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OPERATIONS MANAGEMENT

STUDY GUIDE

Copyright © 2016
MANAGEMENT COLLEGE OF SOUTHERN AFRICA
All rights reserved; no part of this book may be reproduced in any form or by any means, including
photocopying machines, without the written permission of the publisher.
Please report all errors and omissions to the following email address: modulefeedback@mancosa.co.za
MBA - Operations Management

Table of Contents

CHAPTER 1: INTRODUCTION TO OPERATIONS MANAGEMENT ...................................................... 6

CHAPTER 2: GLOBAL OPERATIONS .................................................................................................. 18

CHAPTER 3: PRODUCTIVITY, SUPPLY CHAIN STRATEGY AND COMPETITIVENESS .................. 37

CHAPTER 4: PROCESS SELECTION AND PROCESS MEASURES .................................................. 57

CHAPTER 5: PROCESS IMPROVEMENT: LEAN OPERATIONS AND JUST-IN-TIME SYSTEMS ..... 76

CHAPTER 6: PROCESS QUALITY MANAGEMENT ............................................................................ 87

CHAPTER 7: PROCESS QUALITY MANAGEMENT II ....................................................................... 102

CHAPTER 8: FORECASTING DEMAND ............................................................................................ 111

CHAPTER 9: PRODUCT DESIGN ...................................................................................................... 128

CHAPTER 10: PLANNING FACILITIES AND CAPACITY ................................................................... 137

CHAPTER 11: LOCATION DECISIONS.............................................................................................. 147

CHAPTER 12: DESIGNING THE SUPPLY CHAIN ............................................................................. 159

CHAPTER 13: MANAGING INVENTORY ........................................................................................... 165

CHAPTER 14: AGGREGATE SCHEDULING AND MATERIALS REQUIREMENTS PLANNING ...... 181

CHAPTER 15: MANAGING PROJECTS ............................................................................................. 204

CHAPTER 16: ROLE OF SERVICES IN AN ECONOMY AND THE NATURE OF SERVICES........... 216

CHAPTER 17: SERVICE STRATEGY, NEW SERVICE DEVELOPMENT AND TECHNOLOGY ....... 228

CHAPTER 18: SERVICE QUALITY AND SERVICE FACILITY LOCATION........................................ 234

CHAPTER 19: THE SERVICE ENCOUNTER AND SERVICE WAITING LINES ................................ 246

CHAPTER 20: MANAGING SERVICE SUPPLY RELATIONSHIPS .................................................... 259

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BIBLIOGRAPHY .................................................................................................................................. 264

APPENDIX A : CASE STUDY 1:

DESIGN HOUSE PARTNERSHIPS AT CONCEPT DESIGN SERVICES .......................................... 265

APPENDIX B: CASE STUDY 2:

IKEAS’s INVENTORY MANAGEMENT STRATEGY: HOW DOES IKEA DO IT? ............................... 272

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INTRODUCTION TO THE OPERATIONS MANAGEMENT STUDY GUIDE

1. INTRODUCTION
This module should be studied using the prescribed and recommended text books including journal
articles. You should to read the topic that you intend to study in the appropriate Chapter of your
recommended book before reading journal articles. Craft a reading strategy that encompasses note-
taking. The module is divided into three parts, each with a good number of chapters.

Objectives, found at the start of every Chapter, indicate the level descriptors for this module to which
you need to pay serious attention upon completing each chapter. Material should not be read all at
once. Set aside a maximum of two hours of reading, after which you should take a break and then carry
on accordingly. All think point, self-assessment activities, and case studies MUST be attended to before
proceeding to the next chapter.

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2. STRUCTURE OF THIS STUDY GUIDE


This Study Guide is structured as follows:

Provides an overview of the


Introduction to Operations Management Study Guide Operations Management Study
Guide and how to use it.

1. Introduction to Operations Management

2. Global Operations This part of the Study Guide details


what you are required to learn.
3. Productivity, Supply Chain Strategy and Competitiveness
Each chapter details:
4. Process selection and process measures
 Specific learning outcomes
5. Process quality management I  Essential reading (textbooks and
6. Process quality management II journal articles)
 An overview of relevant theory
7. Process improvement: lean operations and just-in-time
systems Questions for reflection.

8. Forecasting demand

9. Product design

10. Planning facilities and capacity

11. Locations decisions

12. Designing the supply chain

13. Managing inventory

14. Aggregate scheduling and materials requirements


planning (MRPII)

15. Managing projects

16. Role of services in an economy and the nature of


services

17. Service strategy, new service development and


technology

18. Service quality and service facility

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19. The service encounter and service waiting lines

20. Managing service supply relationships

Appendix A: Case Study 1 Appendix A & B provide two case


studies. You are required to prepare
and analyse these case studies in
your Study Groups, and present
your findings at the Operations
Appendix B: Case Study 2
management Workshop two and
Operations management Workshop
three.

3. STRUCTURE OF EACH CHAPTER


Each chapter is structured as follows:
 Specific Learning Outcomes
 Essential (Prescribed) Reading
 Brief Overview of Relevant Theory
 Questions for Reflection

3.1 SPECIFIC LEARNING OUTCOMES


These are listed at the beginning of each chapter. These detail the specific outcomes that you will be
able to competently demonstrate on successful completion of the learning that each particular chapter
requires.

3.2 ESSENTIAL (PRESCRIBED) READING


Your essential (prescribed) reading comprises the following:
International Textbooks
 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition. John
Wiley & Sons Singapore Pte Ltd.
These textbooks will provide you with a strategic understanding of operations management within
advanced economies.

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South African Textbook


Grutter Anthon (2010). Introduction to Operations Management. A strategic Approach. First edition,
Pearson Education, South Africa, Cape Town. Chapter 1, pp.1-20.
This textbook will give you an understanding of operations management within the South African
context.

 Journal Articles
Journal articles have been prescribed for each chapter. They are available from the EBSCO, Emerald
and Sabinet databases that are accessible through the http://mymancosa.com website.
The articles will provide you with an understanding of operations management within emerging
markets, with particular focus on countries in Africa and Asia. It is imperative that you acquire and read
these journal articles, as they form a key part of the curriculum.

3.3 BRIEF OVERVIEW OF RELEVANT THEORY


Each chapter contains a very brief overview of theory relevant to the particular operations management
topic. The purpose of the overview is to introduce you to some of the general and emerging market
issues regarding each operations management topic. Once you have read the overview, you need to
further explore the operations management topic by reading the prescribed textbooks and journal
articles listed under “Essential Reading” for each chapter.

3.4 QUESTIONS FOR REFLECTION


There are questions for reflection at the end of each chapter. The questions are designed to enable you
to reflect on what you have learnt, and consider how what you have learnt should be applied in
practice.

4. CASE STUDIES
Case studies form an integral part of developing competence in operations management. Two case
studies, based on companies operating in (emerging markets/Africa), are included in Appendix A and
Appendix B of this study guide. You are required to analyse these case studies in your Study Groups.

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5. ASSESSMENTS
The formal assessment of Operations Management takes the form of a project. Students will be given a
practical project and a written report or proof of their findings will need to be submitted. A mark of 50%
will be required in order to pass the module. There will be no assignment or examination for the
module.

6. ELECTRONIC LEARNING RESOURCES


Additional electronic learning resources are available to supplement your learning. These are detailed
in the document “Electronic Learning Resources”. These resources seek to build on, and expand, the
learning that is facilitated through the operations management Study Guide and the workshops. They
include video podcasts, audio podcasts, individual activities, as well as additional recommended
reading on operations within emerging markets.

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CHAPTER 1: INTRODUCTION TO OPERATIONS


MANAGEMENT
Specific Learning Outcomes

The overall outcome for this chapter is that, on its completion, the student should be able to
demonstrate an understanding of the nature and scope of operations management functions. This
overall outcome will be achieved through the student’s mastery of the following specific outcomes, in
that he/her will be able to:

1. Outline the purpose and scope of operations management.

2. Analyse what operations managers do.

3. Discuss the transformation process.

4. Discuss functions and duties of operations managers.

5. Examine the role of operations management in small and large companies.

6. Examine the role of operations managers in Not-for-Profit Organisations.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbooks – Relevant Chapter Pages)

 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 1, pp.39-44.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition. John
Wiley & Sons Singapore Pte.Ltd. Chapter 1, pp. 1-25.

(South African Textbook – Relevant Chapter Pages)


 Grutter Anthon (2010). Introduction to Operations Management. A strategic Approach.
First edition, Pearson Education, South Africa, Cape Town. Chapter 1, pp.1-20.

Journal Articles & Reports


 Voss, C.A (1995). Operations management – from Taylor to Toyota – and Beyond? British
Journal of Management, Vol. 6, special issue, pp. S17-S29.
 Li, X. (2014). Operations Management of Logistics and Supply Chain: Issues and
Directions. Hindawi Publishing Corporation Discrete Dynamics in Nature and Society Vol.
2014, no.1, pp.1-8.
 Bendoly, E., Donohue, K., and Schultz, L.K (2005). Behaviour in operations management:
Assessing recent findings and revisiting old assumptions. Journal of Operations
Management, Vol. xxx, No. xxx, pp. 1-16.
 Gupta, C.M., and Boyd L.H. (2008). Theory of constraints: a theory for operations
management. International Journal of Operations and Production Management, Vol. 28,
no. 10. pp. 991-1012.
These articles are available on Google and at the Mancosa Library

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1.1 WHAT IS OPERATIONS MANAGEMENT?


