20/hour in secretarial duties
The lawyer has an absolute advantage in both areas.
• Nevertheless, they can leverage their comparative advantages and disadvantages.
Let us focus on the opportunity cost
• Lawyer: The opportunity cost of secretarial work is high: $175 - $25 per hour
The lawyer is better off producing an hour's worth of legal services and hiring the
secretary to type and organize.
• The secretary is better off typing with the opportunity cost of doing so is low.
Thus the comparative advantage

[Link]

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Core Competence
C. K. Prahalad and Gary Hamel (1990)
“A harmonized combination of multiple resources and skills that distinguish a firm in the
marketplace" and therefore are the foundation of the firm’s competitiveness
• The set of unique skills, talents and capabilities that a firm does at a world-class standard

A firm’s competitiveness is based on the ability to develop core competences

A Core competency fulfills three criteria*:

• Provides potential access to a wide variety of markets
Honda’s engines: Cars, Motorcycles, lawn mowers, generators, snow blowers, and more
• Should make a significant contribution to the perceived customer benefits
Amazon’s strategy focuses on unwavering customer experience and satisfaction
• Should be difficult to imitate by competitors
McDonald’s enormous scale helps it wield massive buying power
*[Link]

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Mission & Strategy
Mission
• The organization’s purpose for existing
• Where is the organization going?
• Answers “What do we contribute to society?”
• Provides boundaries and focus

Strategy
• How to achieve its purpose

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Factors Affecting Mission
Corporate values and the environment determine the mission

Philosophy
and Values

Profitability and
Environment Growth

Mission

Customers Public Image

Benefit to
Society

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Mission – Examples
The mission of Merck is to provide society with superior products and services —
innovations and solutions that improve the quality of life and satisfy customer needs —
to provide employees with meaningful work and advancement opportunities and
investors with a superior rate of return.

Our (Pepsico) mission is to be the world's premier consumer products company

focused on convenient foods and beverages. We seek to produce financial rewards to
investors as we provide opportunities for growth and enrichment to our employees, our
business partners and the communities in which we operate. And in everything we do,
we strive for honesty, fairness and integrity.

Arnold Palmer Hospital for Children provides state of the art, family-centered
healthcare focused on restoring the joy of childhood in an environment of compassion,
healing, and hope.

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Developing Missions

Organization’s
Mission

Functional Area
Missions

Finance/
Marketing Operations Accounting

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Example: Company & OM Missions
Company Mission
To manufacture and service an innovative, growing, and profitable electronics business that exceeds our
customers’ expectations.

Operations Management Mission

To produce low-cost high-quality products

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Example: OM Department Missions (1 of 2)
Product design To design and produce products and services with outstanding quality and inherent
customer value.

Quality To attain the exceptional value that is consistent with our company mission and
management marketing objectives by close attention to design, procurement, production, and
field service operations

Process design To determine, design, and produce the production process and equipment that will
be compatible with low-cost product, high quality, and good quality of work life at
economical cost.

Location To locate, design, and build efficient and economical facilities that will yield high
value to the company, its employees, and the community.

Layout design To achieve, through skill, imagination, and resourcefulness in layout and work
methods, production effectiveness and efficiency while supporting a high quality of
work life.

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Example: OM Department Missions (2 of 2)
Human To provide a good quality of work life, with well-designed, safe, rewarding jobs, stable
resources employment, and equitable pay, in exchange for outstanding individual contribution
from employees at all levels.

Supply-chain To collaborate with suppliers to develop innovative products from stable, effective,
management and efficient sources of supply.

Inventory To achieve low investment in inventory consistent with high customer service levels
and high facility utilization.

Scheduling To achieve high levels of throughput and timely customer delivery through effective
scheduling.

Maintenance To achieve high utilization of facilities and equipment by effective preventive

maintenance and prompt repair of facilities and equipment.

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 Developing Strategies
• Action plan to achieve mission
• Functional areas have strategies
• Strategies must
o Exploit Opportunities and Strengths
o Neutralize Threats, and avoid Weaknesses

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Conceptual Ways to Achieve Mission

1. Differentiation
2. Cost leadership
3. Response

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OM’s Strategies
Translate the 3 conceptual ways into tangible tasks
1. Differentiation – uniqueness / better or at least different
2. Cost leadership – cheaper
3. Response – flexible / reliable / quick response

Resulting in Competitive Advantage

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Competing on Differentiation
Uniqueness can go beyond both the physical characteristics and service
attributes to encompass everything that impacts customer's perception of
value

• Safeskin gloves – leading edge products

• Walt Disney Magic Kingdom – experience differentiation
• Hard Rock Cafe – dining experience

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Experience Differentiation
Engaging a customer with a product through imaginative use of
the five senses, so the customer “experiences” the product
• Theme parks use sight, sound, smell, and participation
• Movie theatres use sight, sound, moving seats, smells, and
mists of rain
• Restaurants use music, smell, and open kitchens

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 Competing on Cost
Provide the maximum value as perceived by customer.
Does not imply low quality.
• Southwest Airlines – secondary airports, no frills service, efficient
utilization of equipment
• Walmart – small overhead, low shrinkage, and distribution costs

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Competing on Response
• Flexibility: Match market changes in design innovation and volumes
• Respond effectively and efficiently to fluctuations from the norm
• Fulfil an unexpected order
• Multi-use parts, multi-functional machines, and cross-training

• Reliability is meeting schedules

• German machine industry – expensive (high costs) but …

• Quickness in design, production, and delivery

• Zara

[Link]
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OM’s Contribution to Strategy
10 Operations Competitive
Decisions Strategy Example Advantage

Product DIFFERENTIATION:
Innovative design ………... Safeskin’s innovative gloves
Broad product line ……… Fidelity Security’s mutual funds
Quality After-sales service …….. Caterpillar’s heavy equipment
service
Process Experience …………….. Hard Rock Café’s dining
experience

Location COST LEADERSHIP:

Low overhead ……… Franz-Colruyt’s warehouse-type Differentiation
stores
Layout (better)
Effective capacity … Southwest Airline’s
use aircraft utilization
Human
resource Inventory ……………. Walmart’s sophisticated Response
management distribution system (faster)
Supply chain Cost
RESPONSE: leadership
Inventory Flexibility …………….. Hewlett-Packard’s response to (cheaper)
volatile world market
Reliability ……………… FedEx’s “absolutely, positively,
Scheduling on time”
Quickness ………………. Pizza Hut’s 5-minute guarantee
at lunchtime
Maintenance

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Perspectives for Formulating Operations Strategy*
• Resources view
o Ensure the potential strategy is compatible with the available financial, physical,
human, and technological resources
• Value-chain analysis
o Identify activities that represent (potential) strengths – these could be leveraged
for developing competitive advantage
• The organization context**
o Factors that can affect the ability to achieve sustained success
o Complex, demanding and ever-changing environment
o External & Internal opportunities and issues
– SWOT Analysis, Porter’s Five Forces model
• Product Life Cycle
* Issues in Operations Strategy
** Competitive environment & Internal changes
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Value Chain Analysis
• Value Chain (Michael Porter)
o Refers to the various business activities and processes involved in creating a
product or performing a service
o All such activities can be split into two categories that contribute to its margin:
primary activities and support activities
– Primary activities: In the creation of a product or the execution of a service:
Inbound / Outbound logistics, Operations, Marketing & Sales, After-sales service
– Secondary activities: Support primary activities to become more efficient:
Procurement, Tech development, HR, Infra
• Value-chain analysis
o Identify activities that could be leveraged for developing competitive advantage
Cost Leadership: evaluate each piece through the lens of reducing expenses

[Link]

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Value Chain – Toyota

[Link]

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Context of an Organization*
Factors that can affect the ability to achieve sustained success
• Interested parties
An entity that can affect, be affected by, or perceive itself to be affected by, the firm

• External issues
o Statutory and regulatory requirements, competition, globalisation, social, economic,
political and social factors, innovation and advances in technology

• Internal issues
o Size and complexity of the organisation, resources, competency, maturity,
organizational flux

* Clause 5, ISO 9001:2015

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Product Life Cycle: Strategies & Issues

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Strategy Development and Implementation
The operations manager’s job is to implement an OM strategy, provide competitive
advantage, and increase productivity
• Understand the corporate’s mission
• Formulate the OM mission
• Analyse the Perspectives
• Execute a SWOT analysis
• Identify key success factors
• Form the strategy
o Build a competitive advantage, such as low price, design, or volume flexibility,
quality, quick delivery, dependability, after-sale service, broad product lines.
• Integrate OM with other activities: Activity Mapping
• Build and staff the organization

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SWOT Analysis
SWOT analysis is a useful technique for understanding strengths and weaknesses, and for
identifying both the opportunities that are available and the threats that are faced

[Link]

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Key Success Factors
Those activities / areas that are necessary for a firm to achieve its goals
• A firm must get them right to survive
• Areas where the firm can gain competitive advantage by focusing resources
• Necessary but may not be sufficient
• Key to achieving competitive advantage

Examples
• Auto industry: Styling, Efficient dealer network, Services, performance
• Food processing industry: New product development, good distribution channels,
health aspects
• Life insurance industry: Reputation, innovative new policies
• Supermarket industry: Right product mix available in each store, having it actually
available on the shelves, pricing it correctly
• McDonald’s: Layout

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Identifying KSFs
10 OM Decisions Sample Options Chapters
Product Customized or standardized 5, S5
Quality Define customer quality expectations and how to achieve them 6, S6
Process Facility size, capacity, how much automation 7, S7
Location Near supplier or near customer 8
Layout Work cells or assembly line 9
HR Specialized or enriched jobs 10
Supply chain Single or multiple suppliers 11, S11
Inventory When to reorder, how much to keep on hand 12, 14, 16
Schedule Stable or fluctuating production rate 13, 15
Maintenance Repair as required or preventive maintenance 17

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Strategy Development Process

Determine the Corporate Mission

• State the reason for the firm’s existence
• Identify the value it wishes to create

Analyze the Environment

• Identify the strengths, weaknesses, opportunities, and threats
• Understand the environment, customers, industry, and competitors.

Form a Strategy
• Build a competitive advantage
o Low price, Design flexibility, Volume flexibility, Quick delivery
Quality, Dependability, After-sale service, Broad product lines

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Strategy Implementation
The operations manager’s job is to implement an OM strategy, provide competitive
advantage, and increase productivity
• Understand the corporate’s mission
• Formulate the OM mission
• Analyse the Perspectives
• Execute a SWOT analysis
• Identify key success factors
• Form the strategy
o Build a competitive advantage, such as low price, design, or volume flexibility,
quality, quick delivery, dependability, after-sale service, broad product lines.
• Integrate OM with other activities: Activity Mapping
• Build and staff the organization – HR

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Activity Mapping: Southwest Airlines

Southwest’s low-cost strategy is highly dependent on a very well-run operations function. To achieve this
competitive advantage
• Southwest has identified six KSFs and support activities
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Activity Mapping: IKEA

IKEA has identified three value proposition. Surrounding these are activities that make these possible
• Needs to make sure they are good at the activities that contribute to that value proposition
Understanding Michael Porter, Joan Magretta

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Operations Strategies of Two Drug Companies
COMPETITIVE BRAND NAME DRUGS, INC. GENERIC DRUGS CORP.
ADVANTAGE PRODUCT DIFFERENTIATION STRATEGY LOW COST STRATEGY
Product selection D&D Heavy R&D investment; extensive labs; focus on Low R&D investment; focus on development of
development in a broad range of drug categories generic drugs
Quality Quality is major priority, standards exceed regulatory Meets regulatory requirements on a country-by-
requirements country basis, as necessary
Process Product and modular production process; tries to have Process focused; general production processes; “job
long product runs in specialized facilities; builds shop” approach, short-run production; focus on high
capacity ahead of demand utilization
Location Still located in city where it was founded Recently moved to low-tax, low-labor-cost environment
Layout Layout supports automated product-focused Layout supports process-focused “job shop” practices
production
Human resources Hire the best; nationwide searches Very experienced top executives provide direction;
other personnel paid below industry average
Supply chain Long-term supplier relationships Tends to purchase competitively to find bargains
Inventory Maintains high finished goods inventory primarily to Process focus drives up work-in-process inventory;
ensure all demands are met finished goods inventory tends to be low
Scheduling Centralized production planning Many short-run products complicate scheduling
Maintenance Highly trained staff; extensive parts inventory Highly trained staff to meet changing demands
TABLE 2.1

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 Global Strategies

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Global Strategies
1. Harley Davidson has assembly plants in Thailand to avoid tariffs and in Brazil to
take advantage of the free trade zone*. It is imperative to retain the “Made in
America” high-end brand
2. Texas Instruments has built optimum-sized plants across the world with similar
processes and strong communication among them
3. Heinz makes ketchups without garlic and onions in India
4. Nestle: Legally Swiss, 95% of assets and 98% of sales outside Switzerland

* May be out-of-date data

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Reasons to Globalize
• Improve the supply chain
o Locating facilities closer to unique resources
• Reduce costs and exchange rate risks & also exploit trade agreements
• Improve operations
o improve response time and customer service
• Understand markets
o Interacting with foreign customers, suppliers, competition can lead to new
opportunities
• Improve products
o Joint production, Joint R&D
• Attract and retain global talent
o Attractive for better growth opportunities and defense against layoffs

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Four Global Operations Strategy Options
High Transnational
Global Strategy strategy
• Standardize product
• Economies of scale • Move material, people,
• Cross-cultural learning or ideas across
national boundaries
Examples: • Economies of scale
TI, Caterpillar, Otis • Cross-cultural learning
Cost Reduction Elevator Examples:
Coca-Cola, Nestlé

International Multidomestic
strategy strategy
• Import/export or • Use existing domestic
license existing model globally
product • Franchise, joint
ventures, subsidiaries
Examples: Examples:
Harley-Davidson McDonald’s, Heinz
Hard Rock Cafe)
Low
Low High
Local Responsiveness
(Quick Response and/or Differentiation) Figure 2.9
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 Outsourcing

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Outsourcing
• Transferring activities that traditionally been internal to external suppliers
• Accelerating due to
o Increased technological expertise
o More reliable and cheaper transportation
o Rapid development and deployment of advancements in telecommunications
and computers
• Subcontracting - contract manufacturing
• Outsourced activities
o Legal services, IT services, Travel services, Payroll, Production, Surgery

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Companies Should Consider
• National literacy rate • Work ethic
• Rate of innovation • Tax rates
• Rate of technology change • Inflation
• Number of skilled workers • Availability of raw materials
• Political stability • Interest rates
• Product liability laws • Population
• Export restrictions • Transportation infrastructure
• Variations in language • Communication system

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Outsourcing: Advantages & Disadvantages
ADVANTAGES DISADVANTAGES
Cost savings Increased logistics and inventory costs
Gaining outside expertise that comes with Loss of control (quality, delivery, etc.)
specialization
Improving operations and service Potential creation of future competition
Maintaining a focus on core Negative impact on employees
competencies
Accessing outside technology Risks may not manifest themselves for
years

TABLE 2.2
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Rating Outsourcing Providers
• Insufficient analysis most common reason for failure
• Factor-rating method
• Points and weights assigned for each factor to each

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Rating Provider Selection Criteria
OUTSOURCING PROVIDERS
IMPORTANCE
FACTOR (CRITERION) WEIGHTS BIM S.P.C. TELCO
1. Can reduce operating costs .2 3 3 5
2. Can reduce capital investment .2 4 3 3
3. Skilled personnel .2 5 4 3
4. Can improve quality .1 4 5 2
5. Can gain access to technology not in
company .1 5 3 5
6. Can create additional capacity .1 4 2 4
7. Aligns with policy/philosophy/culture .1 2 3 5
Total Weighted Score 1.0 3.9 3.3 3.8

Score for BIM = (.2 * 3) + (.2 * 4) + (.2 * 5) + (.1 * 4) + (.1 * 5) + (.1 * 4) + (.1 * 2) = 3.9

TABLE 2.3

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Value Chain Vs Supply Chain
• Supply Chain: All the steps required to get the product to the customer
• Value Chain: The process in which a company adds value to its raw materials to
produce products eventually sold to consumers
• The value chain gives companies a competitive advantage in the industry, while the
supply chain leads to overall customer satisfaction.

[Link]

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Test Yourself
❖ Solved problems: 2.2
❖ Describe how an organization’s mission and strategy have different purposes
Mission specifies where the organization is going
Strategy specifies how it is going to get there.
❖ What is the mission of your organization? Explain your contribution in this
regard.

