MBA – UNIVERSITY OF WALES

MODULE: MANAGING OPERATIONS

Lecturer: Mervyn Sookun

Japanese enjoyed measure of success in Western markets because they are superior in Operation management and
culture.

Operation management is seen to be a “Strategic Activity” in modern organizations. Comprising some key decision.

What How many Where Method of Layout how

product capacity location technology should resource
service planning planning organized

Minimize cost Maximize revenue

Supply chain Production Daily E.g. TQM

management budget activity Customer care

DURKHEIM’S ANOMIE THEORY

In 1893 Durkheim introduced the concept of anomie to describe the mismatch of collective guild labour to
evolving societal needs when the guild was homogeneous in its constituency. Durkheim's use of the term
anomie was about a phenomenon of industrialization—mass-regimentation that could not adapt due to its
own inertia—its resistance to change, which causes disruptive cycles of collective behaviour (e.g.
economics) due to the necessity of a prolonged build-up of sufficient force or momentum to overcome the
inertia.

The contemporary English understanding of the word anomie can accept greater flexibility in the word
“norm”, and some have used the idea of normlessness to reflect a similar situation to the idea of anarchy.
But, as used by Émile Durkheim and later theorists, anomie is a reaction against or a retreat from the
regulatory social controls of society, and is a completely separate concept from anarchy which is an absence of
effective rulers or leaders.

Managing Operation (MBA) sibichan.mungamakal@googlemail.com Page 1

 PLANNING
1.CAPACITY PLANNING
Capacity planning is the process of determining the production capacity needed by an organization to meet
changing demands for its products. Insufficient capacity can quickly lead to deteriorating delivery performance,
unnecessarily increase work-in-process, and frustrate sales personnel and those in manufacturing. However, excess
capacity can be costly and unnecessary. The inability to properly manage capacity can be a barrier to the
achievement of maximum firm performance.

Capacity is calculated: (number of machines or workers) × (number of shifts) × (utilization) × (efficiency).

The broad classes of capacity planning are lead strategy, lag strategy, and match strategy.

 Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an

aggressive strategy with the goal of luring customers away from the company's competitors. The
possible disadvantage to this strategy is that it often results in excess inventory, which is costly and
often wasteful.
 Lag strategy refers to adding capacity only after the organization is running at full capacity or
beyond due to increase in demand (North Carolina State University, 2006). This is a more
conservative strategy. It decreases the risk of waste, but it may result in the loss of possible
customers.
 Match strategy is adding capacity in small amounts in response to changing demand in the market.
This is a more moderate strategy.

Capacity planning is relevant in both the long term and the short term.

The throughput (The throughput of an organization or system is the amount of things it can do or deal with
in a particular period of time) or number of products that an operation system can Manufacture, Store,
Hold or Process over a given period.

Two ways of looking at capacity

Management

H Long Term (years)

Short Term
Low

Capacity in future given

Daily schedule the class Growth in numbers.

Long term capacity decision is difficult.

Capacity Demand
When demand is more,
If the capacity is more and increases production,
demand is less, then reduces quality, pressure
revenue does not cover of employees increases.
the cost Demand Capacity

Type A Type B
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 FACTORS INFLUENCING CAPACITY DECISION

Short-term capacity planning

In the short term, capacity planning concerns issues of scheduling, labour shifts, and balancing resource
capacities. The goal of short-term capacity planning is to handle unexpected shifts in demand in an efficient
economic manner. The time frame for short-term planning is frequently only a few days but may run as long
as six months.

The easiest and most commonly-used method to increase capacity in the short term is working overtime. This is a
flexible and inexpensive alternative. While the firm has to pay one and one half times the normal labor rate, it
foregoes the expense of hiring, training, and paying additional benefits.

Short Term
20
18
16
14
Chase demand Flexi-Time shift
12
10
8 Demand
6 Capacity Number
Maximize 3 Es
4 1. Economy of
2
2. Efficiency Calls
3. Effectiveness
0

Example:
 Linear programs
 Queuing theory
Demand and capacity
 Monte graph of a Call Centre
Carlo

Long-term capacity planning

Over the long term, capacity planning relates primarily to strategic issues involving the firm's major production
facilities. In addition, long-term capacity issues are interrelated with location decisions. Technology and
transferability of the process to other products is also intertwined with long-term capacity planning. Long-term
capacity planning may evolve when short-term changes in capacity are insufficient. For example, if the firm's
addition of a third shift to its current two-shift plan still does not produce enough output, and subcontracting
arrangements cannot be made, one feasible alternative is to add capital equipment and modify the layout of the
plant (long-term actions). It may even be desirable to add additional plant space or to construct a new facility (long-
term alternatives).

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S
v
M
t
u
d
P
w
N
ti
s
r
F
a
i
g
l
o
n
h
c
e
T Long Term

Forecast demand

Quantitative

Example:
 Time series
 Reference &
co-relation
 Actuarial curves

About forecasting:
Planning is what we
want to happen.