Operations management encapsulates the management of business processes that produce tangible
goods or intangible services. Terms such as “Just-in-time, six sigma quality and supply chain
management” appear regularly in the business press in publications such as Financial Times, The
Economist and Business Week. This course considers ways in which operations can be enhanced,
including wider concerns that are characteristic of processes for quality control. It focuses on
quantitative techniques as well as implications for managers. It is designed to help students become
familiar with tools, analytical frameworks and general principles for managing business processes and
operations. Operations management is about how organisations produce goods and services. What is
worn, eaten, utilised, or even read comes from operations managers who organise its production.
Therefore, both goods and services are produced under the supervision of operation managers.

This module is therefore concerned with the tasks, issues and decisions of operations managers.
Operations managers have the responsibility of managing some, or all of the resources which compose
the operations function. Different terms are used to call these types of managers besides the term
operations manager. Terms such as ‘fleet manager,’ in a distribution company, the ‘administration
manager’ in a hospital or even ‘store manager’ in a supermarket may be used. Operations
management can thus be defined as the activity of managing the resources which produce and deliver
products and service. The operations function is the function within an organisation that produces some
type of product and/or services (Slack, Chambers, and Johnson, 2010; Heizer and Render, 2014; and
Russel and Taylor, 2014).

1. Grütter, A. (2010) formally defines operations management as the area of management


concerned with the design, planning and operation of value-creating processes in
organisations.
2. Russel and Taylor (2014) states that operations management is often defined as a
transformation process.
3. Heizer and Render (2014) define operations management as the activities that create value
in the form of goods and services by transforming inputs into outputs.

THINK POINT
Examine five other definitions of operations management from different sources and provide your
own definition.

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1.2 WHY STUDY OPERATIONS MANAGEMENT?


OM (operations management), according to Heizer and Render (2014), is studied for four major
reasons:
1. OM is one of the three major functions of any organization, and it is integrally related to all the other
business functions. All organisations market (sell), finance (account), and produce (operate), and it
is important to know how the OM segment functions. Therefore, we study how people organise
themselves for productive enterprise.
2. To know how goods and services are produced. The production function is the segment of our
society that creates the products we use.
3. To understand what operations managers do. By understanding what these managers do, you can
develop the skills necessary to become such a manager. This will help you explore the numerous
and lucrative career opportunities in OM.
4. OM is studied because it is such a costly part of an organization. A large percentage of the revenue
of most firms is spent in the OM function. Indeed, OM provides a major opportunity for an
organization to improve its profitability and enhance its service to society.

THINK POINT
Critically analyse the value operations management can add to your company.

1.3 THE TRANSFORMATION PROCESS


Operations management designs, operates and enhances productive systems used to get work done.
As noted in Chapter One, operations managers are found in every sector, banks, hospitals, factories,
and government etc. They design systems, ensure quality then produces goods and deliver services.
Operations are often defined as a transformation process. All operations produce products and services
by changing inputs into outputs using an ‘input-transformation-output’ process. Inputs are used to
transform something, or are transformed themselves into outputs of products and services. Figure 1.1
captures the essence of what happens with this process. Operations try to ensure that the
transformation is as efficient and effective as possible. The role of operations is therefore to create
value. The transformation itself can thus be seen as a series of activities along a value chain extending
from the supplier to the customer.

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INPUT OUTPUT
Material Goods
TRANSFORMATION
Machines Services
PROCESS
Labour
Management
Capital

Feedback

Requirements
Figure 1.1 Operations as a Transformation Process
Source: (Russel and Taylor, 2014:2)

THINK POINT
What are the inputs and outputs to the operation transformation process in your organisation?

The input-transformation-output process is characteristic of a wide variety of operating systems. In an


automobile factory, sheet steel is formed into different shapes, painted and finished, then assembled
with thousands of component parts to produce a working automobile. In an aluminium factory, various
grades of bauxite are mixed, heated, and cast into ingots of different sizes.

In a hospital, patients are helped to become healthier individuals through special meals, medication,
laboratory work, and surgical procedures. Therefore, operations do take different forms. The
transformation process can take the following forms:
 Physical, as in manufacturing operations;
 Locational, as in transportation or warehouse operations;
 Exchange, as in retail operations;
 Physiological, as in healthcare;
 Psychological, as in communication.

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1.1 FUNCTIONS AND DUTIES OF OPERATIONS MANAGERS


All good managers perform the basic functions of the management process. The management process
consists of planning, staffing, leading, organising and controlling. Operations managers apply this
generic management process to the decisions they make in the OM function. Managers contribute to
production and operations through the decisions shown in the Table 1.1. To address each of these
decisions requires planning, organising, staffing, leading, and controlling (Slack, Chambers and
Johnson, 2010; and Heizer and Render, 2014).

Table 1.1 Functions and duties of operations managers


Quality Management Who is responsible for quality?
How do we define the quality we want in our service or
product?

Service and Product design What product or service should we offer?


How should we design these products or services?

Process and capacity design What equipment and technology is necessary for these
processes?

Location Where should we put our facility?

Layout design How should we arrange our facility?

Human resources and job design How do we provide a reasonable work environment?

Supply chain management Should we make or buy a component?


How many suppliers should we have?

Inventory, MRP, JIT How much of inventory should we keep?

Intermediate, short-term and project Is subcontracting production a good idea?


scheduling

Maintenance Who is responsible for maintenance?

Returns How do we deal with returned goods?

Adapted: Heizer and Render (2014:44).

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 ACTIVITY: BRICS
1. Find a company from each member country of BRICS. Compare and contrast operations
management practices for each of these companies. In your comparison pay attention to volume of
demand that they have to cope with, the variety of products or services, and variation in demand
during the day, week and year.

2. Think about the impact of volume, variety, variation and visibility on the day-to-day management of
each of the operations and consider how each operation attempts to cope with its volume, variety,
variation and visibility of the preparation of its products and/or services.

1.2 OPERATIONS MANAGEMENT IS ESSENTIAL IN ALL TYPES OF ORGANISATIONS

In the product operations management it is easy to have a visual picture of the operations function in
terms of what it does even without having been there. The automobile assembly line or the Coca Cola
production line is frequently shown in advertisements. But it may not be the same to visualise the
operations of an advertisement. This therefore introduces us to the idea of ‘production’. Some
organisations produce tangible things while others produce intangible things. Simply put, some
organisations produce goods (products) whereas others produce services (performances, acts or
deeds). The motive in both cases is to make a profit. Even organisations that are “not-for-profit” use
resources to produce services which serve society. Services are a predominant force in our society.

The rapid and continuing growth in the service sector is providing marked opportunities for managers.
Understanding the concepts of successfully managing the service will provide a significant advantage
to new graduates who may be employed by a service-oriented firm. Good service does not happen as a
result of one extraordinary employee who goes out of the way to please a customer; good service
should be properly planned and managed. Service operations management concerns the design,
planning, direction and control of all the facilities, processes and required activities to transform labour,
capital, materials, energy, and skills into performance and delivery of service. Good service
organisation performs the operations functions of planning, scheduling, equipment operation, quality
control, record keeping, and human resource management for maintaining efficient usefulness. This
takes place while ensuring that the quality of the service is both high and consistent (Slack, Chambers,
and Johnson, 2010; Heizer and Render, 2014; Russel and Taylor, 2014; and Grutter, 2010).

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CASE STUDY – Operations in Practice IKEA

Love it or hate it, IKEA is the most successful furniture retailer ever. With 276 stores in 36 countries, it
has managed to develop its own special way of selling furniture. The Stores’ layout means customers
often spend two hours in the store - far longer than in rival furniture retailers. IKEA’s philosophy goes
back to the original business, started in the 1950’s in Sweden by Ingvar Kamprad. He built a showroom
on the outskirts of Stockholm where land was cheap and simply displayed suppliers’ furniture as it
would be in a domestic setting. Increasing sales soon allowed IKEA to start ordering its own self-
designed products from local manufacturers. But it was innovation in its operations that drastically
reduced its selling costs. These included the idea of selling furniture as self-assembly flat packs (which
reduced production and transport costs) and its ‘showroom-warehouse’ concept which required
customers to pick the furniture up themselves from the warehouse (which reduces retailing costs). Both
of these operating principles are still the basis of IKEA’s retail operations processes today.

Stores are designed to facilitate the smooth flow of customers, from parking, moving through the store
itself, to ordering and picking up goods. At the entrance to each store large notice-boards provide
advice to shoppers. For young children, there is a supervised children’s play area, a small cinema, and
a parent and baby room so parents can leave their children in the supervised play area for a time.
Parents are recalled via the loud speaker system if the child has any problems. IKEA ‘allows customers
to make up their minds in their own time’ but ‘information points’ have staff who can help. All furniture
carries a ticket with a code number which indicates its location in the warehouse. (For larger items
customers go to the information desks for assistance). There is also an area where smaller items are
displayed, and can be picked directly. Customers then pass through the warehouse where they pick up
the items viewed in the showroom. Finally, customers pay at the checkouts, where a ramped conveyor
belt moves purchases up to the checkout staff. The exit has service points and a loading area that
allows customers to bring their cars from the park and load their purchases.

Behind the public face of IKEA’s huge store is a complex worldwide network of suppliers, 1,300 direct
suppliers, about 10, 000 sub-suppliers, and warehouse and transport operations include 26 Distribution
Centres. This supply network is vitally important to IKEA. From purchasing raw materials, right through
to finished products arriving in its customers’ homes, IKEA relies on close partnerships with its suppliers
to achieve both ongoing supply efficiency and new product development. However, IKEA closely
controls all supply and development activities from IKEA’s home town of Almhult in Sweden.