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Test Yourself – Case Study
A huge market exists for automobile tune-ups, oil changes, and lubrication service for more than 250 million
vehicles on U.S. roads. Some of this demand is filled by full-service auto dealerships, some by Walmart and
Firestone, and some by other tire/ service dealers.
Rapid-Lube stations perform oil changes, lubrication, and interior cleaning in a spotless environment. The buildings
are clean, usually painted white, and often surrounded by neatly trimmed landscaping. To facilitate fast service,
cars can be driven through three abreast. At Rapid-Lube, the customer is greeted by service representatives who
are graduates of RapidLube U. The greeter takes the order, which typically includes fluid checks and the necessary
lubrication, as well as filter changes for air and oil.
Service personnel in neat uniforms then move into action. The standard three-person team has one person
checking fluid levels under the hood, another assigned interior vacuuming and window cleaning, and the third in the
garage pit, removing the oil filter, draining the oil, checking the differential and transmission, and lubricating as
necessary. Precise task assignments and good training are designed to move the car into and out of the bay in 10
minutes.
The business model is to charge no more, and hopefully less, than gas stations, automotive repair chains, and auto
dealers, while providing better and faster service.
1. What constitutes the mission of Rapid-Lube?
2. What are the strategies of the departments: Product/Service design, Layout design and HR.
3. How would we measure productivity in this industry

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Test Yourself – Case Study
1. The mission of Rapid-Lube
We perform oil changes, lubrication, and interior cleaning for automobiles, providing
rapid and quality service at low prices

2. The operation strategy must be:

• Goods and service design: Services are limited to oil changes, lubrication, and
interior cleaning. This focus enables the firm to be more efficient than the full-
service competition
• Layout design: Layout design ensured the simultaneous servicing of 3 vehicles
• HR: RapidLube U trained personnel to ensure quick service

3. One-factor Productivity: Number of jobs per labour-hour

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Takeaway
❖ Management Concepts
❖ Absolute / Comparative / Competitive Advantage
❖ Core competence
❖ Mission and strategy
❖ Developing Missions
❖ Three conceptual ways to achieve the mission
❖ Developing Strategies
❖ Translate the conceptual ways into tasks that generate customer
value
❖ Perspectives to consider
❖ Key success factors and core competencies
❖ Global Strategies
❖ Four global operations strategy options
❖ Use factor rating to evaluate outsource providers
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 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Thank you!!
 BITS Pilani presentation

BITS Pilani
Pilani Campus
 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Operations Management
Project Management
Learning Objectives
❖ Project Planning / Project Scheduling / Project Controlling
❖ Project Management Techniques: AON Network, PERT and CPM, Gantt chart
❖ Determining the Project Schedule
❖ Forward and backward passes
❖ Critical path
❖ Variability in Activity Times
❖ Cost-Time Trade-offs and Project Crashing

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Management of Projects
Define the project
Establish objectives
Develop work breakdown structure
Determining resources
Material availability details
Time/cost estimates
Forming organization

Budgets
CPM/PERT Delayed activities report
Gantt charts Slack activities report
Milestone charts
Cash flow schedules

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Project Organization
• Often temporary structure
• Uses specialists from entire company
• Headed by project manager
o Coordinates activities
o Monitors schedule and costs
• Permanent structure called ‘matrix organization’
o a work structure where team members report to multiple leaders

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The Project Manager
Responsible for making sure that:
1) All necessary activities are finished in order and on time
2) The project comes in within budget
3) The project meets quality goals
4) The people assigned to the project receive motivation, direction, and information

Project managers should be:

• Good coaches
• Good communicators
• Able to organize activities from a variety of disciplines

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Ethical Issues
• Project managers face many ethical decisions on a daily basis
• The Project Management Institute has established an ethical code to
deal with problems such as:
o Offers of gifts from contractors
o Pressure to alter status reports to mask delays
o False reports for charges of time and expenses
o Pressure to compromise quality to meet schedules

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Project Scheduling
• All activities are planned for
• Their order of performance is accounted for
o The precedence relationships among activities
• The overall project time is developed
• Realistic time and cost estimates for each activity
• Critical bottlenecks are identified so as to make better use of people, money and
material

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Project Management Techniques
• Gantt chart
• Critical Path Method (CPM)
• Program Evaluation and Review Technique (PERT)

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Work Breakdown Structure

Level
1. Project
2. Major tasks in the project
3. Subtasks in the major tasks
4. Activities (or “work packages”) to be completed

A work package can be thought of as a sub-project

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A Simple Gantt Chart
Gantt charts are easy to understand & low-cost means of helping managers make sure that
• Activities are planned
• Order of performance is documented
• Activity time estimates are recorded
• Overall project time is developed.

Time
J F M A M J J A S

Design
Prototype
Test
Revise
Production

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Service For a Passenger Airline After Landing
Gantt charts also can be used for scheduling repetitive operations.
In this case, the chart helps point out potential delays.
Deplaning
Passengers
Baggage claim
Baggage Container offload
Pumping
Fueling
Engine injection water
Cargo and mail Container offload
Main cabin door
Galley servicing
Aft cabin door
Lavatory servicing Aft, center, forward
Drinking water Loading
First-class section
Cabin cleaning
Economy section
Cargo and mail Container/bulk loading
Galley/cabin check
Flight services
Receive passengers
Operating crew Aircraft check
Baggage Loading
Passengers Boarding
0 10 20 30 40 (minutes)

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PERT and CPM
• Network techniques
• Developed in 1950s
o CPM by DuPont for chemical plants (1957)
o PERT by Booz, Allen & Hamilton with the U.S. Navy, for Polaris missile (1958)
• Consider precedence relationships and interdependencies
• Identical except
o Each uses a different estimate of activity times
– PERT employs three time estimates for each activity.
These estimates are used to compute μ & σ for the activity.
– CPM assumes that activity times are known with certainty and hence
requires only one time factor for each activity.

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Six Steps PERT and CPM
1. Define the project and prepare the work breakdown structure
2. Develop relationships among the activities – decide which activities must
precede and which must follow others
3. Draw the network connecting all the activities
4. Assign time and/or cost estimates to each activity
5. Compute the longest time path through the network – this is called the
critical path
6. Use the network to help plan, schedule, monitor, and control the project

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Questions PERT and CPM Can Answer
1. When will the entire project be completed?
2. What are the critical activities or tasks in the project?
3. Which are the noncritical activities?
4. What is the probability the project will be completed by a specific date?
5. Is the project on schedule, behind schedule, or ahead of schedule?
6. Is the money spent equal to, less than, or greater than the budget?
7. Are there enough resources available to finish the project on time?
8. If the project must be finished in a shorter time, what is the way to accomplish this
at least cost?

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AON and AOA Network Conventions
A B C A comes before C and D cannot
B, which comes A C begin until both
before C A and B are
completed
B D
A C cannot begin until
A C both A and B are
C A and B must both completed
be completed D cannot begin until
B before C can start B D B is completed

B A B D B and C cannot
begin until A is
A B and C cannot completed
begin until A is D cannot begin
C completed C until both B and C
are completed

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AON Example: Milwaukee Paper
Immediate
Activity Description Predecessors
A Build internal components —
B Modify roof and floor —
C Construct collection stack A F
A C
D Pour concrete and install A, B
frame
E Build high-temperature C E
burner Start H
F Install pollution control C
system
G Install air pollution device D, E B D G

H Inspect and test F, G

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Critical Path Analysis (The Project Schedule)
• The critical path is the longest path through the network
• The critical path is the shortest time in which the project can be completed
• Any delay in critical path activities delays the project
• Critical path activities have no slack time
• Critical activities have no slack time – Float = 0

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Critical Path Analysis: The Variables
Earliest start (ES) = earliest time at which an activity can start, assuming all predecessors have been completed
Earliest finish (EF) = earliest time at which an activity can be finished
Latest finish (LF) = latest time by which an activity has to finish so as to not delay the project completion time
Latest start (LS) = latest time at which an activity can start so as to not delay the project completion time

Activity Name or Symbol

A Earliest Finish
Earliest Start
ES EF

LS LF
2 Latest Finish
Latest Start

Activity Duration

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Forward Pass: Update ES & EF
Begin at starting event and work forward
Earliest Start Time Rule:
For each activity:
• ES = Max {EF of all immediate predecessors}
o Single immediate predecessor: ES equals the EF of the predecessor
o Multiple immediate predecessors: ES is the Max of the EF values of its predecessors

Earliest Finish Time Rule:

For each activity:
• EF = ES + Activity time

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Backward Pass: Update LF & LS
Begin with the last event and work backwards

Latest Finish Time Rule:

For each activity:
• LF = Min {LS of all immediate following activities}
o Single immediate successor: LF equals the LS of the successor
o Multiple immediate successors: LF is the Min of the LS values of its successors

Latest Start Time Rule:

For each activity:
• LS = LF – Activity time

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Determine the Project Schedule

Table 3.2 Time Estimates for Milwaukee Paper Manufacturing

ACTIVITY DESCRIPTION TIME (WEEKS)
A Build internal components 2
B Modify roof and floor 3
C Construct collection stack 2
D Pour concrete and install frame 4
E Build high-temperature burner 4
F Install pollution control system 3
G Install air pollution device 5
H Inspect and test 2
Total time (weeks) 25

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ES/EF Network for Milwaukee Paper
X
ES EF

LS t LF
A C F
0 2 2 4 4 7

2 2 3 Activity t Predeccor
A 2 —
Start E H —
0 0 4 8 13 15 B 3

C 2 A
0 4 2 D 4 A, B

E 4 C
B D G
0 3 3 7 8 13 F 3 C

G 5 D, E
3 4 5
H 2 F, G

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LS/LF Times for Milwaukee Paper
X
ES EF

LS t LF

A C F
0 2 2 4 4 7
Activity t Predeccor
0 2 2 4 10 13 A 2 —
2 2 3
B 3 —
Start E H C 2 A
0 0 4 8 13 15
D 4 A, B
0 0 4 8 13 15 C
0 4 2 E 4

F 3 C
B D G
0 3 3 7 8 13 G 5 D, E

H 2 F, G
1 4 4 8 8 13
3 4 5

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Slack Time & Critical Path
Slack: Length of time the activity can be delayed without delaying the entire project

For each activity

• Compute the ES, EF, LS, and LF
• Slack = LS – ES = LF – EF (Also called Float)

A critical path:
• Starts at the first (critical) activity in the project
• Terminates at the last activity in the project
• Includes only critical activities

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Slack Time for Milwaukee Paper

EARLIEST EARLIEST LATEST LATEST

START FINISH START FINISH SLACK
ACTIVITY ES EF LS LF LS – ES
A 0 2 0 2 0
B 0 3 1 4 1
C 2 4 2 4 0
D 3 7 4 8 1
E 4 8 4 8 0
F 4 7 10 13 6
G 8 13 8 13 0
H 13 15 13 15 0

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Critical Path for Milwaukee Paper

EARLIEST EARLIEST LATEST LATEST ON

START FINISH START FINISH SLACK CRITICAL
ACTIVITY ES EF LS LF LS – ES PATH
A 0 2 0 2 0 Yes
B 0 3 1 4 1 No
C 2 4 2 4 0 Yes
D 3 7 4 8 1 No
E 4 8 4 8 0 Yes
F 4 7 10 13 6 No
G 8 13 8 13 0 Yes
H 13 15 13 15 0 Yes

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Critical Path for Milwaukee Paper

ON
A C F CRITICAL
0 2 2 4 4 7 ACTIVITY PATH
A Yes
0 2 2 4 10 13
2 2 3 B No
Start E H C Yes
0 0 4 8 13 15 D No
0 0 4 8 13 15 E Yes
0 4 2
F No
B D G G Yes
0 3 3 7 8 13
H Yes
1 4 4 8 8 13
3 4 5

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ES – EF Gantt Chart for Milwaukee Paper

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

A Build internal
ACTIVITY ES EF components
A 0 2 B Modify roof and floor
B 0 3 C Construct collection
stack
C 2 4 D Pour concrete and
D 3 7 install frame
E Build high-temperature
E 4 8
burner
F 4 7 F Install pollution control
system
G 8 13
G Install air pollution
H 13 15 device
H Inspect and test

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LS – LF Gantt Chart for Milwaukee Paper

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

ACTIVITY LS LF A Build internal

components
A 0 2
B Modify roof and floor
B 1 4 C Construct collection
stack
C 2 4
D Pour concrete and
D 4 8 install frame
E 4 8 E Build high-temperature
burner
F 10 13
F Install pollution control
G 8 13 system
H 13 15 G Install air pollution
device
H Inspect and test

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PERT: Activity Times
Three time estimates are required
• Optimistic time (a) – if everything goes according to plan
• Pessimistic time (b) – assuming very unfavorable conditions
• Most likely time (m) – most realistic estimate

Recall
• CPM assumes we know a fixed time estimate for each activity and there is no
variability in activity times
• The mean time in PERT is usually taken as the fixed time estimate in CPM

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PERT: Three Assumptions
• Activity time approximately follows the Beta distribution
• Activity times are statistically independent
• Total project completion times follow a normal probability distribution

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Distribution of the Activity Time
Estimates are often assumed to follow a beta distribution
Expected activity time: μ = (a + 4m + b)/6 σ=
(1/6)Range
Variance of activity completion times: σ2 = [(b – a)/6]2

Expected activity time:

t = (a + 4m + b)/6
Probability of 1t in =
100 (a + 4m + b)/6
of < a occurring
Probability

v =
Variance of activity completion[(b − a)/6]2Probability of 1 in 100
of >times:
b occurring

v = [(b – a)/6]2 Activity

Time

Optimistic Most Likely Pessimistic

Time (a) Time (m) Time (b)

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Activity Time: μ & σ2

ACTIVITY OPTIMISTIC MOST LIKELY PESSIMISTIC EXPECTED TIME VARIANCE

a m b (a + 4m + b)/6 [(b – a)/6]2
A 1 2 3 2 0.11
B 2 3 4 3 0.11
C 1 2 3 2 0.11
D 2 4 6 4 0.44
E 1 4 7 4 1.00
F 1 2 9 3 1.78
G 3 4 11 5 1.78
H 1 2 3 2 0.11

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 2
Project Time: μP , σ P
Project Mean / Variance = Sum of the Means / Variances of the critical activities
• μP = (μ of activities on critical path) = 15
• 𝜎𝑃2 = (σ2 of activities on critical path) = 0.11 + 0.11 + 1.00 + 1.78 + 0.11 = 3.11
o σp = √ 3.11 = 1.76 weeks
Activity Optimistic Most Likely Pessimistic Expected Time Variance
a m b t = (a + 4m + b)/6 [(b – a)/6]2
A 1 2 3 2 0.11

B 2 3 4 3 0.11

C 1 2 3 2 0.11

D 2 4 6 4 0.44

E 1 4 7 4 1.00

F 1 2 9 3 1.78

G 3 4 11 5 1.78

H 1 2 3 2 0.11

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Distribution of the Project Completion Time
Let t: Project completion time in weeks
t ~ N(μ, σ) = N(15, 1.76)

σ= 1.76 weeks

μ = 15

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Question 1
What is the probability the project can be completed on or before the 16 week deadline?
Let t: Project completion time in weeks
t ~ N(μ, σ) = N(15, 1.76)
P(t ≤ 16) = P(Z ≤ (16 – μ)/σ) = P(Z ≤ (16 – 15)/1.76) = P(Z ≤ 0.57) = 0.7157

σ= 1.76 weeks

μ 16

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Question 2
Find the due date that gives the project 99% chance of being on time.
Let t: Project completion time in weeks
t ~ N(μ, σ) = N(15, 1.76)
P(t ≤ t0) = 0.99 ⇒ P(Z ≤ (t0 – 15)/1.76) = 0.99 ⇒ (t0 – 15)/1.76 = 2.33 ⇒ t0 = 19.1 weeks

σ= 1.76 weeks

15

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Variability of Completion Time for Noncritical Paths
• Variability of times for activities on noncritical paths must be considered when
finding the probability of finishing in a specified time
• Variation in noncritical activity may cause change in critical path

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Milwaukee Paper: Conclusions So Far
1. The project’s expected completion time is 15 weeks
2. There is a 71.57% chance the equipment will be in place by the 16
week deadline
3. Five activities (A, C, E, G, and H) are on the critical path
4. Three activities (B, D, F) are not on the critical path and have slack time
5. A detailed schedule is available

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Cost–Time Trade-Offs and Project Crashing
It is not uncommon to face the following situations:
• The project is behind schedule
• The completion time has been brought forward
Shortening the duration of the project is called project crashing

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Factors to Consider When Crashing a Project
• The amount by which an activity is crashed should be permissible
• The shortened activity durations should allow the completion of the
project by the due date
• The total cost of crashing should be as small as possible

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Steps in Project Crashing
Crash cost – Normal cost
Step 1: Compute the crash cost per time period =
Normal time – Crash time
(If crash costs are linear over time)

Step 2: Using current activity times, find the critical path and identify the critical activities
Step 3: If there is only one critical path, then select the activity on this critical path that (a) can
still be crashed, and (b) has the smallest crash cost per period.
If there is more than one critical path, then select one activity from each critical path
such that (a) each selected activity can still be crashed, and (b) the total crash cost of
all selected activities is the smallest. Note that the same activity may be common to
more than one critical path.
Step 4: Update all activity times. If the desired due date has been reached, stop.
If not, return to Step 2.