“Fallacy of predetermination” Said Mintzberg.

Sales

“Might as well look at a Cristal Ball” Said Morgan

B. Technological Forecasting

Managing Operation (MBA)

0 1 2

Year

sibichan.mungamakal@googlemail.com
3 4
Forecasting is what
we think happen.

Actuarial Curve

5
?
Future

Page 4
Sony company build capacity ahead in advance during 1980s by building new production plant of CD Roam. As per
Porter “First mover advantage”.

“Irreversible strategy”. Example: Burning ships to show that we not came for battle.

3.Estimate an optimal size/capacity

Diminishing Return
Economies

Average Economies of Diseconomies

Unit cost scale / scope of scale
Positive Returns Economics
Example: Software companies
and film industry

0 25 50 75 100 125 150

Size of Hotel (in room capacity)

Capacity Planning Techniques

Capacity break even.
Pay back
NPV / DCF
Decision Trees

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NPV DCF

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 Project A Project B Project C
Year D/F 10% Cash flow Disc. C/F Cash flow Disc. C/F Cash flow Disc. C/F
0 1 -75 -75.00 -100.00 -100.00 -90.00 -90.00
1991 0.909 3 2.73 10.00 9.09 15.00 13.64
1992 0.826 6 4.96 15.00 12.39 17.00 14.04
1993 0.751 14 10.51 30.00 22.53 22.00 16.52
1994 0.683 16 10.93 42.75 29.20 36.00 24.59
1995 0.621 20 12.42 57.00 35.40 39.00 24.22
NPV of each projects -33.46   8.61   3.01

Decision Trees
A mathematical method being up a complex decision in to measurable out comes and further decision
point using a tree with nodes and branches.

Capacity Decision
Remarks Small plant in town A Large plant in town B
Strong growth £300,000 profit £500,000 profit
Weak growth £50,000 profit £70,000 profit
Probability of strong to weak 50% / 50% 20% / 80%

300,000 x 50% = 150,000

50,000 x 50% = 25,000
-------------
175,000
========

500,000 x 20% = 100,000

70,000 x 80% = 56,000
-------------
156,000
========

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Plant in small town A is better than large plant in town B.
Conclusion of Capacity Planning
 Demand # Capacity.
 Aim to match Demand and Supply.
 Technique which we used to minimise the risk.
 Capacity in some E-commerce business appears to quite flexible.

LOCATION PLANNING
Identify a suitable geographical location for an operations system to maximise revenue or minimise cost.

What factors influence choice of location? Make five suggestions with examples.

1. Cultural factures: Example: Internationalisation of business.

Standard pattern of international frame of firms.
Conclusion of firm “Physically” close to home.
Country Physically close to home location
Spanish firm Latin America
British firm British Colonies
Sweden Nordic countries
Indian / Pakistan firms Middle East
2. Income of potential customers.
GNP per head : Lowest = $250 and Highest = $ 89,000 (Qatar). Have to consider underground economy.

3. Proximity to raw material: Critical Substance Factor (CSF). Example:

Steel mining. 1 ton steel required 10 ton raw materials.

4. Infrastructure: Road, access to ship, air transport, etc.

5. Proximity to market location advantage:

Street Market location advantage
Oxford street Retail
Lexus Square Leisure and pleasure, gambling
City of London Banking, Financial services
Cambridge Research and development parks

6. Comparative wage rates: Cheap labour is intensive for business like clothing, toys, etc.

7. Government regulations: Example, In Europe amount of retail space was restricted by government.
Giving below the approximate details.
Category Area in million square meters Country
A 15 U.K and France
B 5 Germany
C 2 Spane
D 0.75 Switzerland
8 Taxation:
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 Location planning technique
 Breakeven
 Factor rating
 Centre of gravity

Location breakeven

Location Variable cost Fixed cost 1000 units 2000 units

A 75 30,000 105,000 180,000
B 40 60,000 100,000 140,000
C 25 110,000 135,000 160,000

Which is the best location of planned production of 1000 units and 2000 units? (Location B is best).

Location Variable cost Fixed cost

A 100 40,000
B 40 140,000
C 20 180,000

Under what level of production in each location optimal (best).

Note: Assume production unit is X.
A-B
100X + 40,000 = 40X + 140000
100 X - 40X = 140000 – 40000
60X = 40000
X = 40000/60 = 1666
B-C
40X + 14,000 = 20X + 180000
20X = 40000
X = 2000
Factor Rating method
A chain of supermarket aims to open a new store.

Factor rating
1. Identify location option C.S.F

2. Identify CSF (Critical Success Factor)  Population

3. Score each CSF  Income
4. Assign weight  People to
5. Convert into weighted score  Car ration
 Rates
6. Decision

Factor rating is more Systematic then Scientific.