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But success brings its own problems and some customers became increasingly frustrated with
overcrowding and long waiting times. In response IKEA in the UK launched a £150 m programme to
‘design out’ the bottlenecks. The changes included:

 Clearly marked in-store short cuts allowing customers who just want to visit one area, to avoid
having to go through all the preceding areas.

 Express checkout tills for customers with a bag only rather than a trolley.

 Extra ‘help staff’ at key points to help customers.

 Redesign of the car parks, marking them easier to navigate.

 Dropping the ban on taking trolleys out to the car parks for loading (originally implemented to
stop vehicles being damaged).

 A new warehouse system to stop popular product lines running out during the day.

 More children’s play areas.

IKEA spokesperson, Nicki Craddock, says: ‘We know people love our products but hate our shopping
experience. We are being told that by customers every day, so we can’t afford to take offence at being
herded like sheep on the long route around stores. Now if you know what you are looking for and just
want to get in, grab it and get out, you can.”

Source: Slack, Chambers and Johnson, 2010

 ACTIVITY: BRICS
1. Visit a big furniture shop in your country. Observe how it operates, for instance where customers
go, how staff interact with them, how the store has chosen to use its space, what variety of products it
offers and so on. Examine and tabulate differences between this store and IKEA.

2. What operations management challenges can you identify in the store? Discuss innovative solutions
you would recommend to resolve these challenges.

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1.6 IS OPERATIONS MANAGEMENT IMPORTANT IN SMALLER ORGANISATIONS?


Operations management is equally important in small organisations. Whether an organisation is small
or large, operations is essential as all companies need to produce and deliver their products or services
efficiently and effectively. Managing operations in a small-to-medium company poses the challenge of
resources to be dedicated to specialised tasks. As such people tend to do different jobs in small
organisations. The advantage of this is that responses to problems or issues can take place faster. The
demerit is that roles tend to overlap leading to confusion in decision-making. On the contrary large
organisations do possess the resources to commit to specialised tasks.

CASE STUDY: Acme Whistles


Acme Whistles can trace its history back to 1870 when Joseph Hudson decided he had the answer to
London Metropolitan Police’s request for something to replace the wooden rattles that were used to
sound the alarm. So the world’s first police whistle was born. Soon Acme grew to be the premier
supplier of whistles for police forces around the world. ‘In many ways’, says Simon Topman, owner and
Managing Director of the company, ‘the company is very much the same as it was in Joseph’s day’.
The machinery is more modern, of course, and we have a wider variety of products, but many of our
products are similar to their predecessors. For example, football referees seem to prefer the traditional
snail-shaped whistle, so although we have dramatically improved the performance of the product, our
customers want it to look the same. We have also maintained the same manufacturing tradition from
those early days. The original owner insisted on personally blowing every single whistle before it left the
factory. We still do the same, not by personally blowing them, but by using an airline, so the same
tradition of quality has endured.

The company’s range of whistles has expanded to include sports whistles (they provide the whistles for
the Soccer World Cup), distress whistles, (silent) dog whistlers, novelty whistles, instrumental whistles
(used by all of the world’s top orchestras), and many more types. “We are always trying to improve our
products,” says Simon. “It’s a business of constant innovation. Sometimes I think that after 130 years
surely there is nothing more to incorporate. Of course, managing the operations in a small company is
very different to working in a large one. Everyone has much broader jobs; we cannot afford the
overheads of having specialist people in specialised roles.”

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Simon adds, “But this relative informality has a lot of advantages. It means that we can maintain our
philosophy of quality amongst everybody in the company, and it means that we can react very quickly
when the market demands it. Nor is the company’s small size any barrier to its ability to innovate. On
the contrary’, says Simon, ‘there is something about the culture of the company that is extremely
important in fostering innovation.
Because we are small we know each other and we all want to contribute something to the company. It
is not uncommon for employees to figure out new ideas for different types of whistles. If an idea looks
promising we will put a small and informal team together to look at it further. It is not unusual for people
who have been with us only for few months to start wanting to make innovations. It’s as though
something happens to them when they walk through the door to their natural inventiveness.”
Source: Slack, Chambers, and Johnson, 2010

 ACTIVITY: BRICS
Evaluate distinctions between advantages of operations management in small and large organisations.

1.7 OPERATIONS MANAGEMENT IN NOT-FOR-PROFIT ORGANISATIONS


The relevance of operations management also extends to organisations whose purpose is not to make
profits. For example, managing operations in an animal welfare charity, public hospital or a research
organisation is the same as in commercial organisations. The decisions made how to produce products
and services, invest in technology, contract out some of their activities, establish performance
measures, and improve their operations performance and so forth are the same.

1.8 SUMMARY
The central idea in this introductory Chapter is that all organisations have operations processes which
produce products and services and all these processes are essentially similar. However, some believe
that by even trying to characterise processes in this way (perhaps even by calling them ‘processes’)
one loses or distorts their nature, depersonalises or takes the ‘humanity’ out of the way in which we
think of the organisation. This point is often raised in not-for-profit organisations, especially by
professional staff. For example, the head of one European ‘Medical Association’ (a doctors’ trade
union) criticised hospital authorities for expecting a ‘sausage factory service based on productivity
targets. No matter how similar they appear on paper, it is argued, a hospital can never be viewed in the
same way as a factory. Even in commercial businesses, professionals, such as creative staff, often
express discomfort at their expertise being described as a ‘process.

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Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter on operations management, source
and work through the textbook chapters and journal articles listed in the “Essential
Reading” list at the beginning of this chapter. It is essential that you read all of the textbook chapters
and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter on an “Introduction to Operations Management”
reflect on the following questions. (To adequately address these questions you will need to
have completed all the ‘essential reading’ listed at the beginning of this chapter.)

ACTIVITY 1
Find a company from each member country of BRICS. Compare and contrast operations management
practices for each of these companies. In your comparisons pay attention to volume of demand that
they have to cope with, the variety of products or services, and variation in demand during the day,
week and year.

ACTIVITY 2
Think about and discuss the impact of volume, variety, variation and visibility on the day-to-day
management of each of the operations and consider how each operation attempts to cope with its
volume, variety, variation and visibility of the preparation of its products and/or services.

ACTIVITY 3
Distinguish between operations management in the health sector and the automobile industry.

ACTIVITY 4
Compare and contrast operations management in the public and private sectors. Cite specific
examples.

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CHAPTER 2: GLOBAL OPERATIONS

Learning Objectives

After working through this chapter you should be able to:


 Describe the operations function and how it relates to other business functions.
 Discuss the key factors that have contributed to the evolution of operations and supply chain
management.
 Outline and examine the reasons for a new operations agenda.
 Discuss and analyse reasons why businesses operate globally, and the importance of
globalisation in supply chain management.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal articles
listed below.

Textbooks:
(International Textbooks – Relevant Chapter Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 1, pp.
37-56.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 1, pp. 8 -12.

(South African Textbook – Relevant Chapter / Pages)


 Grütter (2010). Introduction to Operations Management. A strategic Approach. First
edition, Pearson Education, South Africa, Cape Town. Chapter 1, pp.1-20.

Journal Articles & Reports

 Tyagi and Agarwal (2014). Supply Chain Integration and Logistics Management among
BRICS: A Literature Review. American Journal of Engineering Research, Vol. 3, No. 5,
pp. 284-290.
 Tyagi and Agarwal (2014). Supply chain Challenges among BRICS Countries.
International Journal of Engineering Research and Applications, Vol.4, No. 1, pp. 316-
318.

These articles are available on Google and at the Mancosa Library.

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THINK POINT
What form of operations take place within your organisation?
Recommend what you would implement to improve this system.

2.1 THE OPERATION FUNCTION


Activities in operations management include work organisation, selecting processes, arranging layouts,
locating facilities, designing jobs, measuring performance, controlling quality, scheduling work,
managing inventory, and planning production. Operations managers deal with people, technology and
deadlines. Operations managers need good technical, conceptual, and behavioural skills. Their
activities are closely intertwined with those of other functional areas of the organisation such as
Finance/Accounting, Marketing, Human resources and suppliers.

THINK POINT
How can you improve the interaction between the operations function, marketing and the finance
departments?

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Finance/Accounting

Production and inventory data, Budgets, Cost analysis, Capital


Capital budgeting requests, investments, Stockholder
Capacity expansion and requirements
technology plans

Product/service, M
S Order materials, availability, lead-time
a
u Production & delivery estimates, status
schedules, Quality order, Delivery r
p requirements, and schedules k
p Design/performance
specs e
l Operations
t
i
I
e
Sales forecasts, n
r customer orders,
Materials availability, g
s Quality data, Delivery
customer feedback,

schedules, Designs promotions

Personnel needs, skills set, Hiring /firing, Training, Legal


Performance evaluations, job requirements, Union contract
designs, Work measurement negotiations
Human resources

Figure 2.1 Operations as a Technical Core


Source: (Russel and Taylor, 2014:3)

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2.3 THE EVOLUTION OF OPERATIONS AND SUPPLY CHAIN MANAGEMENT


The widespread production of consumer goods and operations management did not start until the
industrial revolution in the 1700’s. Before that, skilled crafts-people and their apprentices fashioned
goods for individual customers from studios in their own homes. Every piece was unique, hand-fitted,
and made entirely by one person, a process known as craft production. Craft production still exists
today.