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Crashing The Project
Normal and Crash Data for Milwaukee Paper

Time (Week) Cost ($) Crash

Cost per Critical Activity B
Activity Normal Crash Normal Crash Week ($) Path?
A 2 1 22,000 22,750 750 Yes Crash Cost/Week
B 3 1 30,000 34,000 2,000 No Crash Cost−Normal Cost
=
C 2 1 26,000 27,000 1,000 Yes Normal Time −Crash Time
D 4 3 48,000 49,000 1,000 No 34000−30000
=
E 4 2 56,000 58,000 1,000 Yes 3−1
F 3 2 30,000 30,500 500 No = $2000/Week
G 5 2 80,000 84,500 1,500 Yes

H 2 1 16,000 19,000 3,000 Yes

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Current Critical Path for Milwaukee Paper
Time (Week) Crash
Cost per
Activity Normal Crash Week ($)
A 2 1 750
A C F B 3 1 2,000
0 2 2 4 4 7
C 2 1 1,000
0 2 2 4 10 13 D 4 3 1,000
2 2 3
E 4 2 1,000
Start E H
0 0 4 8 13 15 F 3 2 500

G 5 2 1,500
0 0 4 8 13 15
0 4 2 H 2 1 3,000

B D G
0 3 3 7 8 13
1 4 4 8 8 13
3 4 5

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Milwaukee Paper: Updated Critical Path and Slack
After crashing activity A
A C F
0 1 1 3 3 6 The critical paths are

0 1 1 3 9 12 • Start–A–C–E–G–H
1 2 3
• Start–B–D–G–H
Start E H Project completion time = 14 weeks
0 0 3 7 12 14
0 0 3 7 12 14
0 4 2 If further crashing is required, it must
be done to all critical paths.
B D G • A sensible strategy is to look at
0 3 3 7 7 12 G
0 3 3 7 7 12
3 4 5
What can you say about Start–A–D–
G–H?

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Advantages of PERT/CPM
1. Especially useful when scheduling and controlling large projects
2. Straightforward concept and not mathematically complex
3. Graphical networks help highlight relationships among project activities
4. Critical path and slack time analyses help pinpoint activities that need
to be closely watched
5. Project documentation and graphics point out who is responsible for
various activities
6. Applicable to a wide variety of projects
7. Useful in monitoring not only schedules but costs as well
8. Gantt charts can be generated

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Limitations of PERT/CPM
1. Project activities have to be clearly defined, independent, and stable in
their relationships
2. Precedence relationships must be specified and networked together
3. Time estimates tend to be subjective and are subject to fudging by
managers
4. There is an inherent danger of too much emphasis being placed on
the longest, or critical, path

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Test Yourself
❖ Solved problems: 3.3 – 3.6

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Takeaway
❖ Use a Gantt chart for scheduling
❖ Draw AON networks
❖ Complete forward and backward passes for a project
❖ Determine a critical path
❖ Calculate the variance of activity times
❖ Crash a project

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 AOA Networks

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AON and AOA Network Conventions

Activity on Activity Activity on

Node (AON) Meaning Arrow (AOA)
A comes before
(a) A B C B, which comes
before C A B C
A A
A and B must both
(b) C be completed
before C can start C
B B
B
B and C cannot
(c) A begin until A is B
completed A
C C
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AON and AOA Network Conventions

Activity on Activity Activity on

Node (AON) Meaning Arrow (AOA)

C and D cannot
A C begin until both A C
(d) A and B are
completed
B D B D

C cannot begin until

both A and B are
A C completed A C
(e) D cannot begin until Dummy activity
B is completed
B D A dummy activity is
introduced in AOA B D
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AON and AOA Network Conventions

Activity on Activity Activity on

Node (AON) Meaning Arrow (AOA)

B and C cannot
begin until A is
completed
A B D D cannot begin A B D
until both B and C
(f) are completed Dummy
A dummy activity activity
C
C
is again
introduced in AOA

MBA ZG526 Operations Management 54 BITS-Pilani

 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Thank you!!
 BITS Pilani presentation

BITS Pilani
Pilani Campus
 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Operations Management
Design of Goods and Services
(Includes Selection)
Learning Objectives
❖ Product Strategy Options
❖ Product life cycle & Product-by-Value Analysis
❖ Why new products
❖ Why products fail & Kano model
❖ Time-based competition & Product development continuum
❖ Product Development Stages
❖ Quality function deployment (QFD & House of Quality)
❖ Organizing for product development
❖ Considerations for product design
❖ Manufacturability & Value engineering
❖ Defining a product, Product life-cycle management (PLM)
❖ Make-or-buy decisions and Decision trees
❖ Service design
❖ Sustainability
❖ Assembly for Disassembly & Total Life Cycle Ownership Cost
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HS Talks
[Link]
• New product development, Prof. Keith Goffin – Cranfield University School of
Management, UK; About an hour long
• How can you extend the product life cycle of a FMCG brand?, Dr. Nükhet
Vardar – Founder, El Izi Communications Consultancy, UK, About 17 minutes long

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Product Decision

The objective of the product decision is to develop and implement a product strategy
that meets the demands of the marketplace
• With a competitive advantage

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Examples
• Shouldice Hospital: Differentiation by focusing on Hernia repair
• Asian Heart Institute: “At the heart of your trust”
• Taco Bell: Low-cost strategy through product design – Menu being the product
• Indian IT Services: a cost-effective resource for highly-skilled tech talent
• Toyota: Rapid response to changing consumer demand.
(Speed of product development well under 2 years)
• Product-by-Value Analysis: Dropping or increasing investment in a product

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Product Strategy Options
An organization’s existence is based on the good or service it provides society
• Should meet the demands of the marketplace with a competitive advantage:
o Differentiation, Low-cost strategy, Response
• Fundamental to an organization's strategy
o With implications throughout the operations function

Product strategy covers

• Managing existing products
• Developing new products

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 Existing Products

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Goods and Services Selection
Organizations exist to provide goods or services to society
• Great products are the key to success
• Top organizations typically focus on core products
• Limited and predicable life cycles requires
o Weeding out products
o Enhancing existing products
o Constantly looking for, designing, and developing new products

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Existing Products
• Which products need to be dropped
• Which products require enhancements / re-design / …

Tools
• Product Life Cycle
• Product-by-Value Analysis

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Product Life Cycle
Cost of development and production
$ Sales revenue

Loss Profit
Loss
Introduction Growth Maturity Decline

Product life: Few days (Concert t-shirt), months (seasonal fashion), years (CRT TVs), decades (Coke)
PLC: Introduction (AI products), Growth (EVs), Maturity (Flat screen TV), Decline (Landline)
The operations function must have a system to take appropriate decisions at each stage
Products that manage to escape the "death" predicted by the PLC:
• Stay invested: Vinyl records
• Innovating with existing products: iPhone

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Life Cycle and Strategy
Introductory Phase Growth Phase
Fine tuning may warrant expenses for • Product design begins to stabilize
• R&D • Effective forecasting of capacity becomes
• Process modification and enhancement necessary
• Supplier development • Adding or enhancing capacity may be necessary

Decline Phase Maturity Phase

Unless product makes a special contribution to the • Competitors now established
organization, must plan to terminate offering • High volume, innovative production may be
End-of-Life Phase needed
• Disassembly, recycling, and reuse • Improved cost control, reduction in options, paring
down of product line

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Existing Products: Product-by-Value Analysis
• Lists products in descending order of their
o Individual financial contribution to the firm
o Percentage contribution to total revenue
• Helps management evaluate alternative strategies

The contribution margin can be stated on a gross or per-unit basis

The contribution margin per unit: Selling price per unit – Variable cost per unit
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Example: Automobile Company*
Unit 3000
Dzire
Sales Sales Contribution
Model Contribution
(Units) (₹ Crore) (₹ Crore) 2500
Q2 Q1
(₹)

Constribution (₹ Crore)
2000
Alto 164,110 4,989 898 0.0055 Swift

Omni 42,100 1,048 178 0.0042 1500

WagonR
WagonR 129,520 5,246 997 0.0077 1000
Alto

Ertiga
Swift 143,530 7,004 1,751 0.0122
500
Dzire 172,650 10,877 2,719 0.0157 Q3 Omni
Q4
Ertiga 43,060 2,756 606 0.0141 0
0.0000 0.0020 0.0040 0.0060 0.0080 0.0100 0.0120 0.0140 0.0160 0.0180

Total 694,970 31,920 7,149 Unit Contribution (₹)

Quadrant 4: Growth Phase Push for sales

Quadrant 1: Maturity Phase Probably the leader; Competition will increase; Possible Enhancements
Quadrant 2: “Post-Maturity” Phase Cut costs
Quadrant 3: Decline Phase Drop products
* Prof PB Venkatraman, WILP, BITS Pilani
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Example 5.1
Prepare a product-by-value analysis for the following products, and given the position in
its life cycle, identify the issues likely to confront the operations manager and possible
actions.
Product Sales Contribution Unit Stage Issues
Contribution
Alpha 1000 2,500,000 2,500 Introductory Sales seem to be picking up
Investments in R&D and Capacity augmentation?
Bravo 1500 4,500,000 3,000 Growth Sales seem to be picking up
Investments in Capacity augmentation?
Charlie 3,500 6,125,000 1,750 Decline Drop – Not possible given the revenue
Are enhancements / modification possible?
All three products are generating good revenue – Compare each contribution to total contribution

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 New Products

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Why New Products
Leading companies generate a substantial portion of their sales from products less
than 5 years old

New products are crucial for companies

But managing this is difficult
• 90% of the F&B new products fail within 3 months
• Dupont: One marketable product of 250 ideas
• OMO Power worked effectively in the laboratory settings
• Apple Newton: First PDA – Innovative
o Pricey & issues with handwriting recognition feature

PDA: Personal Digital Assistant

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Why New Products Fail & Kano Model

HSTalks: New product development, Prof. Keith Goffin – Cranfield University School of Management, UK

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Time-based Competition (~ Response Strategy)
A business strategy where companies strive to outperform their competitors by bringing
products and services to the market faster
• The strategy is to reduce lead time – quicker response
• The first model on the market quite often becomes the standard
• Shorter product life cycles requires faster product development
• More concern with getting the product to market than with optimum product design or
process efficiency

• Time—The Next Source of Competitive Advantage George Stalk, Jr.,

HBR (July 1988)
• generic-trademark-product-brand-names-feature-image - Trade Brains

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Product Development Continuum

Enhancements may be changes in colour, size, weight, taste, or features

• Takes place in a fast-food menu items – Taco Bell changed its menu
Migration: Replicating features from one product in another product
• The original 737 continued to be developed into 13 passenger, cargo, corporate and military variants
Suzuki and Toyota are in partnership to share costs in building vehicles.
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Product Development Stages

Concept

Feasibility

Customer Requirements

Functional Specifications

Product Specifications Scope for

Scope of design and
product Design Review engineering
development teams
team Test Market

Introduction

Evaluation

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Quality Function Deployment
• Quality function deployment (QFD)
o Determine what will satisfy the customer
o Translate those customer desires into the target design
o House of Quality
‒ A tool of QFD
‒ Utilize a planning matrix to relate customer wants to how the firm
is going to meet those wants

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Completed House of Quality for a Camera
High relationship: 5

Low electricity requirements

Aluminum components

High number of pixels

Medium relationship: 3

Ergonomic design
Auto exposure
Low relationship: 1

Company A

Company B
Auto focus
G Good

F Fair Lightweight 3 G P

P Poor Easy to use 4 G P

Reliable 5 F G
Easy to hold steady 2 G P
High resolution 1 P P
Our importance ratings 22 9 27 27 32 25

Failure 1 per 10,000

Target values

Panel ranking
(Technical
attributes)

2 circuits
2’ to ∞
0.5 A
75%
Company A 0.7 60% yes 1 ok G
Technical
Company B 0.6 50% yes 2 ok F
evaluation
Us 0.5 75% yes 2 ok G
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Organizing for Product Development
• Traditionally – distinct departments
• Duties and responsibilities are defined
• Difficult to foster forward thinking
• A Champion
• Product manager drives the product through the product development system
and related organizations
• Team approach
• Cross functional – representatives from all disciplines or functions
• Product development team, design for manufacturability team, value
engineering team, marketing team
• Japanese “whole organization” approach
• No organizational divisions

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Considerations for Product Design*
Consideration Remarks
Robust Design • Small variations in production or assembly do not adversely affect the product
• Results in lower cost and higher quality
Modular design • Designed in easily segmented components
• Adds flexibility to both production and marketing – Improved ability to satisfy
customer requirements
Computer-aided • Computers to interactively design products and prepare engineering documentation
• Design (CAD) o Shorter development cycles, improved accuracy, lower cost
• Manufacturing o Information and designs can be deployed worldwide
(CAM) • Specialized computer programs to direct and control manufacturing equipment
Virtual reality tech • An interactive, 3-D model of a product from the basic CAD data – virtual prototyping
Value analysis • Focuses on design improvement during production
o Leading either to a better or cheaper product
Sustainability & • A formal evaluation of the environmental impact of a product
Life Cycle
Assessment (LCA)
*Issues for Product Design
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Manufacturability and Value Engineering
During the design stage itself
• Manufacturability: Optimizing the design of components and the product to make it
easier to manufacture without sacrificing quality.
• Value engineering: Reducing the product cost without affecting its quality or
functionality during the design stage
• NPD decisions require trade-offs

Benefits:
1. Reduced complexity of the product
2. Additional standardization of components
3. Improvement of functional aspects of the product
4. Improved job design and job safety
5. Improved maintainability (serviceability) of the product
6. Robust design

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Defining a Product
• First definition is in terms of functions - Requirements
• Rigorous specifications are developed during the design
phase
• Manufactured products will have an engineering drawing
• Bill of material (BOM)
• Documents for Production

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Make-or-Buy Decisions
Produce the component or buy from an outside source?
• Variations in
o Quality
o Cost
o Delivery schedules
• EMV: Expected Monetary Values

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Application of Decision Trees
Useful when there are a series of decisions and outcomes that lead to other decisions
and outcomes
Procedure
1. Include all possible alternatives and states of nature – including “doing nothing”
2. Enter payoffs at end of branch
3. Determine the expected value of each branch and “prune” the tree to find the
alternative with the best expected value

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Decision Tree Example
ABC, Inc., a semiconductor manufacturer, is interested in
producing and marketing a microprocessor at $100 per unit.
This will require either purchasing a sophisticated CAD system or
hiring and training several additional engineers, or, not producing
the product at all.
The probability of favorable acceptance by the market of the new
microprocessor is 0.40; P(unfavorable acceptance) = 0.60.
• Favorable acceptance: Sales would be 25,000 units
• Unfavorable acceptance: Sales would be 8,000 units
The CAD equipment costs $500,000, but that of hiring and
training three new engineers is only $375,000.
Manufacturing costs
• Without CAD: $50 per unit
• With CAD: $40 per unit

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Decision Tree Example
$2,500,000 Revenue
Purchase CAD (.4) – 1,000,000 Mfg cost ($40 x 25,000)
$388,000 – 500,000 CAD cost
High sales
$1,000,000 Net

$800,000 Revenue
(.6) Low sales – 320,000 Mfg cost ($40 x 8,000)
– 500,000 CAD cost
Hire and train engineers
$365,000
– $20,000 Net loss
$2,500,000 Revenue
(.4) – 1,250,000 Mfg cost ($50 x 25,000)
High sales – 375,000 Hire and train cost
$875,000 Net

$800,000 Revenue
(.6) – 400,000 Mfg cost ($50 x 8,000)
Low sales – 375,000 Hire and train cost
$25,000 Net
Do nothing $0