Centre of Gravity
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Mathematical method for identifying optimal location for a distribution centre scoring multiple outlets.

X Y Containers
90 20 2,000
60 30 5,000
20 80 9,000

X = ∑Q1X1 Y = ∑Q1Y1
∑Q1 ∑Q1

Q = Quantity shifted to each store. X = X coordinate of each store Y = Y coordinate of each store

Find weighted average of X and Y.

X = (90 x 2000) + (60 x 5000) + (20 x 9000) = 660,000/16000 = 41.25

16,000

Y = (20 x 2000) + (30 x 5000) + (80 x 9000) = 910,000/16000 = 56.88

16,000

Conclusion:

1. Location planning aims to minimise cost and maximise revenue.

2. Location = CSF in many business
3. Some organizations less sensitive to physical location. E.g. E.Com, Face book.
4. Good location should ultimately meet all or some operational objectives.
 Q = Quality
 S = Speed
 C = Cost
 D= Dependability

PROJECT MANAGEMENT

1. Applicable to many operations management decision.

2. What is project? A specialised task with a life cycle.
3. Distinguishing Factors:
 Resources : Few or Many
 Dead line : Tight or Flexible (elastic)
 Impact : Strategic or Local

4. Challenges: Time, Natural resources and people.

PROJECT MANAGEMENT TECHNIQUES

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Net work / Critical Path Method / PERT (American Agency)

A Gantt chart is a type of bar chart that illustrates a project schedule. Gantt charts illustrate the start
and finish dates of the terminal elements and summary elements of a project. Terminal elements and
summary elements comprise the work breakdown structure of the project. Some Gantt charts also show the
dependency (i.e, precedence network) relationships between activities. Gantt charts can be used to show
current schedule status using percent-complete shadings and a vertical "TODAY" line as shown here.

Although now regarded as a common charting technique, Gantt charts were considered revolutionary when
they were introduced. In recognition of Henry Gantt's contributions, the Henry Laurence Gantt Medal is
awarded for distinguished achievement in management and in community service. This chart is used also in
Information Technology to represent data that has been collected.

The critical path method (CPM) or critical path analysis, is a mathematically based algorithm
for scheduling a set of project activities. It is an important tool for effective project management.

History

It was developed in 1950s by the DuPont Corporation at about the same time that Booz Allen Hamilton and
the US Navy were developing the Program Evaluation and Review Technique [1] Today, it is commonly used
with all forms of projects, including construction, software development, research projects, product
development, engineering, and plant maintenance, among others. Any project with interdependent activities
can apply this method of scheduling.

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Basic technique
The essential technique for using CPM is to construct a model of the project that includes the following:

1. A list of all activities required to complete the project (typically categorized within a work breakdown
structure),
2. The time (duration) that each activity will take to completion, and
3. The dependencies between the activities

Using these values, CPM calculates the longest path of planned activities to the end of the project, and the
earliest and latest that each activity can start and finish without making the project longer. This process
determines which activities are "critical" (i.e., on the longest path) and which have "total float" (i.e., can be
delayed without making the project longer). In project management, a critical path is the sequence of
project network activities which add up to the longest overall duration. This determines the shortest time
possible to complete the project. Any delay of an activity on the critical path directly impacts the planned
project completion date (i.e. there is no float on the critical path). A project can have several, parallel, near
critical paths. An additional parallel path through the network with the total durations shorter than the
critical path is called a sub-critical or non-critical path.

These results allow managers to prioritize activities for the effective management of project completion, and
to shorten the planned critical path of a project by pruning critical path activities, by "fast tracking" (i.e.,
performing more activities in parallel), and/or by "crashing the critical path" (i.e., shortening the durations
of critical path activities by adding resources).

Expansion
Originally, the critical path method considered only logical dependencies between terminal elements. Since
then, it has been expanded to allow for the inclusion of resources related to each activity, through processes
called activity-based resource assignments and resource leveling. A resource-leveled schedule may include
delays due to resource bottlenecks (i.e., unavailability of a resource at the required time), and may cause a
previously shorter path to become the longest or most "resource critical" path. A related concept is called the
critical chain, which attempts to protect activity and project durations from unforeseen delays due to
resource constraints.

Since project schedules change on a regular basis, CPM allows continuous monitoring of the schedule,
allows the project manager to track the critical activities, and alerts the project manager to the possibility
that non-critical activities may be delayed beyond their total float, thus creating a new critical path and
delaying project completion. In addition, the method can easily incorporate the concepts of stochastic
predictions, using the Program Evaluation and Review Technique (PERT) and event chain methodology.

Currently, there are several software solutions available in industry that use the CPM method of scheduling,
see list of project management software. However, the method was developed and used without the aid of
computers.