The availability of coal, iron ore, and steam power set into motion a series of industrial inventions that
revolutionised the way work is performed. Great mechanically powered machines replaced labour as
the primary factor of production and brought workers to the central location to perform tasks under the
direction of the ‘overseer’ in a place called a “factory”.

This revolution first started with the textile mills, grain mills, metalworking and then machine-making
facilities. Around the same time Adam Smith (1776) proposed the division of labour, in which the
production process was broken down into a series of small tasks, each performed by a different worker.
The specialisation of the workers on limited, repetitive tasks allowed them to become very proficient at
the tasks they performed.

A number of people contributed to the revolution in different ways. This was followed by the introduction
of interchangeable parts, scientific management, mass production, the quality revolution, lean
production and supply chain management which was born to manage global supply chain. Refer to the
table showing historical events in operations management below (Russel and Taylor, 2014; Heizer and
Render, 2014).

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Table 2.1 Evolution of operations management


Era Events/Concepts Dates Originator
Industrial Revolution Steam engine 1769 James Walt
Division of labour 1776 Adam Smith
Interchangeable parts 1790 Eli Whitney
Scientific Management Principles of scientific
management 1911 Frederick W Taylor
Time and motion Frank and Lilian
studies 1911 Gilbreth
Active scheduling chart 1912 Henry Gantt
Moving assembly line 1913 Henry Ford
Human Relations Hawthorn studies 1930 Elton Mayo
Motivation theories 1940s Abraham Maslow
1950s Frederick Herzberg
1960s Douglas McGregor
Operations Research Linear Programming 1947 George Dantzig
Digital computer 1951 Remington Rand
Simulation, waiting line
theory, decision theory,
PERT/CPM 1950s Operations research
MRP 1960s groups
1970s Joseph Orlicky, IBM,
EDI, CIM and others
Auto industry, DARPA
Quality revolution JIT (Just-in-time) 1970s Taiichi Ohno (Toyota)
TQM (Total quality 1980s W. Edwards Deming,
management) Joseph Juran
Strategy and operations 1990s Wickham Skinner,
Reengineering 1990s Robert Hayes
Six Sigma Michael hammer,
James Champy
GE, Motorola
Internet Revolution Internet, WWW 1990s ARPNET, Tim Bernrs-

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ERP, supply chain 1990s Lee


management 2000s SAP, Oracle, Dell
E-commerce Amazon, Yahoo, EBay,
Google and others
Globalisation World Trade 1990s GATT
Organisation Europe
European Union 2000s China, India
Global supply chains Emerging economies
Outsourcing IBM
Services science
Sustainability Global warming Today Numerous companies,
Carbon footprint scientists, statesmen
Green products and World Economic
Corporate social Forum
responsibility (CSR) United Nations
UN Global Impact

Source: (Russel and Taylor 2014:6)


2.4 The New Operations Agenda
The business environment has a significant impact on what is expected from operations management.
New pressures have led to a need for new responses in operations management. It is these responses
which have led to the new agenda. This speaks to trends that have existed before but now have been
accelerated.

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CASE STUDY: OPERATIONS MANAGEMENT IN PRACTICE AT JAGUAR


INTRODUCTION
In recent years, many UK manufacturing and service industries have transformed their production
methods and processes. Businesses that have been at the leading edge of change have prospered,
leaving their competitors behind. Key ingredients in this process of change have been an emphasis on
creating total quality systems that involve:

 Getting it right first time at every stage of production;


 Lean production to cut out waste and to simplify manufacturing systems;
 Creating environmental management systems that guarantee:
o The highest levels of environmental performance within an organisation
o Excellent relationships with the local community.

Today, the Halewood plant is dedicated to producing the new Jaguar X’ Type. This is a car for the 21st
century. It has been developed as a result of feedback from a massive global consumer research
programme. The programme has ensured that the car’s designers, engineers and marketers remain in
tune with the needs and expectations of potential customers at every stage in the car’s development.
This case study examines ways in which Jaguar has transformed its new assembly plant at Halewood
to guarantee world class performance in its production systems.

Developing the site

In January 1960, Ford bought the 1390 hectare Greenfield site in Halewood from Liverpool Corporation
and the British Transport Commission. The Halewood site quickly became established as a leading car
manufacturing plant and was associated particularly with Ford Escort production. When Ford acquired
Jaguar in the early 1990’s, Halewood also began to produce body panels for Jaguar cars. In 1998,
Halewood was announced as the production site for the all new Jaguar X’ Type sports saloon. It would
replace Ford Escort production, which was to be phased out by 2000.

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Halewood was chosen to produce the X’ Type because:

 existing Jaguar plant in the Midlands lacked sufficient capacity.


 the ‘Britishness’ associated with Jaguar made overseas production.

However, it was clear that the Halewood plant would need to be dramatically updated and upgraded if it
was to become a world leader. So £300 million was set aside to modernise the plant. Coupled with this
was a programme for changing ways of working and also the culture within the plant. Many Halewood
employees had previously produced Ford Escorts using traditional manufacturing techniques that did
not encourage them to show initiative. They have now learned new approaches that involve
empowerment and flexibility; more responsibility has been given to operatives at the sharp end of
production.

Creating a highly efficient manufacturing site

Halewood’s refurbishment process involved replacing almost all of the production facilities so as to:

 Deliver the exceptional quality levels required for a premium sports saloon;
 Create a highly efficient ‘lean manufacturing’ environment.

Lean production involves standardising work processes and processes to cut out duplication and
waste. The standard that is set is the best identified method of operation currently available. This
standard is continuously improved. Halewood has the capacity to produce at least 100,000 vehicles a
year. For the first time for Jaguar, the site also offers all major production facilities on a single location.
Press Shop, Body Construction, Paint Shop and the Trim and Final lines are all adjacent to each other
and laid out for a straightforward, sequential production flow.

The plant’s productive efficiency has been further improved by developing a new Supplier Park
alongside. Totally new production lines have been installed in Body Construction and for the Trim and
Final area, with the latter abandoning floor conveyors in favour of overhead conveyors as part of the
overall drive for improved production quality. The Press Shop has been fully refurbished. Two state-of-
the-art computerised measuring machines have been installed to ensure the dimensional accuracy of
the metal stampings. In the Paint Shop, 70% of the equipment has been replaced to deliver the
renowned smooth and glossy finish of Jaguar’s four-coat paint system used in existing Jaguar plant.

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Months of planning were required to ensure that all the different building and installation activities could
be achieved simultaneously within the product development programme. While the redesign of plant
and processes at Halewood has been essential to creating World Class Systems based on total quality
and lean manufacturing, another key part of the change process has been to alter the Halewood
workforce’s working practices and ways of thinking. The transformation of the working processes,
environment and culture at Halewood started two and a half years prior to phasing out the Escort. A key
priority was to transform a ‘them and us’ view of management held by many Halewood employees. The
first stage in the strategy for overhauling customs and practices was the production of the ‘Halewood
Vision’. This is a statement outlining the principles involved in creating a world-class manufacturing
facility. A new set of working relationships was agreed with employees and each employee received a
copy of what became known as the ‘green book’, which set out the operating principles required to
move the business forward.

Three pillars for successful change

Figure 2.3: Three pillars for successful change

In order to create the necessary improvements at Halewood, the management team focused on three
pillars seen as essential to support the required changes.

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Production
The Quality pillar is based on transferring Jaguar’s already existing quality standards to the Halewood
plant. This involved creating consistency across the production process so that, for example, every shift
would be working the same way. At the same time, emphasis was given to reducing time spent on
activities that do not add value to the manufacturing process. Line operators were given responsibility
for identifying continuous improvements that could be made. Operators were organised into smaller
teams working with a group leader. These groups have been given considerable responsibility for
identifying a need for change and then driving it through. By being given experience of production
methods in Jaguar’s leading edge plants in the Midlands, Halewood operators and group leaders
learned more about the changes required.

The Centres of Excellence pillar was seen as the key driving force in changing people’s thinking.
Bringing a large plant like Halewood to the required level of performance in a single leap would have
been too great a task, so the concept of ‘Centres of Excellence’ was born. Under this, manufacturing
improvement could be made first within smaller areas through close co-operation and teamwork. As the
established Centres of Excellence demonstrated progress, the concept was rolled out across more and
more areas, until all the Centres of Excellence linked together and standards across the whole plant
were transformed. Initially, just five showcase Centres of Excellence were established in March 1999.
Each participating workgroup took responsibility for generating improvements through a specified series
of actions, including:

 Standardised work processes;


 Improvements to component delivery at line-side;
 A ‘right first time’ approach;
 A ‘best-in-class’ vision for general housekeeping.

The most obvious difference that this created was better cleanliness and tidiness. Line-side ‘cardboard
cities’ were cleared away, as new racking and packaging – some designed by the operators
themselves – were introduced to improve delivery to the production lines and to ease component
picking. Benches and lockers were relocated into purpose-built rest areas and better floor surfaces
were laid where necessary. In one of the initial centres of excellence, the entire working area, including
overhead conveyor systems, was completely rearranged to a much more efficient layout designed by
the chapter operators themselves, aided by engineering colleagues.

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Efficiency and quality

The improvements in efficiency and quality generated such enthusiasm that by the end of 1999,
Centres of Excellence were established for 30% of the workforce. By the time Escort production ended
in July 2000, the concept had been extended throughout the plant. Centers of excellence not only led to
dramatic increases in productivity at Halewood, but also to increased pride and commitment within the
workforce.