$0 Net

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 Service Design

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Service Design
The service design process is similar to that of the product design
• Find out the customer requirements
• Design the service to meet the requirements
• Analyze the workflows and the tasks to be performed to complete a service
• Bring in changes to improve the customer experience resulting in a better
experience for both users and employees
Documents
1. The service blueprint* focusing on customer interaction – this enables better
customer experience
2. Often explicit job instructions
3. Scripts and storyboards are other techniques

* Will be discussed in Process Mapping

/
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 Sustainability

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Sustainability: Triple Bottom Line
• Consider the systems necessary to support the three Ps: people, planet, and profit

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Walmart’s Objectives
1. Improving livelihoods through the creation of productive, healthy, and safe
workplaces
2. Building strong communities through access to affordable, high-quality services
3. Preventing exposure to substances that are considered harmful or toxic
4. Promoting health and wellness

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Design and Production for Sustainability
• Life cycle assessment valuates the environmental impact of a product, from raw
material and energy inputs all the way to the disposal of the product at its end-of-
life
• The goal is to make decisions that help reduce the environmental impact of a
product throughout its entire life
• The 3Rs— reduce, reuse, and recycle
o Reduce: Design the product to lower the environmental impact
Hotels: Replace Bars of Soap by Pump dispenser

o Reuse & Recycle

Design for disassembly

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Example: Design for Disassembly (1 of 2)
Harmonizer Rocker
Resale Recycling Processing Disposal Resale Recycling Processing Disposal
Part
Value Revenue Cost Cost Value Revenue Cost Cost
Printed circuit board $5.93 $1.54 $3.46 $0.00 $7.88 $3.54 $2.12 $0.00
Laminate back 0.00 0.00 4.53 1.74 - - - -
Coil 8.56 5.65 6.22 0.00 6.67 4.56 3.32 $0.00
Processor 9.17 2.65 3.12 0.00 8.45 4.65 3.43 $0.00
Frame 0.00 0.00 2.02 1.23 0.00 0.00 4.87 1.97
Aluminum / Plastic case 11.83 2.10 2.98 0.00 0.00 0.00 4.65 3.98
Total $35.49 $11.94 $22.33 $2.97 $23.00 $12.75 $18.39 $5.95

Sound Barrier, Inc., needs to decide which of two speaker designs is better environmentally.
The design team collected the following information for two audio speaker designs, the Harmonizer and the Rocker:
1. Resale value of the components minus the cost of transportation to the disassembly facility
2. Revenue collected from recycling
3. Processing costs, which include disassembly, sorting, cleaning, and packaging
4. Disposal costs, including transportation, fees, taxes, and processing time
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Example: Design for Disassembly (2 of 2)
Harmonizer Rocker
Resale Recycling Processing Disposal Resale Recycling Processing Disposal
Part
Value Revenue Cost Cost Value Revenue Cost Cost
Printed circuit board $5.93 $1.54 $3.46 $0.00 $7.88 $3.54 $2.12 $0.00
Laminate back 0.00 0.00 4.53 1.74 - - - -
Coil 8.56 5.65 6.22 0.00 6.67 4.56 3.32 $0.00
Processor 9.17 2.65 3.12 0.00 8.45 4.65 3.43 $0.00
Frame 0.00 0.00 2.02 1.23 0.00 0.00 4.87 1.97
Aluminum / Plastic case 11.83 2.10 2.98 0.00 0.00 0.00 4.65 3.98
Total $35.49 $11.94 $22.33 $2.97 $23.00 $12.75 $18.39 $5.95

Revenue Retrieval = Total resale revenue + Total recycling revenue - Total processing cost – Total disposal cost

Harmonizer: $35.49 + $11.94 – $22.33 – $2.97 = $22.13

Rocker: $23.00 + $12.75 – $18.39 – $5.95 = $11.41

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Production Process & Logistics
• Production Process
• Reduce the amount of resources in the production process
– Energy, Water
o Environmental contamination
o Frito-Lay decided to extract water from potatoes, which are 80% water
• Logistics
• Reduce costs by achieving efficient route and delivery networks
– UPS plans its delivery truck routes with the fewest possible left turns
• Evaluate equipment alternatives
• Life cycle ownership costs

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Life Cycle Ownership Costs (1 of 2)
Blue Star is starting a new distribution service delivering auto parts to the service
departments of auto dealerships in the local area.
The choice has narrowed down to two light-duty trucks
• The Ford TriVan costs $28,000 to buy with an average fuel efficiency of 24 miles
per gallon. The operating cost is $0.20 per mile
• The Honda CityVan, a hybrid truck, costs $32,000 to buy with an average fuel
efficiency of 37 miles per gallon. The operating cost is $0.22 per mile.
• The distance traveled annually is estimated to be 22,000 miles, with the life of
either truck expected to be 8 years.
• The average gas price is $4.25 per gallon.

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Life Cycle Ownership Costs (2 of 2)
Vehicle Cost to Buy Efficiency Operating Costs per Mile

Ford TriVan $28,000 24 mpg $.20

Honda CityVan $32,000 37 mpg $.22
Annual distance = 22,000 miles Life = 8 years Gas price = $4.25/gallon

Total life cycle cost = Cost of vehicle + Life cycle cost of fuel + Life cycle operating cost
• Ford = $28,000 + $(22,000 * 8 * 4.25 / 24) + $(22,000 * 8 * 0.20) = $94,367
• Honda = $32,000 + $(22,000 * 8 * 4.25 / 37) + $(22,000 * 8 * 0.22) = $90,936

Crossover point: Total Distance = M miles

• $28,000 + $(M * 4.25/24) + $(M * 0.20) = $32,000 + $(M * 4.25/37) + $(M * 0.22)
• ⇒ M = 95, 012 miles or 95012/22000 = 4.32 years
• Honda City Van is the best if the operating life is greater tha 4.32 years
• Ford TriVan is cost effective if the operating life is less than 4.32 years
MBA ZG526 Operations Management 42 BITS-Pilani
End-of-Life Phase
• What happens at the end-of-life stage?
• Closed-loop supply chains or reverse logistics
• Automaker’s design incorporates disassembly, recycling, and reuse

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Test Yourself
❖ Solved problems: 5.1, S5.1, S5.2

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Test Yourself – Case Study
De Mar has a simple but powerful product strategy: Solve the customer’s problem no matter what, solve
the problem when the customer needs it solved, and make sure the customer feels good when you leave
De Mar offers guaranteed, same-day service for customers requiring it. The company provides 24 by 7
service at no extra charge for customers whose AC dies on a hot summer Sunday or whose toilet
overflows at 2:30 A.M.
“We will be there to fix your A/C on the fourth of July, and it’s not a penny extra. When our competitors
won’t get out of bed, we’ll be there!”
De Mar guarantees the price of a job to the penny before the work begins. Whereas most competitors
guarantee their work for 30 days, De Mar guarantees all parts and labor for one year. The company
assesses no travel charge because “it’s not fair to charge customers for driving out.”
Owner Larry Harmon says: “We are in an industry that doesn’t have the best reputation. If we start making
money our main goal, we are in trouble. I stress customer satisfaction; money is the by-product.”

How should the following strategic OM decisions be managed to ensure that the product is successful?
Design of Services, Process

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Test Yourself – Case Study
How should the following strategic OM decisions be managed to ensure that the product is successful?

Design of Services
• Have a process to understand customers needs / wants
• Develop the delivery process
• Identify customer touchpoints in the delivery process
• Identify what is required to enhance customer satisfaction
o Give inputs to the hiring and training process as well as Quality
• Get feedback from Quality & Process to make changes

Process
Work with the design team
• Understand the service to be provided & Build the process to deliver the service
Monitor customer feedback
• Make changes to the delivery process
• Give feedback to the design team

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 Appendix
Quality Function Deployment & House of Quality
Regulations and Industry Standards
Documents for Production

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Quality Function Deployment
• Quality function deployment (QFD)
• Determine what will satisfy the customer
• Translate those customer desires into the target design
• House of Quality
• A tool of QFD
• Utilize a planning matrix to relate customer wants to how the firm is
going to meet those wants

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Quality Function Deployment
Product Planning Product Design Process Planning Process Control

How customer needs turn How design requirements How part characteristics turn How manufacturing
into design requirements / turn into part characteristics into manufacturing processes processes turn into
functions controlled manufacturing
processes
Identify and prioritize customer Select from various concepts Determine processes, and Define validation methods for
needs and requirements identify the critical ones, that critical process parameters
can affect critical part
characteristics
Develop a concept that Use tools (e.g. FMEA) to Determine production Establish methods to control
responds to both the stated and analyse risks and identify critical equipment, and their processes (e.g. SPC)
latent needs of the customer part / sub-assembly specifications
(including opportunities) characteristics, including
targets, and specification
ranges
Determine critical technical Verify the design (Design Identify critical process Set up inspection,
characteristics, functions Validation) parameters measurement, testing and
summarize them in the Control
Plan
[Link]

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House of Quality: 7 Steps
1. Identify customer wants
2. Identify how the good/service will satisfy customer wants
3. Relate customer wants to product hows
4. Identify relationships between the firm’s hows
5. Develop importance ratings
6. Evaluate competing products
7. Compare performance to desirable technical attributes

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Example
Great Cameras, Inc.
Your team has been charged with designing a new camera

The first action is to construct a

• QFD
• House of Quality

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House of Quality

Interrelationships
Customer
importance
How to satisfy
ratings
customer wants

assessment
Competitive
What the Relationship
customer matrix
wants

Target values Weighted

rating

Technical
evaluation

MBA ZG526 Operations Management 52 BITS-Pilani

HOQ: What the Customer Wants
Interrelationships

How to Satisfy
Customer Wants

Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants

Technical
Attributes and
What the Evaluation

customer wants
Customer
importance
rating
(5 = highest)
Lightweight 3
Easy to use 4
Reliable 5
Easy to hold steady 2
High resolution 1

MBA ZG526 Operations Management 53 BITS-Pilani

HOQ : How to Satisfy Customer Wants
Interrelationships

How to Satisfy
Customer Wants

Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants

Technical
Attributes and
Evaluation

Low electricity requirements

Aluminum components

High number of pixels

How to Satisfy

Ergonomic design
Customer Wants

Auto exposure
Auto focus

MBA ZG526 Operations Management 54 BITS-Pilani

HOQ : Relationship Matrix
Interrelationships

How to Satisfy
High relationship

Low electricity requirements

Customer Wants

Competitors
Analysis of
Medium relationship What the
Customer
Relationship

Aluminum components
Matrix

High number of pixels

Wants
Low relationship

Ergonomic design
Technical
Attributes and
Evaluation

Auto exposure
Auto focus
Relationship matrix

Lightweight 3
Easy to use 4
Reliable 5
Easy to hold steady 2
High resolution 1

MBA ZG526 Operations Management 55 BITS-Pilani

HOQ : Correlation Matrix
Interrelationships

How to Satisfy
Customer Wants

Competitors
Analysis of
What the
Relationship
Customer
Matrix
+ Wants

- + Technical

Relationships between + Attributes and

Evaluation

the things we can do

Low electricity requirements

Aluminum components

High number of pixels

Ergonomic design
Auto exposure
Auto focus

MBA ZG526 Operations Management 56 BITS-Pilani

HOQ : Importance Ratings
Interrelationships

How to Satisfy
Customer Wants
High relationship: 5

Competitors
Analysis of
What the
Medium relationship: 3 Customer
Wants
Relationship
Matrix

Low relationship: 1 Technical

Attributes and
Evaluation

Lightweight 3
Easy to use 4
Reliable 5
Easy to hold steady 2
High resolution 1

Our importance ratings 22 9 27 27 32 25

Weighted rating

MBA ZG526 Operations Management 57 BITS-Pilani

HOQ : Competitors & Customer Wants
Interrelationships

How to Satisfy
Customer Wants

Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants

Company B
Company A
Technical
Attributes and
Evaluation

How well do competing

products meet customer
wants
G = good
Lightweight 3 G P F = fair
Easy to use 4 G P P = poor

Reliable 5 F G
Easy to hold steady 2 G P
High resolution 1 P P

Our importance ratings 22 5

MBA ZG526 Operations Management 58 BITS-Pilani

HOQ : Technical Specs
Interrelationships

How to Satisfy
Customer Wants

Competitors
Analysis of
What the
Relationship
Customer
Matrix
Wants

Technical
Attributes and

Failure 1 per 10,000

Evaluation

Panel ranking
Target values
(Technical

2 circuits
attributes)

2’ to ∞
0.5 A

Company A 0.7 75%

60% yes 1 ok G
Technical
evaluation Company B 0.6 50% yes 2 ok F

Us 0.5 75% yes 2 ok G

MBA ZG526 Operations Management 59 BITS-Pilani

Completed House of Quality

Low electricity requirements

High relationship: 5

Aluminum components

High number of pixels

Medium relationship: 3

Ergonomic design
Auto exposure

Company A

Company B
Low relationship: 1

Auto focus
Lightweight 3 G P
Easy to use 4 G P
Reliable 5 F G
G = good Easy to hold steady 2 G P
F = fair High resolution 1 P P
P = poor Our importance ratings 22 9 27 27 32 25

Failure 1 per 10,000

Target values

Panel ranking
(Technical
attributes)

2 circuits
2’ to ∞
0.5 A
75%
Company A 0.7 60% yes 1 ok G
Technical
Company B 0.6 50% yes 2 ok F
evaluation
Us 0.5 75% yes 2 ok G
MBA ZG526 Operations Management 60 BITS-Pilani
 House of Quality Sequence
Deploying resources through the organization in response to customer requirements
1. Building starts with developing the initial HOQ.
2. The first set of technical requirements (product requirements) is the new VOC for the HOQ for the
part (or component) requirements. This house assigns the product technical requirements to the
component responsible for providing them.
3. This continues to the process planning house, where the “hows” from the parts house become the
“whats” for the new one, and a new set of requirements is developed.
4. The final house provides the manufacturing requirements that are used to produce the product.
5. The end result is a structured way to connect the actual wants of the customer to the manufacturing
floor

Design Specific Production Quality

characteristics components process plan
characteristics
requirements

components

Production
Customer

House House House

process
House

Specific
Design

1 2 3 4

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Documents for Production
Engineering drawing
• Shows dimensions, tolerances, and materials
Bill of material (BOM)
• An extensive list of raw materials, components, and instructions required to construct / manufacture / repair
Assembly drawing
• an exploded view of the product
Assembly chart
• How a product is assembled in schematic form
Route sheet
• Lists the sequence of operations necessary to produce the component with the material specified in the BoM
Work order
• Instruction to make a given quantity of a particular item, usually to a given schedule.
Engineering change notices (ECNs)
• Change some aspect of the product’s definition or documentation, such as an engineering drawing or a BOM
Configuration management
• System by which a product’s planned and changing configurations are managed
Product life-cycle management (PLM)
• An umbrella of software programs that attempts to bring together phases of product design and manufacture
MBA ZG526 Operations Management 62 BITS-Pilani
Regulations and Industry Standards
• Nearly all industries have regulations
• Product design
o Central Drugs Standard Control Organization (CDSCO), FDA, Consumer
Protection Council
• Manufacturing and assembly activities
o NEBOSH, OSHA, MoEF
• Disassembly and disposal of hazardous products
o MoEF
• International Environmental Policies and Standards
o UNFCCC, ISO, GHG Protocol, European Union Emissions Trading System

MBA ZG526 Operations Management 63 BITS-Pilani

ISO 14000
• Environmental management standards
• Implemented by more than 200,000 organizations in 155 countries
• Environmental and economic benefits

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Takeaway
❖ Product Strategy Options
❖ Product life cycle
❖ Why new products
❖ Why products fail & Kano model
❖ Time-based competition & Product development continuum
❖ Product Development Stages
❖ Quality function deployment (QFD & House of Quality)
❖ Organizing for product development
❖ Considerations for product design
❖ Manufacturability & Value engineering
❖ Defining a product, Product life-cycle management (PLM)
❖ Make-or-buy decisions and Decision trees
❖ Sustainability
❖ Assembly for Disassembly & Total Life Cycle Ownership Cost

MBA ZG526 Operations Management 65 BITS-Pilani

 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Thank you!!
 BITS Pilani presentation

BITS Pilani
Pilani Campus
 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Operations Management
Quality
Agenda
❖ What is Quality
❖ Requirements & Characteristics
❖ Cost of Quality
❖ Quality Systems & Tools
❖ Basic QC Tools
❖ Quality Management Principles
❖ Service Quality

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OM Objective
Build a QMS that identifies and satisfies customer needs

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Different Views of Quality
• User based: better performance, more features
o Fitness for use
o Degree to which the wants of a specific consumer are satisfied
o Best meets the needs of a majority of customers
• Manufacturing based:
o conformance to specs, making it right the first time
•
o
‒

MBA ZG526 Operations Management 5 BITS-Pilani

What is Quality?
• The totality of features and characteristics of a product or service that bears on its
ability to satisfy stated or implied needs*

Requirements
• Need or expectation that is stated, generally implied or obligatory
Customer, Organization, Government
Characteristic
• The Product / Service Specs
• Are measurable or, at least, can be monitored visually

• Customer wants fulfillment of requirements – not concerned with characteristics

American Society for Quality

MBA ZG526 Operations Management 6 BITS-Pilani
Requirements
Need or expectation that is stated, generally implied or obligatory

Hotel Stay
• Stated: Complimentary breakfast
• Generally implied: Comfortable bed
• Obligatory: Cleanliness

Your deliverable at work

• Stated:
• Generally implied:
• Obligatory:

Requirements are converted to Characteristics to be met during production or service

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Quality of Design & Quality of Conformance
Quality of Design – Responsibility with the Design team (Validation)
• Build the right product
• The degree to which design specifications (characteristics) meet customer's needs
and expectations.
• Influenced by factors such as cost, profit policy, demand, availability of parts and
materials, reliability

Quality of Conformance – Responsibility with the Manufacturing team (Verification)

• Build the product right
• The degree to which the design specifications (characteristics) are met
• Satisfying the designed standard to ensure performance levels

Quality should be high on both dimensions

MBA ZG526 Operations Management 8 BITS-Pilani
 Cost of Quality

[Link]

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Cost of Quality – COQ
A methodology that allows an organization to determine the cost of activities that
• prevent poor quality
• appraise the quality of the organization's products or services, and
• result from internal and external failures

Having such information allows an organization to determine the potential savings to be

gained by implementing process improvements.