Flexibility
A schedule generated using critical path techniques often is not realised precisely, as estimations are used to
calculate times: if one mistake is made, the results of the analysis may change. This could cause an upset in
the implementation of a project if the estimates are blindly believed, and if changes are not addressed
promptly. However, the structure of critical path analysis is such that the variance from the original schedule
caused by any change can be measured, and its impact either ameliorated or adjusted for. Indeed, an
important element of project postmortem analysis is the As Built Critical Path (ABCP), which analyzes the
specific causes and impacts of changes between the planned schedule and eventual schedule as actually
implemented.

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 2 weeks 2 weeks
A C F
2 weeks 3 weeks
Start 2 weeks E End
H
4 weeks 2 weeks

B D G 5 weeks
3 weeks 4 weeks

Note: Critical Path was marked in red line with arrows. The total duration of critical path is the project
completion date.

ES A EF
ES (Earliest (Activity)
(Earliest
I Start) Finish)

LS LF
(Latest (Latest
S start) Finish)

fffffffffffffffffffffffff
(Activity
Duration)
5

Under Forward Pass ES is the highest EF

EF = ES + Activity Duration of predecessors if there are 2 or more EF.

Under Backward Pass LF is the lowest LS

LS = LF – Activity Duration of predecessors if there are 2 or more LS

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Assume that for making a cup of tea there are 3 activities. Activity A is boiling which required 5 minutes,
Activity B Find tea bag, sugar, glass, etc. Which required 1 minute and Activity C is Mixing the tea which
required 1 minute. Draw a network diagram and calculate the values of ES, EF, LS and LF by using Forward
pass and backward pass.
Boiling Water

ES
A EF
0 5
(0 + 5)

0 5
(5-5) 5
Start Mixing
LS LF ES
0 S 0 5 C 6 EF
(5+1)
(0 + 0)
ES EF
(6-1)
0 0 5 1 6
(0-0) 0
LS LF Find Everything
0 B 1 LS LF
ES EF
(5-1)

Why LS is 0? There are 2

4 1 5
predecessors. Boiling activity (0) Least Start value of Find Everything
and find everything activity (4). activity is 4. That means we can start
Consider the lowest value. LS LF that activity on the 4th minutes. That
is we have a spare time of 4 minutes
Explanations for above network diagram: and can be used that time for
another jobs.
Forward Pass begins from ‘start activity / first activity’ and moves forward to ‘end activity’ to find out the
value of Earliest Finish (EF).
 The value of Earliest Start (ES) of ‘start activity’ is always 0.
 Use formula to find out the value of EF ( EF = ES + Activity Duration).
 ES value of an activity is the EF value of the immediate predecessor. If there are more than one
predecessors, take the highest value of ES. Do not add the values of ES.

Backward pass begins from ‘end activity / last activity’ and moves backward to ‘start activity’ to find out
the value of Latest Start (LS).
 The value of Latest Finish (LF) of the last activity is always the EF value of that activity.
 Use formula to find out the value of LS (LS = LF – Activity Duration)
 LF value of an activity is the LS value of immediate predecessor. If there are more than one
predecessors, take the lowest value of LS.
 If the LS value of ‘start activity / first activity’ is 0, then your calculation is correct.

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 2 weeks 2 weeks
A C F
2 weeks 3 weeks
Start 2 weeks E End
H
4 weeks 2 weeks

B D G 5 weeks
3 weeks 4 weeks

Use the backward pass and forward pass to identify ES, EF, LS and LF from the above diagram.

A C F
0 2 2 4 4 7
10 13
0 2 2 4 3
2 2

H
S
E 13 15
0 0
4 8
13 15
0 0 2
0 4 8
4

S D G
0 3 3 7 8 13

1 4 4 8 8 13
3 4 5

Note: If you total the duration of critical path will be equal to the value of Earliest Finish (EF).

Find out the spare time (slack) of each activity and check there is any spare time on critical path.

Activity ES EF LS LF LS-ES CP Activity

A 0
B 0
C 2
D 3
E 4
F 4
G 8
H 13
2 0 2 0 Yes
3 1 4 1 No
4 2 4 0 Yes
7 4 8 1 No
8 4 8 0 Yes
7 10 13 6 No
13 8 13 0 Yes
15 13 15 0 Yes

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Question 3

The following represents a software project that should be scheduled using CPM.

Time / Days
Activity Immediate predecessor A M B
A --- 8 10 12
B A 18 22 34
C A 14 21 27
D A 17 30 42
E B 31 42 57
F C,D 33 40 53
G D,E 33 40 62
H F,G 22 40 53
Where A = Optimistic, B = Pessimistic and C = Most likely.

The normal and crash data for this software project are as follows:

Activity Normal days Crash days Normal (£) Crash (£)

A 10 8 22000 24000
B 22 20 30000 32000
C 21 20 21000 25000
D 30 28 45000 56000
E 42 40 20000 22000
F 40 38 30000 34000
G 40 38 35000 38000
H 40 38 30000 38000

Required:

1. Draw a network diagram and identify the critical path using the most likely (M) data. Use the
backward pass and forward pass to identify ES, EF, LS and LF. Explain the significance of your result.
(15 marks).