The Culture change programme was the third pillar. This involved over-hauling existing attitudes and
ways of working to create an environment in which employees were encouraged to take ownership so
that they became involved in managing the process of continuous change revolving around ‘lean
production’. Implementing the Culture change programme involved creating a series of workshops for
managers, union representatives, supervisors and line workers based on creating a new environment
based on participation and empowerment. These workshops communicated the concept of the
‘Halewood Difference’ programme, based on supporting employee involvement in decision-making
about production and production processes.

Fulfilling a role within the local community


As part of the drive to create world class performance Jaguar recognised the importance of creating
standards which best meet the needs of the wider community. This thinking is behind Jaguar’s focus on
meeting the requirements for a healthy environment. The new car is based on company standards that
prohibit the use of substances that have an adverse environmental impact. In addition, the car’s design
is such that it meets the stringent requirements of the toughest exhaust and evaporative standards in
the world. In preparing Halewood for the new X’ type, Jaguar set out to make the production process
cleaner and more environmentally efficient than ever before. New initiatives included:

 Introducing new, cleaner Paint Shop facilities and water-borne processes


 Eliminating expendable component packaging
 Creating a new Supplier Park next to the plant.

At the same time, improvements have been made to Halewood’s working environment, including better
lighting, heating and ventilation. The plant’s energy consumption has also been reduced. A materials
usage strategy has been adopted at Halewood which aims to use only 100% durable, reusable,
returnable packaging within the manufacturing process.

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Commitment to the community


Jaguar’s commitment to the community is also strongly in evidence at a local level. Jaguar is
developing relationships to integrate Halewood into the local community and the whole of Merseyside.
Community Relations is a key part of the organisation’s corporate philosophy. This approach is
exemplified in the process of re-skilling the Halewood workforce. As part of the overall training
programme, over 800 employees spent a week involved in local community projects. These involved
employees in:

 Helping elderly local residents in pruning and redesigning their gardens,


 Designing and creating a school garden area, and
 helping to restore the grounds of a local church.

Jaguar employees are thus able to feel part of a caring organisation with a commitment to setting world
class standards that cover all areas of production. They also know that wider aspects of running a world
class business include concern for the environment and the local community.

Conclusion

Creating World Class Performance involves transforming the way in which a company organises itself
and its relationships with employees and the wider community. The starting point is to transform
production processes to ensure total quality, lean manufacturing and dedicated environmental systems.
However, to create this transformation it is first necessary to change people’s thinking about behaviours
within the organisation. Source: Read more: http://businesscasestudies.co.uk/jaguar/creating-world-
class-performance-in-a-jaguar-assembly-plant/creating-a-highly-efficient-manufacturing-
site.html#ixzz3fxq2FyIh. With reference to the historical development of operations management,
answer the following questions.

 Examine the various operations issues and practices at Jaguar that tie in with the historical
perspective of operations management.
 Examine current practices in operations management at your company.
 Is your company moving towards world-class operations management? Discuss.
 Assess the area(s) your company is operating in.

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Changing business environment Prompting operations responses


 Increased cost-based  Globalisation.
competition.  Increased pressures.
 Higher quality expectation.  Information-based
 Demands for better service. technologies. Internet-based
 More choice and variety. integration of operations
 Rapidly developing activities.
technologies.  Supply chain relationship
 Frequently new management.
product/service introduction.  Customer relationship
 Increased ethical sensitivity. management.
 Environmental impacts are  Flexible working patterns.
more transparent.  Mass customisation.
 More legal regulation.  Fast time to market
 Greater security awareness. methods.
 Lean process design.
 Environmentally sensitive
design. Supplier
partnerships.
 Failure analysis.
 Business recovery planning.

Figure 2.4 Changes in the business environment are shaping a new operations
Source:
agenda. (Slack, Chamber and Johnson, 2010:11)

THINK POINT
What operational challenges is your organisation currently facing?
Critically discuss how you would go about resolving them. Present your resolutions in a short
power point presentation for management’s attention.

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2.5 GLOBALISATION
Two thirds of today’s businesses operate globally through markets, global operations, global financing,
and global supply chains. It takes the form of selling in foreign markets, producing in foreign lands,
purchasing from foreign suppliers, or partnering with foreign firms. Organisations go “global” to take
advantage of favourable costs, to gain access to international markets, to be more responsive to
changes in demand, to build reliable sources of supply, and to keep abreast of the latest trends and
technologies (Russel and Taylor, 2014). Heizer and Render, 2014, discuss eight reasons why domestic
businesses go “global”.

Eight reasons why domestic business go global


2.5.1 Reduction of Costs
International operations seek to take advantage of the tangible opportunities in reducing their costs.
Foreign countries have lower wage structures and lower direct and indirect labour cost. Less restrictive
government regulations on a wide variety of operations practices (e.g. environmental control, health,
safety regulations etc.) can reduce the costs of operations in a foreign country. Tax and tariff incentives
are additional reasons used to establish operations in a foreign country.

2.5.2 Reduce Risks


Globalisation has become easier and less hazardous for international operations because of
international trade operations. GATT, for example, seeks to reduce tariffs and promote conditions of fair
competition and increased investment opportunities by lowering barriers to create free flow of goods
across international borders.

2.5.3 Improving the Supply Chain


The supply chain can be improved by locating facilities in countries where unique resources are
available. These resources may include expertise, labour or raw materials.

2.5.4 Provision of Superior Goods and Services


Improved understanding of local conditions and differences in culture permits firms to customize
products and services to meet unique needs. Closeness to foreign customers helps to improve
response times to meet customers’ changing product and service requirements. It also offers a better
after-sales service.

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2.5.5 Establishing New Markets


As international operations require local interaction with foreign customers, suppliers and other
competitors, they are in a position to explore new and unique opportunities for new products or
services. Knowledge of these markets helps to increase sales and diversify their customer base. Global
operations also add production flexibility so that products and services can be switched between
economies that are booming and those that are not.

2.5.6 Improving Operations


Learning does not take place in isolation. The world is full of ideas and firms can learn from their
customers by allowing the free flow and exchange of ideas.

2.5.7 Attracting and Retaining Talented Employees


A Global operation is in a position to identify, attract and retain talented employees from across the
world. It needs people in all functional areas and areas of expertise worldwide. Global firms can recruit
and retain talented employees because they provide greater growth opportunities and insulation
against unemployment during times of recession.

2.5.8 Product Design and Process Technology


A basic product or service is designed, wherever possible, to fit global tastes. If local variation is
needed, it is handled as an option rather than as a separate product. Process technology is also
standardised globally (Schroeder et al., 2011). Failing trade barriers and the internet paved way for
globalisation. The World Trade Organisation (WTO) has opened up the heavily protected industries of
agriculture, textiles, and telecommunications, and extended the scope of international trade rules to
cover services and goods. The European Union requires that strict quality standards be met before
doing business with member countries. Strategic alliances, joint ventures, licencing arrangements,
research consortia, suppliers’ partnerships, and direct marketing agreements among global partners
have proliferated (Russel and Taylor, 2014).

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2.6 SUMMARY
Operations can be viewed as a transformation process that turns inputs into outputs or greater value.
Operations management is the study of processes directly related to the creation and distribution of
goods and services. Increasingly these operations have been taking place outside of enterprise
boundaries regarded as traditional. This is the reason why managers need to understand that they
need to manage operations not only for their firms but on a global scale. Therefore, they ought to
develop skills in coordinating operations across the global supply chain (Russel and Taylor, 2014).

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter on operations management, source
and work through the textbook chapters and journal articles listed in the “Essential
Reading” list at the beginning of this chapter. It is essential that you read all of the textbook chapters
and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter on an “Global operations management” reflect on
the following questions. (To adequately address these questions you will need to have
completed all the ‘essential reading’ listed at the beginning of this chapter.)
ACTIVITY 1
Benchmark your organisation’s performance with both local and international competitors in the
following categories:
Profit
Market Share
Number of Staff
Technology

ACTIVITY 2
Identify how changes in the external environment may affect the OM strategy for a company.
For example, what impact are the following factors likely to have on OM strategy?

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a. The occurrence of a major storm or hurricane.


b. Terrorist attacks of 9/11/01.
c. The much discussed decrease in the quality of American primary and secondary
school systems.
d. Trade Legislation such as WTO and NAFTA and changes in tariffs and quotas.
e. The rapid rate at which the cost of health insurance is increasing.
f. The Internet.
ACTIVITY 3
Identify how the changes in the internal environment affect a company’s OM. For example,
what impact are the following factors likely to have on OM strategy?
a. The increased use of Local and Wide Area Networks (LANs and WANs).
b. An increased emphasis on service.
c. The increased role of women in the workplace.
d. The seemingly increasing rate at which both internal and external environments
change.
ACTIVITY 4
Operations managers are called upon to support the organisation's strategy. OM does this with
some combination of one of three strategies. What are these three strategies?

Solutions to Reflection Questions


Activity 2
a. A major storm or hurricane may have considerable impact on a company’s facilities and scheduling.
Flooding and wind damage can make a facility unusable or significantly reduce its capacity. Stocks
of raw materials, especially agricultural products, might be damaged or in short supply. The long-
term availability of some materials might be significantly reduced. There may be a shortage of
important services during the recovery. For example, the demand for roofers and builders is high
after a major storm and they would like to be able to rapidly increase their capacity to handle the
higher demand.
b. Terrorist activity has forced organisations to rethink, and in many cases expand, their security
systems. Firms have also had to reevaluate their supply networks and consider increasing their
inventory safety stock. They may also reassess the risks of foreign locations and expansion.