Effective quality management decreases production costs because the sooner an error
is found and corrected, the less costly it will be

[Link]

MBA ZG526 Operations Management 10 BITS-Pilani

Categories of COQ
The costs may be categorized as
1. Prevention costs: Costs related to defect prevention
2. Appraisal costs: Costs incurred to detect defects before delivery
3. Internal Failure costs: Costs incurred remedying defects before delivery
4. External Failure costs: Cost incurred remedying defects found by customer

• Cost of Poor Quality

• Cost of Internal & External Failures

• Cost of Good Quality

• Cost of Prevention & Cost of Appraisal

• GE recalled 3+ million dishwashers – the cost of repairs exceeded the value of the m/c
MBA ZG526 Operations Management 11 BITS-Pilani
COQ Expenses – Examples
Prevention Costs Internal Failure
Prevention of problems The cost to rework a defective product before delivery
Process capability studies Overtime
Process documentation Redesign
Vendor evaluation Rework
Design review Scrap
Quality improvement projects Downtime
Training

Appraisal Costs External Failure

Inspection to monitor ongoing quality The cost to repair/replace a defective product after delivery
Incoming material inspection Customer dissatisfaction (difficult to quantify)
In-process material inspection Price concession
Equipment calibration Product recall
Final product inspection Time spent resolving customer complaints
Automated testing tools Penalties, Liabilities
Testing, Labs, Inspectors Rework, Returned goods, Loss of goodwill, Costs to society
MBA ZG526 Operations Management 12 BITS-Pilani
Goal & Strategies of a COQ System
Goal: Bring down the COQ
Strategy: Increase investments on Prevention & Appraisal activities.

Strategy
Elimination of External Failure Costs
Elimination of Internal Failure Costs
Investment in Appraisal Costs
Investment in Prevention Costs

MBA ZG526 Operations Management 13 BITS-Pilani

COQ Indices
COQ can be measured and presented as
• Sales Index: Percentage of Sales
• Profit Index: Percentage of Profits
• Cost Index: Percentage of Manufacturing Cost
• Labour Index: Rs. Per Labour Hour
• Production Index: Rs. Per Unit of Product

MBA ZG526 Operations Management 14 BITS-Pilani

Example
The company produces small motors for use in garden equipment. The company
instituted a Quality Improvement Program in 1999. It wants to asses this initiative.
The following table gives the relevant data for four years. Analyze the table.

Quality Costs Year

1999 2000 2001 2002
Prevention 27,000 28,500 74,600 112,300
Appraisal 155,000 170,300 113,400 107,000
Internal Failure 386,400 469,200 347,800 219,100
External Failure 242,000 192,000 103,500 106,000
Total 810,400 860,000 639,300 544,400
Sales 4,360,000 4,450,000 5,050,000 5,190,000
Manufacturing Costs 1,760,000 1,810,000 1,880,000 1,890,000
All figures in USD

MBA ZG526 Operations Management 15 BITS-Pilani

Quality Cost Indices
Quality Costs Year
1999 2000 2001 2002
Prevention 27,000 28,500 74,600 112,300
Appraisal 155,000 170,300 113,400 107,000
Internal Failure 386,400 469,200 347,800 219,100
External Failure 242,000 192,000 103,500 106,000
Sales 4,360,000 4,450,000 5,050,000 5,190,000
Manufacturing Costs 1,760,000 1,810,000 1,880,000 1,890,000
Cost of Good Quality 182,000 198,800 188,000 219,300
Cost of Poor Quality 628,400 661,200 451,300 325,100
TCOQ 810,400 860,000 639,300 544,400
Quality Sales Index 18.59% 19.33 12.66 10.49
Quality Manufacturing Index 46.05% 47.51 34.01 28.80
Quality Sales Index: TCOQ / Sales = 810,400 / 4360000 = 18.59%

MBA ZG526 Operations Management 16 BITS-Pilani

Quality Cost Indices
Quality Costs Year
1999 2000 2001 2002
Prevention 27,000 28,500 74,600 112,300
Appraisal 155,000 170,300 113,400 107,000
Internal Failure 386,400 469,200 347,800 219,100
External Failure
The Quality 242,000improved
index numbers show dramatically 192,000 103,500
quality over 106,000
the 4-year period
Senior management should appreciate
Sales the impact4,450,000
4,360,000 of the Quality5,050,000
initiative with5,190,000
the
accounting numbers they are familiar with
Manufacturing Costs 1,760,000 1,810,000 1,880,000 1,890,000
Cost of Good Quality 182,000 198,800 188,000 219,300
Cost of Poor Quality 628,400 661,200 451,300 325,100
TCOQ 810,400 860,000 639,300 544,400
Quality Sales Index 18.59 19.33 12.66 10.49
Quality Manufacturing Index 46.05 47.51 34.01 28.80

MBA ZG526 Operations Management 17 BITS-Pilani

 Quality Systems and Tools

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SQC, QA & QMS
QMS: Includes Quality goals, KPIs, Accountability for the KPIs, Feedback and reviews,
Continuous improvement projects, Risk management tools, etc

QA: Process-oriented, focusing on preventing quality issues

• Process development / documentation, Audits, etc
• SOPs that result in reproducible production outcomes of desired levels of quality
• Includes SQC
• Proactive and intended to prevent the manufacture of NC products / services
• Focused on providing confidence that quality requirements will be fulfilled

SQC: Three components

• SPC: use of statistical techniques to monitor and control a process
• Acceptance Sampling: Accepting a lot after testing a sample
o (Incoming / In-process, Outgoing)
• Descriptive statistics: Describes the characteristics
[Link]

MBA ZG526 Operations Management 19 BITS-Pilani

Continuous Improvement Focus
• Never-ending process of continuous improvement
• Covers people, equipment, suppliers, materials, procedures
• Every operation can be improved
• Kaizen describes the ongoing process of unending improvement
• TQM and ZD also used to describe continuous improvement
• PDCA is a process of improvement

MBA ZG526 Operations Management 20 BITS-Pilani

Shewhart Cycle / Deming Wheel

4. Act 1. Plan
Implement Identify the
the plan, pattern and
document make a plan

3. Check 2. Do
Is the plan Test the
working? plan

MBA ZG526 Operations Management 21 BITS-Pilani

Six Sigma
• Originally developed by Motorola, adopted and enhanced by Honeywell and GE
o A program designed to reduce defects, lower costs, save time, and improve
customer satisfaction
o 3.4 defects per million opportunities (DPMO) (refer Appendix)
• Highly structured approach to process improvement – DMAIC (refer Appendix)
o Define, Measure, Analyze, Improve, Control
• A comprehensive system for achieving and sustaining business success

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 Basic QC Tools

MBA ZG526 Operations Management 23 BITS-Pilani

Basic 7 QC Tools
Dr. Kaoru Ishikawa popularized this basic tools of QC:
• A fixed set of graphical techniques identified as being most helpful in troubleshooting
issues related to quality
• The tools are related to numerical data processing
• They are very basic in nature
o Suitable for people with little formal training in Statistics
o They can be used to solve the vast majority of quality-related issues.

The designation was inspired by the seven famous weapons of Benkai

• A Japanese warrior monk of the 10th century

MBA ZG526 Operations Management 24 BITS-Pilani

The Basic 7 QC Tools
1. Check Sheet or Tally Sheet
2. Histogram
3. Pareto Diagram or Pareto Chart
4. Cause and Effect Diagram
5. Flowchart / Process Mapping
(Some lists have Stratification instead)
6. Scatter Diagram
7. Control Charts (& Process Capability)

[Link]

MBA ZG526 Operations Management 25 BITS-Pilani

1. Check Sheet
Ensures that the data is collected carefully and accurately by operating personnel
• Enables the collection of necessary data easily and systematically
• When data can be observed and collected repeatedly by the same person
• Where data can be observed and collected at the same location
• Frequency of events, problems, defects, defect location, defect causes, etc

What’s happening
on
Wed & Sat?
Friday?

[Link]

MBA ZG526 Operations Management 26 BITS-Pilani

2. Histograms

• Displays pictorially the variation in a process

o The X Axis is a Quality Characteristic & the Y Axis is the frequency
• The shape of the histogram may show process behavior
• Sometimes it indicates otherwise unseen causes of variation
• Used to determine the capability of a process
• Starting point for the improvement process
MBA ZG526 Operations Management 27 BITS-Pilani
3. Pareto Diagram

[Link]

MBA ZG526 Operations Management 28 BITS-Pilani

4. Cause and Effect Diagram
Developed by Professor Kaoru Ishikawa of the University of Tokyo in the 1940s’
• Also known as the ‘Fishbone Diagram’ or ‘Ishikawa Diagram’.
• There is no “correct” way to construct a fishbone diagram
o Each situation requires an appropriate diagram
o Usually constructed through brainstorming sessions
o As a starting point, the categories are:
Manufacturing: Manpower, M/c, material, Method, Milieu
Services: Surroundings, Suppliers, Systems, Skills, Safety

Once the diagram is complete, the team votes on the causes.

• Resulting in identification of the most likely causes..
• Solutions are developed to correct the causes
• Resulting in improvement
MBA ZG526 Operations Management 29 BITS-Pilani
Cause & Effect Diagram – Template

Total Quality Management, Dale Besterfield et al, Pearson Publication

MBA ZG526 Operations Management 30 BITS-Pilani

Example

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5. Flow Chart
Displays pictorially the process

(Stratification: A technique that separates data gathered from a variety of sources so that patterns can be seen)

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6. Scatter Diagrams
Identifies correlations between a quality parameter and a factor that might be driving it
o A Critical To Quality (CTQ) characteristic and a factor affecting it

Productivity

Absenteeism

MBA ZG526 Operations Management 33 BITS-Pilani

7. Control Charts
• Also called Run charts
• Focuses attention on detecting and monitoring process variation over time
• When a value falls outside the limits, the process is considered to be out of
control, and an assignable cause for the variation is present
• Distinguishes special from common causes of variation
• Serves as a tool for on-going process control

• The Y Axis represents some measurable Quality characteristic

• The X axis represents Time the sample was taken

MBA ZG526 Operations Management 34 BITS-Pilani

Control Chart – Examples

[Link]
[Link]
MBA ZG526 Operations Management 35 BITS-Pilani
Patterns in Control Charts
Process Out of Control when
• A point falls outside the control limits
• When there are patterns:
o 7 above or below the central line
o 5 consecutive points increasing or decreasing
o Two points very near LCL / UCL
o Run of 5 above (or below) central line
o Erratic behavior

If there are assignable causes, the control chart can be revised after dropping such points

MBA ZG526 Operations Management 36 BITS-Pilani

Example: Data (1 of 6)

Sample Obs 1 Obs 2 Obs 3 Obs 4 Obs 5

1 10.682 10.689 10.776 10.798 10.714
2 10.787 10.86 10.601 10.746 10.779
3 10.78 10.667 10.838 10.785 10.723
4 10.591 10.727 10.812 10.775 10.73
5 10.693 10.708 10.79 10.758 10.671
6 10.749 10.714 10.738 10.719 10.606
7 10.791 10.713 10.689 10.877 10.603
8 10.744 10.779 10.11 10.737 10.75
9 10.769 10.773 10.641 10.644 10.725
10 10.718 10.671 10.708 10.85 10.712
11 10.787 10.821 10.764 10.658 10.708
12 10.622 10.802 10.818 10.872 10.727
13 10.657 10.822 10.893 10.544 10.75
14 10.806 10.749 10.859 10.801 10.701
15 10.66 10.681 10.644 10.747 10.728
Total Quality Management, Dale Besterfield et al, Pearson Publication

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 ത , R, R
Example: X ഥ, X
ധ (2 of 6)

Sample Obs 1 Obs 2 Obs 3 Obs 4 Obs 5 Avg Range

1 10.68 10.689 10.776 10.798 10.714 10.732 0.116
2 10.79 10.86 10.601 10.746 10.779 10.755 0.259
3 10.78 10.667 10.838 10.785 10.723 10.759 0.171
4 10.59 10.727 10.812 10.775 10.73 10.727 0.221
5 10.69 10.708 10.79 10.758 10.671 10.724 0.119
6 10.75 10.714 10.738 10.719 10.606 10.705 0.143
7 10.79 10.713 10.689 10.877 10.603 10.735 0.274
8 10.74 10.779 10.11 10.737 10.75 10.624 0.669
9 10.77 10.773 10.641 10.644 10.725 10.710 0.132
10 10.72 10.671 10.708 10.85 10.712 10.732 0.179
11 10.79 10.821 10.764 10.658 10.708 10.748 0.163
12 10.62 10.802 10.818 10.872 10.727 10.768 0.250
13 10.66 10.822 10.893 10.544 10.75 10.733 0.349
14 10.81 10.749 10.859 10.801 10.701 10.783 0.158
15 10.66 10.681 10.644 10.747 10.728 10.692 0.103

Averages 10.728 0.220400

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Example: Control Limit Formulas and Tabled Values (3 of 6)
A2, d2, D3, and D4 are factors that vary with the subgroup size

Control Factors
n A2 D3 D4 d2
ഥ 𝐂𝐡𝐚𝐫𝐭 𝐂𝐨𝐧𝐭𝐫𝐨𝐥 𝐋𝐢𝐦𝐢𝐭𝐬
𝐗 2 1.88 0 3.27 1.13
• UCL = Xന + A2 R
ഥ 3 1.02 0 2.57 1.69
• LCL = Xന − A2 R
ഥ 4 0.73 0 2.28 2.06
5 0.58 0 2.11 2.33
R 𝐂𝐡𝐚𝐫𝐭 𝐂𝐨𝐧𝐭𝐫𝐨𝐥 𝐋𝐢𝐦𝐢𝐭𝐬 6 0.48 0 2.00 2.53
ഥ
• UCL = D4 R 7 0.42 0.08 1.92 2.70
ഥ
• LCL = D3 R 8 0.37 0.14 1.86 2.85
9 0.34 0.18 1.82 2.97
10 0.31 0.22 1.78 3.08

MBA ZG526 Operations Management 39 BITS-Pilani

Example: Control Limits & R Chart (4 of 6)

UCL = D4 R = ( 2.11)( 0.2204) = 0.46504

LCL = D3 R = (0)(0.2204) = 0
0.800
0.700
0.600
0.500 Range
UCL
R 0.400
LCL
0.300 R-bar

0.200
0.100
0.000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Sample

MBA ZG526 Operations Management 40 BITS-Pilani

 ത Chart & Control Limits (5 of 6)
Example: X

UCL = x + A2 R = 10.728 + .58( 0.2204 )=10.856

LCL = x - A2 R = 10.728-.58( 0.2204 )=10.601
10.900

10.850

10.800

10.750
Means

Sample
10.700 mean
UCL

10.650 LCL

grand
10.600
mean of x

10.550
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Sample
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Interpreting X Bar R Control Charts
• Always examine the R chart first (X bar chart control limits require R bar)
• If the points are out of control in R chart, then stop the process.
o Identify the special cause and address the issue.
• Once the R bar chart is in control, review X bar chart against the control limits.
o The specification limits are provided by customer or management
o Control limits are derived from the average and range values of the subgroups.
• If any point is out of control in the X bar chat
o Identify the special cause and address the issue.
• Process capability studies can be performed only after both X bar and R chart
values are within the control limits.