2. Using the Beta Probability Distribution identify the variance for each activity. (5 marks).

3. Determine the least cost of reducing the project completion date. (5 marks)

a)
B E
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10 32 32 74
 A D G
0 10 10 10 74 114

0 10 44 74 74 114
10 30 40

C F H
10 31 40 80 114 154

53 74 74 114 114 154

21 40 40

Under Forward Pass ES is the highest ES

EF = ES + Activity Duration of predecessors if there are 2 or more ES.

Under Backward Pass LS is the lowest LF

LS = LF – Activity Duration of predecessors if there are 2 or more LF

b)

Activity ES EF LS LF LS-ES CP Activity

A 0 10 0 10 0 Yes
B 10 32 10 32 0 Yes
C 10 31 53 74 43 No
D 10 10 44 74 34 No
E 32 74 32 74 0 Yes
F 40 80 74 114 34 No
G 74 114 74 114 0 Yes
H 114 154 114 154 0 Yes

There are several spare days are available on non-critical activities which is not helpful to reduce the
project completion date of 154 days because all the critical path shows zero slacks.

c)

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 Crash cost – Normal cost
Crash cost per day =
Normal time – Crash time

Normal
Normal Crash Crash Per day Least
Activity -crash Normal (£) Crash (£)
days days -Normal crash exp. crash cost
day
A 10 8 2 22000 24000 2000 1000 2000
B 22 20 2 30000 32000 2000 1000 2000
C 21 20 1 21000 25000 4000 4000
D 30 28 2 45000 56000 11000 5500
E 42 40 2 20000 22000 2000 1000 2000
F 40 38 2 30000 34000 4000 2000
G 40 38 2 35000 38000 3000 1500 3000
H 40 38 2 30000 38000 8000 4000 8000
10 days 17000

We can finish the project in 144 days by crashing 10 days with the additional cost of 17000.

 Many activities have abnormal completion time.

 Many activities have crash time.
 Many activities have normal cost. They have also crash cost.

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 Examination Questions

There is two sections A and B.

Section A has 3 essay questions out of that 2 attempt.
Section B has 1 question only.

Section A questions: ( 60 marks )

1. Restructuring operations (strategy operation).
2. Supply chain / J.I.T
3. TQM (Total Quality Management).

Section B questions: (40 marks)

1. Critical path analysis with crashing (34 marks)
And Stock control (6 marks)

RESTRUCTURE OPERATION TO DELIVER MORE VALUE

1. Topic associated with “Resource Based View” of the organization.
2. Earlier theories (Porter) suggest that firms should create barriers to entry. Example: Large scale
operation. RBV (Resource Based View) barriers to imitation.
3. Recent years several start up have created vast wealth.

Example:

E. commerce Amazon.com, Ebay, etc.

PCs Dell
Coffee bar Starbuks
Cosmetics Body shop
Bicycle National Panasonic
Hotel Nowate

4. All above challenged the respective industries recipe for success. Developed a unit paradigm. ( A
paradigm is a model for something which explains it or shows how it can be produced).
However these firms face a major danger ‘imitation’.
5. Imitation: things are not genuine but are made to look as if they are.
6. Protection: Imitation can be protected by copy right, legal right, IPR’s and patent. But one
firm can not protect:

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  Business concept.
 Use of rival goods.
 Unique resources.
 Restructure operation challenge paradigm and deliver more value.

Cinema : Case study

 Demand for cinema declined since II world war because it was replaced by CD, DVD, Cable
Connection and Internet.
 Cinema operators attempted to liberate assets.
 Restructure the cinema.

DESCRIPTION MEGA PLEX MULTI PLEX

Capacity 25 studios with 700 seats 10 studios with 100 seats
Location Out of Town (free car parking) Town
Technology 70mm projector, 29m x 10m screen 35mm projector, 10m x 7m screen
Layout Specious Cramped (not big enough)
Marketing cost Low (mouth to mouth advt.) Higher

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 TOTAL QUALITY MANAGEMENT
What is quality?

In earlier days people consumed or purchased what the manufacturers had produced. Their only concern
was the price of the product. But thing have changed, people are beware of the ‘quality’ of the products or
services which they are going to consume. The consumers are giving more importance to the quality of the
products or services rather than their price.

The evolution of the concepts and practices of TQM has taken several years of trials and tribulations in
many organizations all over the world. According to Feigenbanum, “in the increasing competitive world
the quality is no longer an optional extra, it is essentially a business strategy”. Without quality, an
organization cannot survive. The creation of quality products and services demands total commitment
from the entire organization and hence it requires TQM.