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c. A decrease in the skill levels of Americans entering the labour market requires that organisations
place more emphasis on training, turn to automation to obviate the need for human labour, and hire
from outside the United States.
d. WTO and NAFTA changed the rules for trading, opened new markets, and in some instances,
changed the role of labour versus capital (where labour is especially low cost, emphasis often shifts
from the use of capital to the use of labour).
e. The increasing cost of health insurance adds significantly to the cost of labour. Some large US
organisations are passing on this increased cost to the employees or reducing other parts of the
benefit package in response to these pressures.
f. The Internet has promoted globalisation of markets, and eliminated barriers of geography and time.

Activity 3
a. The increased use of LANs and WANs has, among other things, enabled new organisational
structures, the movement of the locus of responsibility further down the organisational hierarchy
(elimination of middle management), and the increasing practicality of JIT operations, mass
customisation, etc.
b. The increased emphasis on service has, among other things, fostered an increased information or
information technology content of many products. Firms are also increasing training because so
much of the service economy is dependent upon individual competence.
c. The increased role of women in the workplace is requiring an increased emphasis on the creation
and communication of appropriate human resource policies. It may also be fostering the creation of
flexible work schedules and, to a lesser degree, telecommuting.
d. Some companies seem to be adopting the perspective that their main problem is now the
“management of change” as opposed to the management of a specific process or product. If
nothing else, the management of change is becoming a formal part of the manager’s responsibility.

Activity 4
OM managers support the firm's strategy by achieving a competitive advantage through some
combination of differentiation, low-cost leadership, and response.

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CHAPTER 3: PRODUCTIVITY, SUPPLY CHAIN STRATEGY


AND COMPETITIVENESS
Learning Objectives

 Discuss how to improve productivity.


 Calculate and interpret productivity ratios for your organisation.
 Discuss supply chain management.
 Discuss the role of the purchasing department.
 Evaluate whether to make or buy a product.
 Analyse and comment on materials management practices.
 Explain and apply three strategic approaches to competitive advantage.

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ESSENTIAL READING
Students are required to read ALL of the Textbook Chapters and journal articles
listed below.

Textbooks:
 (International Textbook Relevant Chapter Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 1, pp. 49-
54.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 1, pp.12-25.

 (South African Textbook – Relevant Chapter / Pages)


Grütter (2010). Introduction to Operations Management. A Strategic Approach. First edition,
Pearson Education, South Africa, Cape Town. Chapter 1, pp.1-20.

Journal Articles & Reports


 Pettersson and Segerstedt (2013). To Evaluate cost Savings in a Supply Chain: Two
Examples from Ericsson in the Telecom Industry. Journal of Operations and Supply Chain
Management, Vol. 6, no.3, pp. 94 -102.
 Ngai, and Gunasekaran (2004). Virtual supply-chain management. Journal of Production
Planning and Control, Vol. 15, no. 6, pp. 584-595.
 Argarwal and Tyagi (2014). Supply Chain Challenges among BRICS Countries.
International Journal of Engineering Research and Applications, Vol. 4, no. 4, pp. 316-
318.
 Hultman, Hertz, Johnsen and Johnsen (2009). Global Sourcing Development at IKEA – a
Case Study. Paper presented for the 25th IMP Conference.

These articles are available on Google and at the Mancosa Library.

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3.1 INTRODUCTION

Creation of goods and services requires changing resources into goods and services. This change
ought to be efficient in order to be more productive (Heizer and Render, 2014:49). The operations
manager’s job is to increase levels of efficiency and thus add more value to goods and services.

3.2 PRODUCTIVITY

The difference between production and productivity:


Production is the conversion of raw materials into finished goods that can be used by the customer,
whereas productivity is a ratio of Output.

Productivity of land
By improving methods of planting, fertilisation and harvesting of crops, we can increase the harvest
tonnage from 1 to 1.5 tons per hectare. We can then say that the productivity of the land will have
increased by 50%.

Productivity of materials
A team of skilled carpenters with accurate equipment uses 4 metres of timber to construct a dining
room suite. A second group of carpenters uses 4.5 metres of timber to produce the same dining room
suite. Which group has the higher material productivity?

Productivity of machines
A forming press has a process time of 7 minutes and a load and unload time of 3 minutes. Therefore for
every hour 6 units can be produced. If we had to improve the method of loading and unloading, we may
be able to reduce this time to 1 minute. We can now produce 7.5 units per hour. Our machine
productivity has now increased by 25% (7.5/6).

Productivity of labour
A bricklayer can lay 500 bricks per day. After improving the method, he can now lay 700 bricks per day.
This is an increase of 40%.

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 ACTIVITY
Identify three BRICS member countries. For each country identify any major company inputs and
outputs to their production/operations system.

Example:
Bakers Bread produces 10 000 loaves of bread per day. The factory has 500 workers, each working
8 hours per day.
Remember our definition of productivity - Output
Input

Therefore our output is bread which equals 10 000 loaves


And our input is man hours which is 500 workers x 8 hours per day = 4000 man hours.

So if you calculate 10 000


4 000
the answer is = 2.5

This means nothing at this stage, unless you have something to compare it with e.g.
Bakers Bread plans to produce 12 500 loaves of bread per day using 480 workers each working
8 hours per day.
Therefore the Plan Productivity is 12 500
3840
= 3.26

3.26-2.5
Actual versus plan = x 100% = 30.4 % increase
2.5

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 ACTIVITY
Calculate the productivity using the information below.

1996 1997 1998 1999


Fridges produced per annum 2 508 000 3 207 000 3 759 000 4 056 000

No. of workers 200 250 350 400

Hours per day 8 8 8 8

Working days per year 250 252 251 253

Firstly let us plot our production figures on a graph.


 Analyse the graph and comment on our performance.
 Now calculate the productivity.
 Plot the productivity on a separate graph.
 Now analyse the performance.
 What can you conclude?

Solution:
Output 2 508 000 3 207 000 3 759 000 4 056 000
Input 40 0000 504 000 702 800 809 600
Productivity 6.27 6.36 5.35 5.01

 ACTIVITY
Calculate the productivity of your department.

The next step is to now calculate the productivity of your own departments, plot the results and then
comment on the performance.

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Remember by using productivity ratios, you will be able to identify problem areas and thereby take any
action if necessary.
3.3 FACTORS THAT AFFECT PRODUCTIVITY
Several factors can affect productivity and these include: Methods; Capital; Quality; Technology and
Management.
You have to type a lengthy report. If you are a typist of average speed, you can possibly complete three
pages per hour. How then can you improve your productivity?

 Enrol on a short course to improve your typing skills.


 Replace your typewriter with a computer.
 Outsource the typing.

A common mistake that people make is that they believe workers are the main determinant of
productivity. According to that theory, productivity gains are achieved by getting employees to work
harder. However, many of the productivity gains have come from technological improvements e.g. paint
rollers, power lawn mowers, copying machines, microwave ovens, washing machines, calculators,
computers, email, and many other electric and electronic items/goods.

3.4 IMPROVING PRODUCTIVITY


There are a number of ways to improve productivity:
 Develop productivity measures for all operations; measurement is the first step in managing
and controlling an operation.
 Consider the system as a whole in deciding which operations to concentrate on. Find
bottleneck operations in the system and try to improve them.
 Develop methods for achieving productivity improvements such as getting ideas from the
workers, studying how other companies have improved productivity and re-examining the way
work is done.
 Establish reasonable goals for improvement.
 Obtain support of top management.
 Measure improvements and publicise them.

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3.5 SUPPLY–CHAIN MANAGEMENT


Supply-chain management is the integration of the activities that procure materials, transform them into
products and deliver them to the customer via a distribution system. Supply-chain management
includes:
 Transportation
 Credit and cash transfers
 Suppliers
 Distributors and banks
 Accounts payable and receivable
 Warehousing and inventory levels
 Order fulfilment
 Forecasting
 Production

As companies strive to improve their competitiveness, quality, cost reductions and speed to market,
they place added emphasis on supply-chain management. The key to effective supply-chain
management is to make suppliers partners.

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Figure 3.1 Supply Chain Model


Source: Heizer and Render (2014:468)

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Table 3.1 Organisation’s overall strategy

LOW-COST STRATEGY RESPONSE STRATEGY DIFFERENTIATION


STRATEGY

Supplier’s goal Supply demand at lowest Respond quickly to Jointly develop


possible cost changing requirements products and options

Primary Select primarily for cost Select for capacity, speed Select for product
selection and flexibility development skills
criteria
Maintain high utilisation Invest in excess capacity Develop modular
Process and flexible processes processes
characteristics
Minimise inventory Develop responsive Minimise inventory to
Inventory throughout the chain systems with buffer stock avoid obsolescence
characteristics
Shorten lead times Reduce production lead- Reduce
Lead time time development lead-
characteristics time
Maximise performance and Reduce set-up times
Product design minimise costs Use modular design
characteristics

Source: Heizer and Render (2014:470)

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3.6 GLOBAL SUPPLY-CHAIN ISSUES


When companies enter the global market, expanding their supply chains becomes a strategic
challenge. Distribution systems in certain countries may be inferior or unreliable. Additionally,
companies may be faced with tariff quotas. Furthermore, market instabilities, such as the devaluation of
the rand, are common in newly emerging industrial economies.

Heizer and Render (2014:475) suggests that supply-chains in a global environment must be:

 Flexible enough to react to sudden changes in parts availability, distribution or shipping


channels, import duties and currency rates.

 Able to use latest computer and transmission technologies to manage the shipment of parts.

 Staffed with local specialists to handle duties, trade, freight, customs and political issues.