[Link]

MBA ZG526 Operations Management 42 BITS-Pilani

 Example: Process Now Under Control (6 of 6)
Sample Obs 1 Obs 2 Obs 3 Obs 4 Obs 5 Avg Range R X Bar
1 10.6820 10.6890 10.7760 10.7980 10.7140 10.7318 0.1160 UCL 0.3974 10.8451
2 10.7870 10.8600 10.6010 10.7460 10.7790 10.7546 0.2590 LCL 0.0000 10.6266
3 10.7800 10.6670 10.8380 10.7850 10.7230 10.7586 0.1710
ഥ & LCL = D3 R
R Chart: UCL = D4 R ഥ
4 10.5910 10.7270 10.8120 10.7750 10.7300 10.7270 0.2210
ഥ
X Chart: UCL = ന ഥ & UCL = ന
X + A2 R ഥ
X − A2 R
5 10.6930 10.7080 10.7900 10.7580 10.6710 10.7240 0.1190
6 10.7490 10.7140 10.7380 10.7190 10.6060 10.7052 0.1430
7 10.7910 10.7130 10.6890 10.8770 10.6030 10.7346 0.2740
9 10.7690 10.7730 10.6410 10.6440 10.7250 10.7104 0.1320
Control Factors
10 10.7180 10.6710 10.7080 10.8500 10.7120 10.7318 0.1790
n A2 D3 D4 d2
11 10.7870 10.8210 10.7640 10.6580 10.7080 10.7476 0.1630 2 1.88 0 3.27 1.13
12 10.6220 10.8020 10.8180 10.8720 10.7270 10.7682 0.2500 3 1.02 0 2.57 1.69
4 0.73 0 2.28 2.06
13 10.6570 10.8220 10.8930 10.5440 10.7500 10.7332 0.3490 5 0.58 0 2.11 2.33
14 10.8060 10.7490 10.8590 10.8010 10.7010 10.7832 0.1580 6 0.48 0 2.00 2.53
15 10.6600 10.6810 10.6440 10.7470 10.7280 10.6920 0.1030 7 0.42 0.08 1.92 2.70
8 0.37 0.14 1.86 2.85
X Dbl Bar 10.7359 9 0.34 0.18 1.82 2.97
R Bar 0.1884 10 0.31 0.22 1.78 3.08
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Process Capability
• The natural variation of a process should be small enough to produce products that
meet the standards required
• A process in statistical control does not necessarily meet the design specifications
• Process capability: 6σ
• To make computations easy: σ = R ഥ′ /d2
o (Rഥ′ : The mean range after removing OOC pts)

Control Factors
n A2 D3 D4 d2
Example: Process Capability = 6 * 0.1884 / 2.33 = 0.4852 2 1.88 0 3.27 1.13
3 1.02 0 2.57 1.69
4 0.73 0 2.28 2.06
5 0.58 0 2.11 2.33
6 0.48 0 2.00 2.53
7 0.42 0.08 1.92 2.70
8 0.37 0.14 1.86 2.85
9 0.34 0.18 1.82 2.97
10 0.31 0.22 1.78 3.08
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Process Capability Index

Upper Specification – Lower Specification

Cp =
6
• Process capability index is a measure of the relationship between the natural
variation of the process and the design specifications
• A capable process must have a Cp of at least 1.0
• Does not look at how well the process is centered in the specification range
• Often a target value of Cp = 1.33 is used to allow for off-center processes
• Six Sigma quality requires a Cp = 2.0

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Process Capability Ratio - Example
Process mean x = 10.7359
Process standard deviation s = 0.0809 (Process Capability)
Design specification = 10.7 ± 0.1
• That is, LSL = 10.6 & USL = 10.8

USL−LSL 0.2
Cp = = = 0.41
6σ 0.4852

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 Quality Management Principles

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Quality Management Principles
ISO 9000: 2015 has defined QMPs in Clause 2.3
• The QMPs forms a basis to guide an organization’s performance improvement.
• Helps align the organization with all stakeholders: customers, suppliers & employees

1. Customer Focus
2. Leadership
3. Engagement Of People
4. Process Approach
5. Improvement
6. Evidence based Decision Making
7. Relationship Management

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QMP (1 of 2)
Customer Focus
• The needs of current and future customers are understood
• Customer requirements are met & Customer expectations are exceeded.
Leadership
• A unity of purpose exists in the organization
• Quality objectives are set that inspire and challenge
Engagement of People
• The employees (people) are competent, empowered and engaged
Process Approach
• Organizations manage their business as a system of processes
Not departments or people or products.

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QMP (2 of 2)
Improvement
• Successful organizations have an ongoing focus on improvement

Evidence Based Decision Making

• Decisions are taken after analysis of data and information

Relationship Management
A mutually beneficial relationships with all interested parties

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 Service Quality

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Service Quality
The operations manager must recognize:
• The tangible component of services is important
• The service process is important
• The service is judged against the customer’s expectations
• Exceptions will occur

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Determinants of Service Quality
Reliability involves consistency of performance and dependability
Responsiveness concerns the willingness or readiness of employees to provide service

Competence means possession of the required skills and knowledge to perform the service

Access involves approachability and ease of contact

Courtesy involves politeness, respect, consideration, and friendliness
Communication means keeping customers informed and listening to them
Credibility involves trustworthiness, believability, and honesty
Security is the freedom from danger, risk, or doubt

Understanding/knowing the customer involves making the effort to understand the customer's needs

Tangibles include the physical evidence of the service

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The 5 Service Dimensions Customers Care About

[Link]

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Service Recovery Strategy
Managers should have a plan for when services fail
• Marriott's LEARN routine
o Listen
o Empathize
o Apologize
o React
o Notify

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Test Yourself
❖ Solved problems: 6.1, S6.6

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 Appendix
Inspection
Six Sigma: Why 3.4 defect per million
Six Sigma: DMAIC
Actions for Nonconformity

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Inspection
► Involves examining items to see if an item is good or defective
► Detect a defective product
► Does not correct deficiencies in process or product
► It is expensive
► Issues
► When to inspect
► Where in process to inspect

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When and Where to Inspect
1. At the supplier’s plant while the supplier is producing
2. At your facility upon receipt of goods from your supplier
3. Before costly or irreversible processes
4. During the step-by-step production process
5. When production or service is complete
6. Before delivery to your customer
7. At the point of customer contact

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Inspection
► Many problems
► Worker fatigue
► Measurement error
► Process variability
► Cannot inspect quality into a product
► Robust design, empowered employees, and sound
processes are better solutions

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Source Inspection
► Poka-yoke is the concept of foolproof devices or techniques
designed to pass only acceptable products
► Checklists ensure consistency and completeness

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Service Industry Inspection – Examples
ORGANIZATION WHAT IS INSPECTED STANDARD
Alaska Airlines Last bag on carousel Less than 20 minutes after arrival at the gate
Airplane door opened Less than 2 minutes after arrival at the gate
Jones Law Office Receptionist performance Phone answered by the second ring
Billing Accurate, timely, and correct format
Attorney Promptness in returning calls
Hard Rock Hotel Reception desk Use customer’s name
Doorman Greet guest in less than 30 seconds
Room All lights working, spotless bathroom
Minibar Restocked and charges accurately posted to bill
Arnold Palmer Billing Accurate, timely, and correct format
Hospital Pharmacy Prescription accuracy, inventory accuracy
Lab Audit for lab-test accuracy
Nurses Charts immediately updated
Admissions Data entered correctly and completely
Olive Garden Busboy Serves water and bread within 1 minute
Restaurant Busboy Clears all entrée items and crumbs prior to dessert
Waiter
Knows and suggest specials, desserts
Nordstrom Display areas Attractive, well-organized, stocked, good lighting
Department Stockrooms Rotation of goods, organized, clean
Store Salesclerks
MBA ZG526 Neat, courteous, very knowledgeable
Operations Management 62 BITS-Pilani
Six Sigma: Why 3.4 defects per million
P(Z < -3 OR Z > 3) = 0.002700, P(Z < -6 OR Z > 6) = 1.97x10-6 ~ P(-7.5 < Z < 4.5) = 3.4x10-6

As per Motorola convention,

Lower limits Upper limits
► Two meanings process centre may shift in
2,700 defects/million the long term by 1.5σ due to
► Statistical definition of a process that is poor control or technology
99.9997% capable, 3.4 defects per
3.4 defects/million
million opportunities (DPMO)
► A program designed to reduce defects,
lower costs, save time, and improve
customer satisfaction Mean
±3
► A comprehensive system for achieving

and sustaining business±6success
Figure 6.4

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Six Sigma Process: DMAIC
1. Defines the project’s purpose, scope, and outputs, then identifies the required
process information keeping in mind the customer’s definition of quality
2. Measures the process and collects data
3. Analyzes the data ensuring repeatability and reproducibility
4. Improves by modifying or redesigning existing processes and procedures
5. Controls the new process to make sure performance levels are maintained
• Requires organization infrastructure: Steering committee, A champion & a Sponsor

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 Actions for Nonconformity

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Defect & Nonconformity
• Nonconformity: Deviation from a requirement or specification (characteristics)

• Defect: Non-fulfilment of a requirement related to an intended or specified use

o A nonconformity severe enough to cause the product not to satisfy normal usage
o Defect is based on fitness for use or fitness for purpose*

*The degree to which products conform to essential requirements and meet the needs of the users for which they are intended

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Actions for Nonconformity
An NC has been detected
Containment and Root Cause Investigation – Should be done immediately (?)
• Containment: Immediately prevent further use or distribution of NC material / product
• RCA: Determine the underlying cause of the non-conformance.
RCA tools: Fishbone diagram, Flowcharts, Brainstorming, Five why’s
Correction
• The NC is corrected but it does not address the cause of the problem.
• Corrections include reworking, recalling, disposing NC materials appropriately
• Sometimes the problem may have to be corrected at the customer’s site
Corrective Action
• Corrective action eliminates the root causes of the NC identified by the RCA.
Preventive Action
• Clause 10.2.1 b)
o Determine if similar NCs exist or could potentially occur & evaluate the need for action

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 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Thank you!!
 BITS Pilani presentation

BITS Pilani
Pilani Campus
 BITS Pilani
Pilani Campus

Operations Management
Process Mapping
Objectives
❖ To understand the process approach
❖ Process Mapping
❖ Process Map
❖ Swim Lanes
❖ Time-Function Mapping
❖ Service Blueprint
❖ Describe customer interaction in service processes
❖ Outline Process Chart

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 Introduction

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 What is Process Approach
A process approach
• Requires the organization to manage the business as a system of
processes – not a system of departments or people
• Introduces horizontal management, crossing the barriers between
different functional units and unifying their focus to the main goals of the
organization.
ISO/TC 176 SC 2/N1290

ISO/TC 176/SC 2/N1289

ISO/TC 176/SC 2/N 544R3

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Process Linkages across Departments

There is a process owner

ISO/TC 176/SC 2/N 544R3

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Benefits
When the organization is viewed as a system of processes
• Increases accountability for more consistent results
• There can be a focus on important (“high‐risk” & key) processes
• Improves integration of processes – Management of process interfaces.
• Transparency of operations within the organization
• Improves communication and provide process documentation
• Inputs for training
• Provides insight into a process
o Helps teams brainstorm ideas for process improvement
o Helps identify bottlenecks, repetition and delays
o Will help improve efficiency
o Defines process boundaries, process ownership, process responsibilities and effectiveness
measures or process metrics

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A Generic Process

ISO/TC 176/SC 2/N 544R3

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SIPOC: A Simple Process Model
Starting End
point Point

Activities
Source of Inputs Inputs Outputs Receivers of outputs

Matter, energy
Matter, energy information (e.g. in the
• Predecessor processes information (e.g. form of product, • Subsequent processes
• Suppliers, materials, service, decision • Customers,
• Customers, resources,
• Other relevant parties requirements

Possible controls and checkpoints

to
• Monitor and Measure
performance

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Types of Process Maps
Process Map Provides a picture of the process – a flowchart

Swimlane Process map with the responsible departments / roles

Time-Function Mapping A Swimlane with time added

Service Blueprint A process map simultaneously depicting the process of

service delivery, the roles of customers and employees

Outline Process Chart Recording the essential features of a work situation for
subsequent analysis (Textbook: Process Chart)

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 Process Map

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Process Map
• A process map visually shows the steps of a work activity and the people or
departments involved in carrying out each step.
• A simple process map would look like this:

Select Payment Checked

Pay
Fruits Method Out

• Also called flowcharts, process flowchart, process chart, functional process chart,
functional flowchart, process model, workflow diagram, business flow diagram or
process flow diagram.

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 Swimlane

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 What are Swimlane Diagrams?
A process map that delineates who does what in a process.
• Uses the metaphor of lanes in a swimming pool
• Provides clarity and accountability by placing process steps within the horizontal
(or vertical) “swimlanes” of a particular employee, work group or department
• Shows connections, communication and handoffs between these lanes
ISO/TC 176 SC 2/N1290

[Link]

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Procurement Process - I

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Procurement Process - II

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 Time-Function Map

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"Baseline" Time-Function Map
Order Receive
Customer product product

Process
Sales order

Order
Production Wait
control

Product
Order
Plant A Print

Product
WIP
Warehouse Wait Wait Wait

Product
WIP
WIP
WIP
Plant B Extrude

Transport Move Move

12 days 13 days 1 day 4 days 1 day 10 days 1 day 9 day 1 day

52 days

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"Target" Time-Function Map

Order Receive
Customer product product

Process
Sales order

Product
Order
Production
control Wait

Order
WIP
Plant Print Extrude

Product
Warehouse Wait

Product
Transport Move

1 day 2 days 1 day 1 day 1 day

6 days

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 Service Blueprint

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 What are Service Blueprints?
• A service blueprint visually displays the service by simultaneously depicting the
process of service delivery, the roles of customers and employees.
• It breaks down a service into its logical components and depict the steps or tasks
in the process, the means by which the tasks are executed, and the evidence of
service as the customer experiences it.

• A service blueprint is used both for:

1. Developing new services
2. Improving existing services
ISO/TC 176 SC 2/N1290

3. Training of service providers

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Service Blueprinting Defines
Customer Actions: The steps that customers take in a service delivery process.
Frontstage or Visible Contact Employee Actions:
• What customers see and who / what they interact with
o Staff greeting a customer; The website where the customer places an order
Backstage or Invisible Contact Employee Actions:
• All other organization actions
o Employee responding by email or packaging an order or making a preparation
Support Processes:
• Internal activities required to deliver the service
o Payment verification, Delivery of unit from warehouse to store; Maintenance of lift
ISO/TC 176 SC 2/N1290

Physical Evidence:
• For each customer action, the moment of truth: The related physical evidence
• Tangibles the customer is exposed to, that can influence the quality perceptions

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 Interaction Planes
These group the sections of a service blueprint into three visual groupings
• The Line of Interaction delineates the service activities that the client carries out
independently
• The Line of Visibility separates the service activities that the client can see from the
service activities which are hidden from view.
• The Line of Internal Interaction separates activities that have immediate relation to
the client’s order from support activities
ISO/TC 176 SC 2/N1290

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 Blueprint – Overnight Hotel
ISO/TC 176 SC 2/N1290

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 Service Blueprinting
• Focuses on the customer and provider interaction
• Defines three levels of interaction
• Each level has different management issues
• Identifies potential failure points
• The better the customer interactions are accommodated in the process design, the
more efficient and effective the process
• Find the right combination of cost and customer interaction
ISO/TC 176 SC 2/N1290

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 Service Blueprinting
• Focuses on the customer and provider interaction
• Defines three levels of interaction
• Each level has different management issues
• Identifies potential failure points
• The better the customer interactions are accommodated in the process design, the
more efficient and effective the process
• Find the right combination of cost and customer interaction
The textbook also mentions Process
Chain Network (PCN) analysis
ISO/TC 176 SC 2/N1290

PCN Analysis is a tool for designing

and improving service processes by
visualizing and strategically
leveraging customer interactions

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 Outline Process
Chart

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Outline Process Chart
Records an outline of a process
• Only those steps of a process that can be represented by the ASME symbols of
operation and inspection are recorded
• The five symbols were first promulgated by the American Society of Mechanical
Engineers

It is used when analyzing the steps in a process, to help identify and eliminate waste
• A tool for efficiency planning.