Definition
The British Quality Association defined TQM as “management philosophy and company practices that aim
to harness the human and material resources of an organization in the most effective way to achieve the
objectives of the organization.”

DESCRIPTION QUALITY EXPECTED

Trane Frequency of service, punctuality, comfort, cleanliness, speed and catering.
Hospital Hygiene, quality of clinical care, Efficiency of Doctors, Good appointment.
House Location, design, transport facility, proximity to school and shopping centre.
Motor car Model, engine’s power, comfort, cost and durability.

 Quality is not luxury.

 Quality is multi-dimensional.
 Quality is what customer expects.
 Quality is contextual.

Traditional western approach to Quality Management (QM)

Shop Floor
Raw materials (R.M) Work in progress (W.I.P) Finished Goods
(Quality checkers & sampling)

Principles of TQM
1. Customers’ needs must be met in time, regularly and fully.
2. Employees must strive to do error-free work.
3. Employees must strive to do error-free work.
4. Management should aim at preventing the occurrence of errors and not at correcting them
after they occur.

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 5. Cost of quality must be measured appropriately and relatively.
6. The management should establish standards in products, processes and people.
7. The management should ensure the involvement of everyone in the organization – from the
Chief Executive to the labourer.
8. At all levels, managers need to be made conscious that they are role models for total quality.
9. There shall be a system of recognition and reward in the organizaiton.

Benefits of TQM
TQM offers a wide range of advantages or benefits to both consumers and the manufacturers. These
can be classified into tangible benefits and intangible benefits. The tangible benefits are:

1. Better quality products

2. Productivity improvement
3. Reduced quality costs
4. Increased market
5. Higher profitability
6. Reduced employee grievances
7. Better returns to shareholders

Limitations of managing Quality

1. Cost of production goes up due to reject/rework.
2. Responsibility for quality is narrow.
3. Reactive approach versus Proactive.
4. Best judge is customer.
5. Conflict between quality checkers and rest of the staff.

TOTAL QUALITY MANAGEMENT (TQM)

1. Associated with Japanees management (Ishikawa, Taguchi) but originated from USA (Deming,
Crosby, Juran)
2. Total = quality everything.
3. Suppliers Workers Customers Users
 Quality is recognize an important reserves by senior executives. Why?
 Protection of the company, image and brand.
 Premium price.
 Customer Preference or Loyalty. (eg. Cigarette)
 Cost reduction. Volume makes lower cost.
 Market power.

4. Quality is built in to the product at the design stage. Built on principles of redundancy. (When there are
redundancies, an organization tells some of its employees to leave because their jobs are no longer necessary or because the
organization can no longer afford to pay them. (BRIT BUSINESS; in AM, use dismissals, layoffs) Faults arise without
putting unfair committee.
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 5. Different level of quality.

Perfect Quality

Design quality

Production quality

6. Raw material / Technology / Process / Skills / Culture (may be wrong).

7. Raw material / Suppliers (Garbage in Garbage out (G.I.G.O)).
Careful appraisal and selection of suppliers. (Purchasing Mix)
 Quality – ISO , BS, ISI
 Price
 Timing of delivery
 Delivery reliability
 Quantity
 Service
8. Technology: How could technology based application improve quality?
Cost reduction = Internal process more efficiency
Example: In 1970s machine set up time of a car manufacturing unit in:

USA SWEEDEN JAPAN

20 hours 6 hours 12 minutes

 Online service
 Scope – variety of products (eg. Dell)
 Accuracy (eg. Motorolla)
 Skills: careful recruitment, selection, training and development of personality of staff.
(Honda takes 6 interviews before taking an employee in production department and gives
training).
 Management development. Charls Hany (1990) conducted a study about management
development in 5 countries.

USA FRANCE JAPAN GERMANY UK

MBA/MPA Grands Life time Higher UN degree No clear rout into
(Master of Public Ecoles employment Doktor management
Administration)

9. Culture:

Japan: KAJZEN = Continuous improvement

MUDA = Eliminate waste / wastage.

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 Toyoda

Quality Circle

Six-Sigma : Six Sigma is a business management strategy originally developed by Motorola, USA in 1981.[1]
As of 2010, it enjoys widespread application in many sectors of industry, although its application is not
without controversy.

Theory Z : William Ouchi

Maslow's Theory Z should not be confused with the book by William Ouchi bearing the same name.

Theory Z, was presented by William Ouchi, in his 1981 book 'Theory Z: How American management can
Meet the Japanese Challenge'. William Ouchi is professor of management at UCLA, Los Angeles, and a
board member of several large US organisations.

Theory Z is a name applied to two distinctly different psychological theories. One was developed by
Abraham H. Maslow in his paper Theory Z and the other is Dr. William Ouchi's so-called "Japanese
Management" style popularized during the Asian economic boom of the 1980s.