THINK POINT
Discuss the supply-chain strategy you would use if your company were to enter the global market.

3.7 PURCHASING
Purchasing can be defined as the acquisition of goods and services. For both goods and services, the
cost of purchases as a percent of sales is often substantial. Since such a huge portion of revenue is
devoted to purchasing, an effective purchasing strategy is vital. Purchasing provides a major
opportunity to reduce costs and increase profit margins. The objective of purchasing activity is:

 To help identify the products and services that can be obtained externally.
 To develop, evaluate and determine the best supplier, price and delivery for those products
and services.

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3.8 MAKE-OR-BUY DECISIONS


This entails choosing between producing a component or service or purchasing it from an outside
source. The purchasing department’s role is to evaluate alternative suppliers and provide current,
accurate and complete data relevant to the buy alternative. Table 3.2 highlights considerations for the
make-or buy decision.

Table 3.2 Make-or-buy decisions

Reasons for making Reasons for buying


 Maintain core competence.  Frees management to deal with its
 Lower production cost. primary business.
 Unsuitable suppliers.  Lower acquisition costs.
 Assure adequate supply (quantity or  Preserve supplier commitment.
delivery).  Obtain technical or management ability.
 Utilise surplus labour or facilities.  Inadequate capacity.
 Obtain desired quality.  Reduce inventory costs.
 Remove supplier collusion.  Ensure alternative sources.
 Obtain unique item that would entail a  Inadequate managerial or technical
prohibitive commitment for a supplier. resources.
 Protect personnel from a layoff.  Reciprocity.
 Protect proprietary design or quality.  Item is protected by a patent or trade
 Increase or maintain the size of the secret.
company.
Source: Heizer and Render (2008:437)

 ACTIVITY
Would it be easier for you to make or buy in terms of your operation?

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3.9 SUPPLY-CHAIN STRATEGIES


Heizer and Render (2014:471) maintain the following strategies being used:

Many Suppliers
With the many-supplier strategy, the supplier responds to demands and specification of a ‘request for
quotation’, with the order usually going to the lowest bidder. This strategy plays one supplier against
another. Suppliers tend to compete aggressively with each other. This approach holds the supplier
responsible for maintaining the necessary technology, expertise, quality, cost and delivery schedules.

Few Suppliers
A strategy of few suppliers implies that rather than looking for short-term attributes, such as low cost, a
buyer is better off forming a long-term relationship with a few dedicated suppliers. Using few suppliers
can create value by allowing suppliers to have economies of scale. Few suppliers, each with large
commitment to the buyer, may also be more willing to participate in JIT systems, as well as provide
innovations and technological expertise.

Vertical Integration
This simply means developing the ability to produce goods or services previously purchased or actually
buying out (acquiring) a supplier or distributor. This strategy has the advantage of improving research
and development, quality and product flexibility.

Keiretsu Networks
Manufacturers sometimes offer financial support to their suppliers through loans. The supplier then
becomes part of the company coalition known as Keiretsu. Members of Keiretsu are assured long-term
relationships and are therefore to function as partners.

Virtual Companies
Virtual companies rely on a variety of supplier relationships to provide services on demand. These
companies have fluid; moving organisational boundaries that allow them to create unique enterprises in
order to meet changing market demands. These relationships may provide a variety of vendor services
such as doing the payroll, recruiting personnel, designing products, providing consulting services,
manufacturing components, conducting tests or distributing products.

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3.10 VENDER SELECTION


A firm that decides to buy components instead of making them must select suitable vendors. Vendor
selection considers numerous factors, such as:

 Inventory and transportation costs


 Availability of supply
 Delivery performance
 Quality and reputation of suppliers
 Financial strength of the supplier
 Manufacturing range
 Technical assistance
 After-sales service
 Labour/trade relations
 Packaging
 Warranties and guarantees

3.11 MATERIALS MANAGEMENT


The purpose of materials management is to obtain efficiency of operations through the integration of all
material purchases, movement and storage activities. If transportation and inventory costs are high, the
emphasis should be placed on materials management. Due to the high costs of moving materials, firms
constantly evaluate their means of distribution.
Companies usually move materials through the following channels:
Road
Trucks move a large amount of materials. Companies have put pressure on truckers to pick up and
deliver on time, with no damage to goods. Trucking firms are using computer technology to monitor
driving, weather patterns, loading and unloading methods, reducing fuel consumption and finding the
most effective routes.

Rail
Containerisation has made inter-modal shipping of truck trailers on railroad flat cars a popular means of
distribution. With the growth of JIT, rail transportation has suffered a setback because small-batch
manufacturers require frequent, smaller shipments.

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Airfreight
Seldom used because of the high cost. It is used mainly for national or international movement of
lightweight items such as medical and emergency supplies, flowers, documentsetc. Airfreight offers
speed and reliability.

Shipping
Shipping remains one of the oldest means of freight transportation. The usual cargo on ships are bulky
products such as iron-ore, grains, cement, coal, chemicals and petroleum products.

Pipelines
Pipelines are an important form of transporting crude oil, natural gas and other petroleum and chemical
products.

 ACTIVITY
Comment on the method of transportation you are currently using. Do you think this is the best mode of
transport? Suggest practical alternatives, if any.

3.12 ACHIEVING COMPETITIVE ADVANTAGE THROUGH OPERATIONS


Grütter (2010) argues that the term competitiveness is understood to imply different things in different
fields. He goes on to say that an organisation that does better at value addition for its customers may
not necessarily be competitive if it does so at a high cost, even if they made the right products for the
right market. Hence an organisation has to add value while being productive at the same time.

As discussed by Heizer and Render (2014:71) each of the three strategies, that is, differentiation, low
cost and response do provide opportunities for operations managers to achieve competitive advantage.
Competitive advantage means creating a system that has a unique advantage over other competitors.
The firm has to create value for customers in an efficient and sustainable way. Operations managers
can use these strategies in their pure form or in combination.

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Competing on Differentiation – Heizer and Render (2014:71) give an example of Safeskin Corporation
the manufacturer of latex exam gloves as a good example of differentiation. Latex has differentiated
itself and its products by producing gloves designed to prevent allergic reactions about which doctors
were complaining. When direct competitors caught up Safeskin developed another product, the
hypoallergenic gloves. They then added texture to their gloves. They followed this up with the creation
of synthetic disposable gloves for those allergic to latex thus constantly staying ahead of competitors.

Differentiation is preoccupied with uniqueness. Imagination is the only limit to expanding uniqueness.
Competing on Cost- Heizer and Render (2014) further explain using the example of Southwest Airlines
as a good example of low cost approach. Southwest Airlines has fulfilled the need for low cost and what
are called shop-hop flights. It has used secondary airports and terminals, first come first serve seating,
few fare options smaller crews flying more hours, snacks only or even no meal at flights and no
downtown ticket offices. They have also have matched capacity and demand very well. Low-cost
leadership is premised on achieving maximum value as defined by the customer. This means that each
of the ten operations management decisions has to be re-examined constantly and consistently. The
main focus is to reduce cost while meeting customer expectation.

Competing on Response- Heizer and render (2014:73) argue that this strategy is based on flexibility,
reliability as well as quick response. Response is therefore defined as a set of values that relating to
rapid, flexible, and reliable performance. A good example of this is Hewlett-Packard. They have
demonstrated flexibility in their designs and volume changes in the volatile world of personal
computers.

3.13 SUMMARY
To compete effectively, firms need to be more productive by maximising efficiency and they need to
adopt one or a combination of strategies. The professional manager is responsible for the effective use
of resources As much as the challenge is great, the rewards would benefit the entire society.
Manufacturing organisations focus on efficient production, as the equipment is usually organised in
terms of production. Conversely customers are involved in the service delivery process, so service
operations need to rely on their staff to do the right things the first time because the customer is often
aware of how the service is performed.

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Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)

ACTIVITY 1
Mance Fraily, the Production Manager at Ralts Mills, can currently expect his operation to
produce 1000 square yards of fabric for each ton of raw cotton. Each ton of raw cotton requires
5 labour hours to process. He believes that he can buy better quality raw cotton, which will
enable him to produce 1200 square yards per ton of raw cotton with the same labour hours.

What will be the impact on productivity (measured in square yards per labour-hour) if he
purchases the higher quality raw cotton?
ACTIVITY 2
C. A. Ratchet, the local auto mechanic, finds that it usually takes him 2 hours to diagnose and
fix a typical problem. What is his daily productivity (assume an 8 hour day)? Mr. Ratchet
believes he can purchase a small computer trouble-shooting device, which will allow him to find
and fix a problem in the incredible (at least to his customers!) time of 1 hour. He will, however,
have to spend an extra hour each morning adjusting the computerised diagnostic device. What
will be the impact on his productivity if he purchases the device?

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ACTIVITY 3
Joanna French is currently working a total of 12 hours per day to produce 240 dolls. She thinks
that by changing the paint used for the facial features and fingernails that she can increase her
rate to 360 dolls per day. Total material cost for each doll is approximately R3.50; she has to
invest R20 in the necessary supplies (expendables) per day; energy costs are assumed to be
only R4.00 per day; and she thinks she should be making R10 per hour for her time. Viewing
this from a total (multifactor) productivity perspective, what is her productivity at present and
with the new paint?
ACTIVITY 4
How would total (multifactor) productivity change if using the new paint raised Ms. French’s
material costs by R0.50 per doll?
ACTIVITY 5
If she uses the new paint, by what amount could Ms. French’s material costs increase without
reducing total (multifactor) productivity?