[Link]

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Process Chart Symbols

OPERATION: an activity that adds some value: The part, material or product is usually modified or changed

INSPECTION: Inspects something that has occurred; Indicates a check for quality or quantity

TRANSPORT: the movement of workers, materials or equipment without transforming anything

STORAGE: Setting something aside for a while; Controlled storage in which material is received into or
issued from a store, or an item is retained for reference purposes

DELAY or TEMPORARY STORAGE: Waiting for something to happen; indicates a delay in the process

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Processing An Invoice
Scope: Begins after receiving the invoice and ends with paying the supplier.

[Link]

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 Example
Restaurant Service

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Process Map
Start End

Guest Guest Order to Food Food

Order Eat Pay Bill Leave
arrives seated kitchen assembled served

Yes Yes
Table All
Free? ready?

Put name in
queue Cook some

Seat in Re-heat
Lobby some

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Swimlane
Place
Seated Eat Bill? Pay End
Start Arrives order
Guest

Take to Write
table order
No Table Yes
Free?

Serve Generate
Waiter food bill

Submit
Take Seat at order
name lobby

Assemble
Chef order

No All
Heat some Cook some
ready?

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Service Blueprint
Physical Exterior, Parking Ambience Time, Waiter Time,
Evidence Ambience Waiter Food Availability Courtesy

Seated Place Eat Bill? Pay

Start Arrives End
Guest order

Line of Interaction

Seat at Write
table order
No Table Yes
Free?

Waiter Serve Generate

food bill

Submit
Take Seat at order
name lobby

Line of Visibility Line of internal Interaction

Assemble
Chef order

No All
Cook some
ready?

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Outline Process Chart
Subject: Waiter
Step Step Description Ops Ins Trans Store Delay Time Distance
1 Greet guest ✓ 5 0
2 Is a table free ✓
3 Write name in queue ✓
4 Seat in lobby ✓ ✓
5 Is a table free ✓
6 Seat guest at table ✓ ✓
7 Take order ✓
8 Submit order to ✓
kitchen
9 Check if food is ✓
ready
10 Serve food ✓
11 Generate bill ✓
12 Accept cash ✓

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Takeaway
❖ What is the Process Approach
❖ The components of a Process
❖ Process Mapping
❖ SIPOC
❖ Process Map
❖ Swim Lanes
❖ Outline Process Chart
❖ Time-Function Mapping
❖ Service Blueprint

MBA ZG526 Operations Management 36 BITS-Pilani

 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Thank you!!
 BITS Pilani presentation

BITS Pilani
Pilani Campus
 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Operations Management
Process Strategy
Objectives
Describe the four process strategies

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Introduction
We examined the need for the selection, definition, and design of goods and services

Operations must find the best way to produce

A process strategy is the approach to transforming resources into goods and services

The objective is to create a process that can produce offerings that

• Meet customer requirements
• Within cost and other managerial constraints

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Process Strategies
Virtually every good or service is made by using some variation of one of four basic
process strategies

1. Process focus
2. Repetitive focus
3. Product focus
4. Mass customization

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Process Strategies
Process Focus
projects, job shops
(hospitals, fine-dining
restaurants)

Repetitive
(autos, motorcycles,
home appliances, fast
foods)

Product Focus
(commercial baked
goods, steel, glass,
beer)

Mass Customization
difficult to achieve; huge
rewards
(DELL, Confectionary)
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Process, Volume, and Variety
Process Focus
projects, job shops (hospitals,
restaurants)
high variable costs with low
utilization of facilities

Repetitive
(autos, motorcycles, home
appliances)
Possibly the economic
advantage of the product-
focused model and the
custom advantage of the low-
volume, high-variety model

Product Focus
(commercial baked goods,
steel, glass, beer)

Mass Customization
(difficult to achieve, but huge
rewards)

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Process, Volume, and Variety

Continuous manufacturing
generally uses raw materials
that undergo some kind of
chemical reaction or change.

Repetitive process is classic

assembly line

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Comparison of Processes
PROCESS FOCUS REPETITIVE FOCUS PRODUCT FOCUS MASS CUSTOMIZATION
(LOW-VOLUME, HIGH-VARIETY) (MODULAR) (HIGH-VOLUME, LOW-VARIETY) (HIGH-VOLUME, HIGH-VARIETY)
(ARNOLD PALMER HOSPITAL) (HARLEY-DAVIDSON) (FRITO-LAY) (DELL COMPUTER)
Small quantity and large variety of Long runs, a standardized product Large quantity and small variety of Large quantity and large variety of
products from modules products products

Broadly skilled operators Moderately trained employees Less broadly skilled operators Flexible operators

Instructions for each job Few changes in the instructions Standardized job instructions Custom orders requiring many job
instructions

High inventory Low inventory Low inventory Low inventory

Finished goods are made to order Finished goods are made to Finished goods are made to a Finished goods are build-to-order
and not stored frequent forecasts forecast and stored (BTO)

Scheduling is complex Scheduling is routine Scheduling is routine Sophisticated scheduling

accommodates custom orders

Low utilization and and variable Fixed costs are dependent on Fixed costs are high and variable Fixed costs tend to be high and
costs high flexibility of the facility costs low variable costs low

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Service Process Matrix

Customer interaction represents the degree to Degree of Customer Interaction & Customization
Low High
which the customer can intervene in the service
process. Service Factory Service Shop

• For example, a high degree of interaction Fast-food

restaurants
Restaurants

implies that the customer can demand more

Low
or less of some aspects of the service

Degree of Labor
No-frills Specialized
airlines hospitals
Customization refers to the need and ability to
alter the service in order to satisfy the individual
Mass Service Professional Service
customer's particular preferences.
Architects
Colleges
Labor intensity can be defined as the ratio of High
Fine-dining
labor cost to plant and equipment restaurants

Commercial Private
banking banking

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Service Process Matrix
Firms should strive to move left and upward
Degree of Customer Interaction & Customization
Low High
Mass Service and Professional Service
Service Factory Service Shop
• Labor involvement is high
Fast-food Restaurants
• Focus on human resources restaurants
• Selection and training highly important Low
Professional Service

Degree of Labor
No-frills Specialized
• Personalized services airlines hospitals

Service Factory and Service Shop

Mass Service Professional Service
• Restricted offerings
• Tight control to maintain standards Colleges
Architects
High
• Automation of standardized services Fine-dining
restaurants
Service Factory
Commercial Private
• Low labor intensity responds well to banking banking
process technology and scheduling
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Service Process Matrix

Degree of Customer Interaction & Customization

Low High
Product design
Service Factory Service Shop
Quality
Fast-food Restaurants
Process design restaurants

Location Low
Layout design

Degree of Labor
No-frills Specialized
Human resources airlines hospitals

SCM
Inventory Mass Service Professional Service

Scheduling Architects
Colleges
Maintenance High
Fine-dining
restaurants

Commercial Private
banking banking

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Improving Service Productivity
STRATEGY TECHNIQUE EXAMPLE
Separation Structuring service so customers must go Bank customers go to a manager to open a
where the service is offered new account, to loan officers for loans, and to
tellers for deposits
Self-service Self-service so customers examine, Supermarkets and department stores
compare, and evaluate at their own pace Internet ordering
Postponement Customizing at delivery Customizing vans at delivery rather than at
production
Focus Restricting the offerings Limited-menu restaurant
Modules Modular selection of service Investment and insurance selection
Modular production Prepackaged food modules in restaurants
Automation Separating services that may lend Automatic teller machines
themselves to some type of automation
Scheduling Precise personnel scheduling Scheduling ticket counter personnel at 15-
minute intervals at airlines
Training Clarifying the service options Investment counselor, funeral directors
Explaining how to avoid problems After-sale maintenance personnel

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 Appendix
More about Process Strategies

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Process Focus – High Variety, Low Volume
• Facilities are organized around specific activities or processes
• General purpose equipment and skilled personnel
• High degree of product flexibility
• Product flows may vary considerably making planning and scheduling a challenge
• High variable costs with low utilization of facilities

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Repetitive Focus
• Classic assembly line
• Facilities often organized as assembly lines
• Characterized by modules with parts and assemblies made previously
• Modules may be combined for many output options
• Less flexibility than process-focused facilities but more efficient
• Advantages
o Economics: The product-focused model (Consider the modules)
o Custom advantage of the low-volume, high-variety model

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Product Focus: High Volume, Low Variety
• Also called continuous processes
• Facilities are organized by product
• High volume but low variety of products
• Long, continuous production runs enable efficient processes
• Typically high fixed cost but low variable cost
• Generally less skilled labor

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Mass Customization: High Volume, High Variety
• The rapid, low-cost production of goods and service to satisfy increasingly unique
customer desires
o Not about variety
• Combines the flexibility of a process focus with the efficiency of a product focus
o Requires high volume to control costs

• Imaginative product design

• Flexible process design
• Tightly controlled inventory management
• Tight schedules
• Responsive partners in the supply-chain
MBA ZG526 Operations Management 18 BITS-Pilani
 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Thank you!!
 BITS Pilani presentation

BITS Pilani
Pilani Campus
 BITS Pilani
Pilani | Dubai | Goa | Hyderabad

Operations Management
Capacity and Constraint Management
HS Talks
[Link]
• Capacity strategies
Prof. Brian Tomlin – Tuck School of Business, Dartmouth College, USA
• About 6 minutes long

MBA ZG526 Operations Management 3 BITS-Pilani

Objectives
❖ Crossover points for different processes
❖ Capacity: design capacity, effective capacity, efficiency and utilization
❖ Bottleneck analysis
❖ Break-even analysis
❖ Expected monetary value of a capacity decision
❖ Net present value (NPV)

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Crossover Chart Example
DOLLARS REQUIRED PER
TOTAL FIXED COST ACCOUNTING REPORT
Software A $200,000 $60
Software B $300,000 $25
Software C $400,000 $10
Evaluate three different accounting software products
Calculate crossover points between software A and B and between software B and C

Crossover points between software A and B

200000 + 60V = 300000 + 25 V ⇒ V = 2857
Software A is most economical from 0 to 2,857 reports

Crossover points between software B and C

300000 + 25V = 400000 + 10 V ⇒ V = 6666
Software B is most economical from 2,857 to 6,666 reports
MBA ZG526 Operations Management 5 BITS-Pilani
Capacity
• The number of units a facility can hold, receive, store, or produce in a time period
o The throughput
• Capacity decisions often determine capital requirements – the fixed costs
• Determining facility size, with an objective of achieving high levels of utilization and
a high return on investment, is critical
o Satisfied demand or Idle capacity
o Three time horizons
• Capacity decisions must be integrated into the organization’s mission and strategy

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Planning Over Three Time Horizons

Options for Adjusting Capacity

Time Horizon
Design new production processes
Long-range planning Add (or sell existing)
Generally greater than 3 years long-lead-time equipment
Acquire or sell facilities
Acquire competitors
Intermediate-range planning
(aggregate planning) Subcontract Build or use inventory
Usually 3 to 36 months Add or sell equipment More or improved training
Add or reduce shifts Add or reduce personnel

Short-range planning Schedule jobs

(scheduling)
Usually up to 3 months
* Schedule personnel
Allocate machinery
Modify capacity Use capacity

* Difficult to adjust capacity as limited options exist

MBA ZG526 Operations Management 7 BITS-Pilani

Planning Over Three Time Horizons

Options for Adjusting Capacity

Time Horizon Feb 08, 2024
Design new production processes
Long-range planning Add (or sell existing) Expansion of the
Generally greater than 3 years long-lead-time equipment AMNS India
Acquire or sell facilities Hazira plant to
Acquire competitors ~15Mt capacity
Intermediate-range planning (Phase 1A) is on
(aggregate planning) Subcontract Build or use inventory track for
Usually 3 to 36 months Add or sell equipment More or improved training
completion in 2026
Add or reduce shifts Add or reduce personnel
Phase 1B Hazira
capacity
Short-range planning Schedule jobs
(scheduling)
Usually up to 3 months
* Schedule personnel
Allocate machinery
expansion to 20Mt
planned

Modify capacity Use capacity

* Difficult to adjust capacity as limited options exist

MBA ZG526 Operations Management 8 BITS-Pilani

Design and Effective Capacity
Design capacity
• The maximum theoretical output of a system
o Normally expressed as a rate
o Number of tons of steel that can be produced per week or month or year
o Capacity may also be no. of beds in a hospital or no. of billable hours

Effective capacity
• The capacity a firm expects to achieve given current operating constraints
o Often lower than design capacity

Both are units per time period

MBA ZG526 Operations Management 9 BITS-Pilani

 Capacity Measurements
MEASURE DEFINITION EXAMPLE
Design capacity Ideal conditions exist during the time Machines at Frito-Lay are designed to produce 1,000 bags of
that the system is available chips/hr., and the plant operates 16 hrs./day.

Design Capacity = 1,000 bags/hr. × 16 hrs = 16,000 bags/day

Effective capacity Design capacity minus lost output Frito-Lay loses 3 hours of output per day
because of planned resource (= 0.5 hrs./day on preventive maintenance,
unavailability (e.g., preventive 1 hr./day on employee breaks, and 1.5 hrs./day setting up machines
maintenance, machine for different products).
setups/changeovers, changes in Effective Capacity
product mix, scheduled breaks) = 16,000 bags/day – (1,000 bags/hr.)(3 hrs./day)
= 16,000 bags/day – 3,000 bags/day
= 13,000 bags/day

Actual output Effective capacity minus lost output On average, machines at Frito-Lay are not running 1 hr./day due to
during unplanned resource idleness late parts and machine breakdowns.
(e.g., absenteeism, machine Actual Output
breakdowns, unavailable parts, quality = 13,000 bags/day – (1,000 bags/hr.)(1 hr./day)
problems) = 13,000 bags/day – 1,000 bags/day
= 12,000 bags/day
MBA ZG526 Operations Management 10 BITS-Pilani
Two Measures of System Performance

Utilization is the percent of design capacity actually achieved

• Utilization = Actual output/Design capacity

Efficiency is the percent of effective capacity actually achieved

• Efficiency = Actual output/Effective capacity

MBA ZG526 Operations Management 11 BITS-Pilani

Design Capacity: Example (1 / 2)
The bakery has a plant for processing Deluxe breakfast rolls. Last week the facility
produced 148,000 rolls. The effective capacity per week is 175,000 rolls. The
production line operates 7 days per week, with three 8-hour shifts per day. The line was
designed to process the Deluxe roll at a rate of 1,200 per hour. Determine the utilization
and efficiency for this plant when producing this Deluxe roll.

Actual production last week = 148,000 rolls per week

Effective capacity = 175,000 rolls per week
Design capacity = 1,200 rolls per hour
Bakery operates 7 days/week, 3 8-hour shifts

• Design capacity = (7 x 3 x 8) x (1,200) = 201,600 rolls per week

• Utilization = 148,000/201,600 = 73.4% Design capacity: The theoretical output
Effective capacity: The firm expects to achieve
• Efficiency = 148,000/175,000 = 84.6% Utilization: Actual output/Design capacity
Efficiency: Actual output/Effective capacity
MBA ZG526 Operations Management 12 BITS-Pilani
Design Capacity: Example (2 / 2)
The demand for the Deluxe roll has increased. The Bakery will be adding a second
production line. The second line has the same design capacity and effective capacity
However, new workers will be operating the second line.
Quality problems and other inefficiencies stemming from the inexperienced workers are
expected to reduce output on the second line to 130,000 (instead of 148,000). Determine
the new utilization and efficiency for the Deluxe roll operation after adding the second line.
Design capacity = 201,600 * 2 = 403,200 rolls
Effective capacity = 175,000 * 2 = 350,000 rolls
Actual output = 148,000 + 130,000 = 278,000 rolls
Utilization = Actual output /Design capacity = 278,000 / 403,200 = 68.95%
Efficiency = Actual output /Effective capacity = 278,000 / 350,000 = 79.43%
Design capacity: The theoretical output
Effective capacity: The firm expects to achieve
Utilization: Actual output/Design capacity
Efficiency: Actual output/Effective capacity
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Capacity & Strategy
• Capacity decisions must be integrated into the mission and strategy.
• Investments in capacity expansion must be part of a coordinated plan that will place
the firm in an advantageous position.
o Will these investments eventually win profitable customers?
o What competitive advantage (such as process flexibility, speed of delivery,
improved quality, and so on) do we obtain?”
• Change in capacity will have
o Quality, supply chain, human resource, and maintenance implications.