Maslow's Theory Z' In contrast to Theory X, which stated that workers inherently dislike and avoid work
and must be driven to it, and Theory Y, which stated that work is natural and can be a source of satisfaction
when aimed at higher order human psychological needs.

For Ouchi, Theory Z focused on increasing employee loyalty to the company by providing a job for life with
a strong focus on the well-being of the employee, both on and off the job. According to Ouchi, Theory Z
management tends to promote stable employment, high productivity, and high employee morale and
satisfaction.

Ironically, "Japanese Management" and Theory Z itself were based on Dr. W. Edwards Deming's famous
"14 points". Deming, an American scholar whose management and motivation theories were rejected in the
United States, went on to help lay the foundation of Japanese organizational development during their
expansion in the world economy in the 1980s.

Ouchi studied American and Japanese management to develop theory Z.

Study conducted on Japan (Theory J) USA (Theory A) Ideal (Theory Z)

Employment Life time Short Long
Career path Generalized Specialized Less specialized than A
Promotion Slow Rapid Slow
Appraisal Loyalty Performance Loyalty
Decision making Consulted by many Individual Consulted by many
Responsibility for decision Collective Individual Individual

Theory Z is conducive to the concept of Quality Circle (QC).

QUALITY CIRCLE (QC)

A quality circle is a volunteer group composed of workers (or even students), usually under the leadership
of their supervisor (but they can elect a team leader), who are trained to identify, analyse and solve work-
related problems and present their solutions to management in order to improve the performance of the

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organization, and motivate and enrich the work of employees. When matured, true quality circles become
self-managing, having gained the confidence of management.

Quality circles are an alternative to the dehumanising concept of the division of labour, where workers or
individuals are treated like robots. They bring back the concept of craftsmanship, which when operated on
an individual basis is uneconomic, but when used in group form (as is the case with quality circles), it can be
devastatingly powerful and enables the enrichment of the lives of the workers or students and creates
harmony and high performance in the workplace. Typical topics are improving occupational safety and
health, improving product design, and improvement in the workplace and manufacturing processes.

The term quality circles derives from the concept of PDCA (Plan, Do, check, Act) circles developed by Dr.
W. Edward Deming.

They are formal groups. They meet at least once a week on company time and are trained by competent persons
(usually designated as facilitators) who may be personnel and industrial relations specialists trained in human factors
and the basic skills of problem identification, information gathering and analysis, basic statistics, and solution
generation.[1] Quality circles are generally free to select any topic they wish (other than those related to salary and
terms and conditions of work, as there are other channels through which these issues are usually considered)

Quality circles were first established in Japan in 1962; Kaoru Ishikawa has been credited with their creation. The
movement in Japan was coordinated by the Japanese Union of Scientists and Engineers (JUSE). The first circles were
established at the Nippon Wireless and Telegraph Company but then spread to more than 35 other companies in the
first year.[5] By 1978 it was claimed that there were more than one million Quality Circles involving some 10 million
Japanese workers.[citation needed] There are now Quality Circles in most East Asian countries; it was recently claimed that
there were more than 20 million Quality Circles in China. [ Quality circles have been implemented even in educational
sectors in India, and QCFI (Quality Circle Forum of India) is promoting such activities. However this was not successful
in the United States, as it (was not properly understood and) turned out to be a fault-finding exercise although some
circles do still exist.

QC

 Voluntary team advising firm on quality problem.

 8 – 12 people
 Own agenda
 Access to senior management
 Training in quality control
 Cause and effects
 Originated from USA but popular in Japan

1,000,000 QCs

Research by Bradley and Hill in 1990 on effectiveness of Qc’s in US and UK firm observations:

 Economic game
 Improve industrial relations
 But Trade Unions are against this concept.
 Line managers are suspicious QCs.

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 SUPPLY CHAIN MANAGEMENT (SCM)
Supply chain management (SCM) is the management of a network of interconnected businesses involved
in the ultimate provision of product and service packages required by end customers (Harland, 1996).[1]
Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory,
and finished goods from point of origin to point of consumption (supply chain).

Another definition is provided by the APICS Dictionary when it defines SCM as the "design, planning,
execution, control, and monitoring of supply chain activities with the objective of creating net value,
building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand,
and measuring performance globally."

A supply chain, as opposed to supply chain management, is a set of organizations directly linked by one or more of
the upstream and downstream flows of products, services, finances, and information from a source to a customer.
Managing a supply chain is 'supply chain management' (Mentzer et)

1. Management of activities that purchase material and service, transforming them into intermediate and final
goods and delivering the final product into a distribution system.

2. Volkwagen’s Radical experiment in supply-chain Management. In its new Brazilian truck factory introduced
new supply chain management to reduce defective parts, labour costs, and improve efficiency. There are
1000 workers in that factory out of that 800 works for sub-contractors and 200 for Volkswagen. These 200
workers are responsible for TQM. The VW employees are responsible for overall quality, marketing,
research and design. Sub-contractors do the entire assembling jobs including materials. VW is buying not
only the materials but also labour and related services. Volkswagen manufacturing nothing and all the
assemble works are done by sub-contractors.