MBA ZG526 Operations Management 14 BITS-Pilani

 Capacity Considerations
• Forecast demand accurately
• Match technology increments and sales volume
o Capacity options are often constrained by technology
– Power plant Vs Handbags
• Find the optimum operating size (volume)
o Most business are optimally sized until a player with a new operating model enters
– Very large integrated steel mills Vs Nucor, CMC, and other minimills
• Build for change
o Managers build flexibility into facilities and equipment; changes will occur in processes,
as well as products, product volume, and product mix.

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Managing Demand
Managers may tactically manage demand rather than strategically manage capacity
• Demand exceeds capacity
o Short Term: Curtail demand by raising prices
o Long-term: Increase capacity
• Capacity exceeds demand
o Stimulate market: Price reduction or Aggressive marketing
o Product changes
• Adjusting to seasonal demands
o Produce products with complementary demand patterns
o Honda added a line of snowmobile motors to its line of jet skis to smooth demand
o Schedule maintenance during off-season

MBA ZG526 Operations Management 16 BITS-Pilani

Tactics for Matching Capacity to Demand
1. Making staffing changes
2. Adjusting equipment
• Purchasing additional machinery
• Selling or leasing out existing equipment
3. Improving processes to increase throughput
4. Redesigning products to facilitate more throughput
5. Adding process flexibility to meet changing product preferences
6. Closing facilities

MBA ZG526 Operations Management 17 BITS-Pilani

Services: Demand and Capacity Management
• Demand management
o When demand and capacity are fairly well matched
Appointment, reservations, FCFS rule
o Otherwise Early bird specials, Off-season rates

• Capacity management
o When managing demand is not possible
Full time, temporary, part-time staff

MBA ZG526 Operations Management 18 BITS-Pilani

 Reducing Risk with Incremental Changes
Demand growth is usually in small units, while capacity additions are likely to be both instantaneous and in large units
• To reduce risk, incremental changes that hedge demand forecasts may be a good option.

(a) Leading demand with (a) New capacity acquired at the (b) Leading demand with a
incremental expansion one-step expansion
beginning of period 1 to stay ahead
New
New of demand capacity
capacity

Demand
Demand

Expected Expected
demand (b) Make a larger increase at the demand
beginning of period 1

(c) Capacity lags demand, perhaps

(c) Lagging demand with (d) Attempts to have an average
incremental expansion using overtime or subcontracting to capacity with incremental
New
accommodate excess demand expansion
capacity New

Demand
Demand

Expected (d) straddles demand by building capacity Expected

demand demand
capacity that is “average,”
sometimes lagging demand and
sometimes leading it

MBA ZG526 Operations Management 19 BITS-Pilani

Bottleneck Analysis
Each workstation has its own unique capacity
Throughput Time
• The time it takes a unit to go through production from start to end, with no waiting .
A bottleneck
• Has the lowest effective capacity in a system
• Is the limiting factor or constraint
• A point of congestion that stops or severely slows the system
• Unit: Time per unit
Process time
• The time to produce a unit or a specified batch size – Identical to Throughput time
Throughput Capacity of a Workstation
• The effective capacity of the workstation (within a specific time frame)
Capacity analysis
• Determines the throughput capacity of each workstation and ultimately the system capacity

MBA ZG526 Operations Management 20 BITS-Pilani

Bottleneck Time & Throughput Time
The bottleneck time
• The time of the slowest workstation in a production system to complete a task
o 4 minutes per unit
The throughput time
• The time it takes a unit to go through production from start to end, with no waiting
o 9 minutes per unit

A B C

2 min/unit 4 min/unit 3 min/unit

MBA ZG526 Operations Management 21 BITS-Pilani

 Capacity Analysis
Howard provides sandwiches.
• An order is registered. The order is then sent to the assembly line.
• The assembly line has two workers and three operations: (1) assembly worker 1 retrieves and cuts
the bread, (2) assembly worker 2 adds ingredients and places the sandwich onto the toaster conveyor
belt, and (3) the toaster heats the sandwich.
• Finally, another worker wraps the sandwich coming out of the toaster and delivers it to the customer.
Howard wants to determine the bottleneck time and throughput time of this process.
• The bottleneck: The toaster at 40 seconds per sandwich
• Throughput time is 30 + 15 + 20 + 40 + 37.5 = 142.5 seconds per sandwich

Wrap/
Order Bread Fill Toaster
Deliver
15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
30 sec/sandwich 37.5 sec/sandwich

MBA ZG526 Operations Management 22 BITS-Pilani

Capacity Analysis with Parallel Processes
Howard provides sandwiches with two identical sandwich assembly lines.
• An order is registered. The order is then sent to one of two assembly lines.
• Each assembly line has two workers and three operations: (1) assembly worker 1 retrieves and cuts
the bread, (2) assembly worker 2 adds ingredients and places the sandwich onto the toaster conveyor
belt, and (3) the toaster heats the sandwich.
• Finally, another worker wraps the sandwich coming out of the toaster and delivers it to the customer.
• Howard wants to determine the bottleneck time and throughput time of this process.

First assembly line

Bread Fill Toaster

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
Wrap/
Order
Deliver
30 sec/sandwich
Bread Fill Toaster 37.5 sec/sandwich

15 sec/sandwich 20 sec/sandwich 40 sec/sandwich

Second assembly line

MBA ZG526 Operations Management 23 BITS-Pilani
Capacity Analysis with Parallel Processes
• The two lines are identical, so parallel processing can occur
• Toaster:
o For each line: It is the bottleneck at 40s per sandwich
o For the system: The bottleneck time 40s / 2 = 20 seconds per sandwich!
o Achieved by staggering!
• The bottleneck: Wrapping and delivery at 37.5 seconds per sandwich
• Throughput time is 30 + 15 + 20 + 40 + 37.5 = 142.5 seconds per sandwich
3600
• Capacity per hour = sandwiches = 96 sandwiches per hour
37.5

Bread Fill Toaster

15 sec 20 sec 40 sec

Order Wrap

30 sec
Bread Fill Toaster 37.5 sec

15 sec 20 sec 40 sec

MBA ZG526 Operations Management 24 BITS-Pilani

Capacity Analysis with Simultaneous Processes
An order or a product is essentially split into different paths to be rejoined later on.
• Bottleneck time: Each operation is treated separately, just as though all operations
were on a sequential path
• Throughput time: The time over all paths must be computed, and the throughput
time is the time of the longest path.

MBA ZG526 Operations Management 25 BITS-Pilani

Capacity Analysis with Simultaneous Processes
Standard process for cleaning teeth
• Cleaning and examining X-rays can happen simultaneously

Hygienist
cleaning

Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray out

2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam

5 min/unit

MBA ZG526 Operations Management 26 BITS-Pilani

Capacity Analysis
Bottleneck: All possible paths must be compared
• Bottleneck: Hygienist at 24 m per patient
o Hourly capacity is 60 / 24 = 2.5 patients
Throughput Time: Maximum of the two paths through the system
• X-ray exam path is 2 + 2 + 4 + 5 + 8 + 6 = 27 m
• Cleaning path is 2 + 2 + 4 + 24 + 8 + 6 = 46 m
• Patient should complete in 46 m
• Throughput time: 46 m per patient

Hygienist
cleaning

Takes Develops 24 min/unit Check

Check in Dentist
X-ray X-ray 5 min/unit out

2 min/unit 2 min/unit 4 min/unit X-ray 8 min/unit 6 min/unit

exam

MBA ZG526 Operations Management 27 BITS-Pilani

Bottleneck Management
1. Release work orders to the system at the pace set by the bottleneck’s capacity
2. Lost time at the bottleneck represents lost capacity for the whole system
3. Increasing the capacity of a non-bottleneck station is a mirage
4. Increasing the capacity of a bottleneck increases the capacity of the whole system

Drum, Buffer, Rope

• The Rope controls the release of new work.
o The bottleneck sets the pace and work should only be released at the rate the
bottleneck can consume it.
• Together, the Buffer and the Rope ensure that the bottleneck is always fed and
there is no wasted time.

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Theory of Constraints
Five-step process for recognizing and managing limitations
Step 1: Identify the constraints
Step 2: Develop a plan for overcoming the constraints
Step 3: Focus resources on accomplishing Step 2
Step 4: Reduce the effects of constraints by offloading work or expanding capability
Step 5: Once overcome, go back to Step 1 and find new constraints

MBA ZG526 Operations Management 29 BITS-Pilani

Break-Even Analysis
• Objective is to find the capacity a facility must have to achieve profitability
o Find the point in Cash & Units at which cost equals revenue
• Technique for evaluating process and equipment alternatives
• Requires estimation of fixed costs, variable costs, and revenue
o Fixed costs are costs that continue even if no units are produced
– Depreciation, taxes, debt, mortgage payments
o Variable costs are costs that vary with the volume of units produced
– Labor, materials, portion of utilities
• Contribution is the difference between selling price and variable cost

MBA ZG526 Operations Management 30 BITS-Pilani

Break-Even Analysis
• Revenue function begins at
–
the origin and proceeds Total revenue line
upward to the right, 900 –

increasing by the selling 800 –

Total cost line
Break-even point
price of each unit 700 – Total cost = Total revenue

• Where the revenue 600 –

Cost
function crosses the total 500 –
cost line is the break-even 400 –
Variable cost
point 300 –
• Assumption: 200 –
o Costs and revenue are 100 – Fixed cost
linear functions | | | | | | | | | | | |

Not the case in the real 0 100 200 300 400 500 600 700 800 900 1000 1100

world Volume (units per period)

MBA ZG526 Operations Management 31 BITS-Pilani

Break-Even Analysis
BEPx = break-even point in units
BEP$ = break-even point in dollars
x = number of units produced
P = price per unit (after all discounts)
F = fixed costs
V = variable cost per unit
TR = total revenue = Px
TC = total costs = F + Vx

Break-even point occurs when TR = TC or Px = F + Vx

⇒ BEPx = F / (P – V)
F F
⇒ BEP$ = TR = BEPx P = P =
P−V 1−VൗP
MBA ZG526 Operations Management 32 BITS-Pilani
Break-Even: Example
Fixed costs = $10,000
Direct labor = $1.50/unit, Material = $.75/unit
Selling price = $4.00 per unit

BEPx: Total cost = Total Revenue ⇒ 10,000 + 2.25x = 4x ⇒ x = $10,000 / (4 – 2.25) = 5714.29 ~ 5,714

BEP$: Total revenue when x = 5714: 5714 * 4 = $22,856

Total cost when x = 5714: 10,000 + 2.25 * 5714 = 22,856.5

MBA ZG526 Operations Management 33 BITS-Pilani

Break-Even: Multiproduct Case

F
=
BEP$ éæ V ö ù
( )
åêêç1- Pi ÷ ´ Wi úú
ëè i ø û

where
V = variable cost per unit
P = price per unit
F = fixed costs
W = percent each product is of total dollar sales (expressed as a decimal)
i = each product

Sales will be in accordance with a pre-determined sales mix

MBA ZG526 Operations Management 34 BITS-Pilani

Multiproduct Example
Le Bistro serves three items to its customers – refer the table below.

The manager wants to know the breakeven point in dollars

Item Annual Forecasted Sales Units Price Cost

Sandwich 9,000 $5.00 $3.00
Drink 9,000 1.50 0.50
Baked potato 7,000 2.00 1.00
Fixed Cost $3,000 per month

MBA ZG526 Operations Management 35 BITS-Pilani

Solution
Fixed costs (F) = $3,000 per month
1 2 3 4 5 6 7 8 9
Annual Annual % OF Weighted
Price Variable 1–
Item (i) Forecasted Forecasted V / P SALES Contribution
(Pi) Cost (Vi) (V / P)
Sales Units Sales $ (Wi) (Col 7 X Col 8)
Sandwich 9,000 $5.00 $3.00 $45,000 0.60 0.40 0.621 0.248
Drinks 9,000 1.50 0.50 13,500 0.33 0.67 0.186 0.125
Baked
7,000 2.00 1.00 14,000 0.50 0.50 0.193 0.097
potato
$72,500 1.000 0.470

F
BEP$= V = $3000 * 12 / 0.47 = $76,596
σ 1−Pi × Wi
i

Total weekly Sales must be 76596 / 52 = $1473

• At break-even, weekly sandwich sales = 0.621 * 1473 / 5 = 182.9 ~ 183
MBA ZG526 Operations Management 36 BITS-Pilani
Expected Monetary Value (EMV) and Capacity Decisions

• Determine states of nature

• Future demand
• Market favorability

• Assign probability values to states of nature to determine expected value

MBA ZG526 Operations Management 37 BITS-Pilani

EMV Applied to Capacity Decision: Example (1/2)
Southern Hospital Supplies is considering a capacity expansion making hospital gowns
The new capacity would produce a new type of gown, and currently the marketability
for this product is unknown. The alternatives are to do nothing, build a small plant, build
a medium plant, or build a large plant.
• Large Plant: $100,000 profit could be realized with a favorable market. An
unfavorable market would yield a $90,000 loss.
• Medium Plant: $60,000 profit could be realized with a favorable market. A $10,000
loss would result from an unfavorable market.
• Small Plant: $40,000 profit could be realized with a favorable market. A $5,000 loss
would result in an unfavorable market.
Recent market research indicates that there is a 0.4 probability of a favorable market,
which means that there is also a 0.6 probability of an unfavorable market.
Find the best decision using the EMV approach.
MBA ZG526 Operations Management 38 BITS-Pilani
EMV Applied to Capacity Decision: Example (2/2)
EMV (large plant)= (.4)($100,000) + (.6)(–$90,000) = –$14,000

EMV (medium plant)= (.4)($60,000) + (.6)(–$10,000) = +$18,000

EMV (small plant)= (.4)($40,000) + (.6)(–$5,000) = +$13,000

EMV (do nothing) = $0

MBA ZG526 Operations Management 39 BITS-Pilani

NPV Applied to Capacity Decision
• Analyzing capacity alternatives should include capital investment,
variable cost, cash flows, and net present value

MBA ZG526 Operations Management 40 BITS-Pilani

A Digression: Compound Interest Rates
𝐫 𝐦𝐭 𝐫 𝒎𝒕 𝐫 −𝒎𝒕
𝐏𝐭 = 𝐏𝟎 𝟏 + & Discount Factor = 𝟏ൗ 𝟏 + = 𝟏+
𝐦 𝐦 𝐦

where r is the rate of interest per year compounded m times a year

Example
Find the Future Value of Rs.2,000 3 years hence when the interest rate is 8% pa compounded annually
2,000 (1 + 0.08)3 = 2,519.42

Example
Find the PV of Rs.2519.42 received 3 years from now when the interest rate is 8% pa compounded
annually
Discount Factor: (1 + .08)-3 = 0.7938 AND PV = 2519.424 * 0.7938 = 1,999.92

MBA ZG526 Operations Management 41 BITS-Pilani

Net Present Value (NPV)
Suppose we receive ₹1 every year for the next 5 years. Find NPV assuming the interest rate is
flat at 6%

1 1 1 1 1
𝑁𝑃𝑉 = + + + + = 0.9434 + 0.8900 + 0.8396 + 0.7921 + 0.7473
1.06 1 1.06 2 1.06 3 1.06 4 1.06 5

= 4.2124

MBA ZG526 Operations Management 42 BITS-Pilani

NPV: Example
The clinic is thinking of investing in a sophisticated new piece of medical equipment. It
will generate $7,000 per year in receipts for 5 years. Assuming the applicable
interest rate is 6% pa, compute the NPV of this investment.

• $7,000 in receipts per year for 5 years

• Interest rate = 6%
7000 7000 7000 7000 7000
NPV = + + + +
1.06 1 1.06 2 1.06 3 1.06 4 1.06 5
= 7000 × (0.9434 + 0.8900 + 0.8396 + 0.7921 + 0.7473)
= 7000 × 4.2124
= $29,486.80

MBA ZG526 Operations Management 43 BITS-Pilani

Limitations
1. Investments with the same NPV may have different projected lives and salvage
values
2. Investments with the same NPV may have different cash flows
3. Assumes we know future interest rates
4. Assumes interest rate is flat
5. Payments are not always made at the end of a period

MBA ZG526 Operations Management 44 BITS-Pilani

Test Yourself
❖ Solved problems: 7.1, S7.1 – S7.5

MBA ZG526 Operations Management 45 BITS-Pilani

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