3. Why is supply chain management important? Make 5 suggestions.

Basic operations objective.

1. Q = Quality
2. F = Flexibility
3. D = Dependability
4. C = Cost
5. S = Speed

4. Supply chain becoming more global. Why?

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5. Global Drivers

Government Driver
Liberalization of trade helps the Supply chain’s span across many territories. Example: 40 years ago
GNP of South Korea and Ghana were at par (same). South Korea followed liberal economy and GNP
increase a great extent whereas Ghana followed closed economy and present GNP is too low if we
compare with South Korea.

By signing WTO agreement, the government harmonise traffic of goods and services and it cause
longer and broader supply chain.
Managing Operation (MBA) sibichan.mungamakal@googlemail.com Page 28
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Technological

Cost
Cost is powerful competitive weapon (Porter). Even perishable products sources overseas.
Example: In US markets flowers arrives from Colombia. Flowers must be delivered within 8 hours in
90C – 130C to keep the freshness.

Market
Convergence (The
become more similar)

argument.
convergence of different ideas, groups, or societies is the process by which they stop being different and

in terms of taste, life style, values, expectation = Cultural homogenisation

In middle class economy there is a large homogenous market and supply chain will be deeper and
broader.

SUPPLY CHAIN ECONOMICS

 Transaction cost Theory (Williamson / Coase)
 Agency Theory
 NASH Equilibrium

Transaction cost Theory

In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange
(restated: the cost of participating in a market). For example, most people, when buying or selling a stock,
must pay a commission to their broker; that commission is a transaction cost of doing the stock deal. Or
consider buying a banana from a store; to purchase the banana, your costs will be not only the price of the
banana itself, but also the energy and effort it requires to find out which of the various banana products you

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 prefer, where to get them and at what price, the cost of traveling from your house to the store and back, the
time waiting in line, and the effort of the paying itself; the costs above and beyond the cost of the banana
are the transaction costs. (Ronald Coase and Oliver E. Williamson).

Firm grows in size. Hierarchy is expensive because the use of market. Make Vs Buy. Make is cheaper
and buy is expensive. Historically firms ‘made’ many things in house. When they grow the size
concentrated on supply chain.

Transaction
cost
Cost saving

TC 1

TC 2

0 25 50 75 100 125 150

Size

TC 1 TC 2
Sales 100 100
Cost of sales 70 65
Gross profit 30 35

Cost saving = 5/70 x 100 = 7% Profit = 5/30 x 100 = 16%

7% cost saving leads to 16% profit.

Example:

L.A Canteen KFC

Profit Margin 30% Profit margin 3% - 5%
Hierarchical
Complex Management
Problems eats margin
Agency Theory
Agency theory suggests that the firm can be viewed as a nexus of contracts (loosely defined)
between resource holders. An agency relationship arises whenever one or more individuals,
called principals, hire one or more other individuals, called agents, to perform some service and
then delegate decision-making authority to the agents. These relationships are not necessarily
harmonious; indeed, agency theory is concerned with so-called agency conflicts, or conflicts of
interest between agents and principals.

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 Various mechanisms may be used to try to align the interests of the agent in solidarity with those of the
principal, such as piece rates/commissions, profit sharing, efficiency wages, performance
measurement (including financial statements), the agent posting a bond, or fear of firing.

 Hierarchical business
 More problems. Higher management costs.

A1

Agency A2
cost
Cost saving

0 25 50 75 100 125 150

Size

Outsourced problems
 Validity of transactions
 Agency theory
 Many more but efficient suppliers.
Example: Volkswagen use of market will less expensive.

 Organization less hierarchical.

Example: In 1990s British Telecome had 12 level hierarchy by today it is only 5 levels. Supply
chain more effective now.
Todays agency norm is outsourcing.

NASH Equilibrium
In game theory, Nash equilibrium (named after John Forbes Nash, who proposed it) is a solution concept of
a game involving two or more players, in which each player is assumed to know the equilibrium strategies of
the other players, and no player has anything to gain by changing only his or her own strategy unilaterally. If
each player has chosen a strategy and no player can benefit by changing his or her strategy while the other
players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs
constitute a Nash equilibrium.

The Nash equilibrium concept is used to analyze the outcome of the strategic interaction of several decision
makers. In other words, it is a way of predicting what will happen if several people or several institutions are
making decisions at the same time, and if the decision of each one depends on the decisions of the others.
The simple insight underlying John Nash's idea is that we cannot predict the result of the choices of multiple
decision makers if we analyze those decisions in isolation. Instead, we must ask what each player would
do, taking into account the decision-making of the others.

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