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Solutions to Reflection Questions


Activity 1
1000 sq yds
Current labor productivity =  200 sq yds per hour
1 ton*5 hours

1200 sq yds
New labor productivity =  240 sq yds per hour
1 ton * 5 hours

Productivity improves 20% = (240 - 200) / 200 = 2

Activity 2

8 hours per day


Current productivity =  4 problems per day
2 hours per problem

7 hours per day


Productivity with computer =  7 problems per day
1 hour per problem

74 3 
Productivity improves 75%    .75 
 4 4 

Activity 3

Currently Using the new paint

Labour 12 hrs * R10 = R120 12 hrs * R10 = R 120

Material 240 * R3.50 = R840 360 * R3.50 = R1260

Supplies = R 20 = R 20

Energy =R 4 =R4

Total Inputs = R984 = R1404

Productivity 240/984 = 0.24 360/1404 = .26

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Activity 4

If the material costs increase by R0.50 per doll:

Using the new paint

Labour 12 hrs * R10 = R 120

Material 360 * R4.00 = R1440

Supplies = R 20

Energy =R4

Total Inputs = R1584

Productivity 360/1584 = 0.23

Activity 5

From the answer to Activity 3 we know the following:

Currently Using the new paint

Labour 12 hrs * R10 = R120 12 hrs * R10 = R 120

Material 240 * R3.50 = R840 360 * R3.50 = R1260

Supplies = R 20 = R 20

Energy =R 4 =R 4

Total Inputs = R984 = R1404

Productivity 240/984 = 0.24 360/1404 = .26

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We want to know how high the material cost could go, using the new paint, before the productivity
drops to the current level of 0.24. In mathematical terms we make the material cost a variable (X), set
the new multifactor productivity value to the current level, 0.24, and solve for X.

360 / ((R12x10) + 360 R(X) + R20 + R4) = 0.24


360 = 0.24 (R120 + 360R(X) + R20 + R4)
360 = R28.8 + 86.4R(X) + R4.8 + R.96
325.44 = 86.4R(X)
R(X) = 325.44/86.4 = R3.7666 = R3.77

It follows then that the new paint could raise materials cost by no more than
approximately R0.27 (the difference between R3.77 and R3.50) before Ms. French
would experience a decrease in multifactor productivity.

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CHAPTER 4: PROCESS SELECTION AND PROCESS


MEASURES

Learning Objectives

After working through this chapter you should be able to:


 Evaluate strategic options in processes planning, including whether or not to outsource.
 Describe and differentiate among different types of production processes.
 Understand the effect of volume and standardisation on process selection.
 Appreciate the effect of volume and standardisation on process selection.
 Use simple flowcharting tools to improve everyday processes.
 Describe process strategies.
 Use process metrics to measure process effectiveness.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbooks – Relevant Chapter Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 7, pp.
308-319.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 6, pp.178-185.

(South African Textbook – Relevant Chapter / Pages)


 Grütter (2010). Introduction to Operations Management. A strategic Approach. First
edition,
Pearson Education, South Africa, Cape Town. Chapter 4, pp. 74-84.

Journal Articles & Reports


 Shu et al. (2010). Dynamic performance measures for tools with multi-state wear processes
and their applications for tool design and selection. International journal of production research,
Vol. 48, no.16, pp. 4725-4744.

These articles are available on Google and at the Mancosa Library.

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4.1 INTRODUCTION
According to Russel and Taylor (2014:178), a process is a group of related tasks with specific inputs
and outputs. Processes exist to create value for the customer, the stakeholder, or society. Process
design defines what tasks need to be done and how they are to be coordinated among functions,
people, and organisations.

Process Selection then is the development of the process necessary to produce the designed product.
Process strategy is an organisation’s overall approach for physically producing goods and services.
Process decisions should reflect how the firm chooses to compete in the marketplace, reinforce product
decisions, and assist with the achievement of organisational goals.

A firm’s process strategy defines the following:


Vertical integration: the extent to which the organisation will produce the inputs and control the
outputs of each stage of the production process.
Capital intensity: the mix of capital (i.e. equipment, automation) and labour resources used in the
production process.
Process flexibility: the ease with which resources can be adjusted in response to changes in demand,
technology, products or services and resource availability.
Customer involvement: the role of the customers in the production process.

4.2 PROCESS PLANNING


Process planning entails determining how a product will be produced or a service provided. This
includes deciding what will be made in house or what will be outsourced. The organisation has to select
processes, and develop and document the specifications for manufacture and delivery.

Outsourcing – an organisation that sells products, assembles the product, makes all parts, and
extracts the raw material is entirely vertically integrated. However, most companies cannot or will not
make all the parts. The decision whether to make parts in-house or outsource is based on the
consideration of the following factors (Russel and Taylor (2014:178-179):
I. Cost
A determination should be made whether it will be cheaper to buy the item from suppliers or to make it
in-house. The cost of buying includes the buying price and the transport cost. The costs of coordinating
production including inventory costs can be very high as well.

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II. Capacity
Companies that operate at below capacity may want to produce the parts themselves since they do not
have enough capacity to accommodate production/manufacturing. However, at times available capacity
may not be ample to make all the products. Volatile products should rather be made in-house and
steady ones purchased from outside.
III. Quality
The ability to provide quality parts consistently is an important consideration in the outsourcing
decision. It is much easier to control the quality of goods if they are made in-house. But supplier
partnerships and involvement in designs can improve the quality of supplied parts.
IV. Speed
Buying from a supplier far from the organisation can end up not being a cost saving. Sometime smaller
suppliers can be very flexible and can therefore adapt quickly to changing circumstances. If speed is
reliable then it is effective.
V. Reliability
Reliability in terms of time and quality is crucial. Missed deliveries or even incorrect deliveries can affect
manufacturing negatively. Many companies also require that suppliers meet quality standards. The
most common applied quality standard is ISO 9000. Some organisations pay huge penalties for poor
quality. Expertise Companies good at making or even designing something may want to make parts in-
house. Coca-Cola would not like to release their trade secret to other organisations so they would
rather make the product themselves.

4.3 PROCESS SELECTION


The next step after process planning is to select the production process for the items that will be
produced in-house. Production processes can be categorised as follows (Russel and Taylor,
2014:180):
I. Projects
Projects take a long time to complete, involve a large investment of funds and resources and produce
one item at a time to consumer order. Some examples are construction projects, shipbuilding, new-
product development, and aircraft manufacturing.
II. Batch production
Batch production processes have many different jobs through the production systems at the same time,
in groups of batches. Products are thus made to customer order. This type of production process
produces low volumes with fluctuating demand.

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III. Mass production


Mass production produces large volumes of a standard product for a mass market. Product demand is
stable and product volume is high. Automobiles are among goods that are mass produced, televisions,
personal computers, fast food and most consumer goods.
IV. Continuous production
Continuous production is used for very high-volume commodity products that are mostly very
standardised. The system is highly automated and is typically in operation continuously 24 hours a day.
Examples include refined oil, treated water, paints, chemicals, and some foodstuff. The process that is
selected to create the product or service has to be consistent with product and service characteristics
respectively. The most important characteristic for product and service selection are standardisation
and demand volume. Figure 4.1 shows the product-process matrix. The best process strategy is found
on the diagonal of the matrix. Companies or products that are off the diagonal have either made poor
process choices or have found a means to execute a competitive advantage (Russel and Taylor, 2014).

Figure 4.1 Product-Process Matrix


Source: (Russel and Taylor, 2014:181)

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Table 4.1
Project Batch Mass Production Continuous
Production Production
Type of Product Unique Made-to-order Made-to-stock Commodity
(customised) (standardised)

Type of customer One-at-a -time Few individual Mass market Mass market
customers
Product demand Infrequent Fluctuates Stable Very stable
Demand volume Very low Low to medium High Very high
No. of different Infinite variety Many, varied Few Very few
products
Production system Long-term project Discrete, job Repetitive, Continuous,
shops assembly lines process industries
Equipment Varied General purpose Special-purpose Highly automated
Primary type of Specialised Fabrication Assembly Mixing, treating,
work contracts refining
Worker skills Experts, Wide range of Limited range of Equipment
craftspersons skills skills monitors

Advantages Custom work, Flexibility, quality Efficiency, speed, Highly efficient,


latest technology low cost large capacity,
easy of control
Disadvantages Non-repetitive, Costly, slow, Capital Difficult to change,
small customer difficult to manage investment, lack of far-reaching
base, expensive responsiveness errors, limited
variety
Examples Construction, Machine shops, Automobiles, Paint, chemicals
shipping, print shops, televisions,
spacecraft bakeries, computers, fast
education food

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4.4 PROCESS SELECTION WITH BREAKEVEN ANALYSIS

Russel and Taylor (2014) indicate that many quantitative techniques are available for selecting a
process. One that basis its selection decision on the cost trade-off associated with demand volume is
the breakeven analysis. The components of breakeven analysis are volume, cost, revenue and profit.
Volume refers to the level of production, usually expressed as the number of units produced and sold.
We assume that the number of units produced can be sold.

Cost is divided into two categories: fixed and variable. Fixed costs remain constant regardless of the
number of units produced, such as plant and equipment and other elements of overhead costs.
Variable costs vary with the volume of units produced, such as labour and material. The total cost of a
process is the sum of its fixed costs and variable costs. The variable cost is defined as volume time per
unit variable cost.

Revenue on per unit basis is simply the price at which an item is sold. Total revenue is price multiplied
by volume sold. Profit is Total revenue minus total cost. The components can be expressed as an
equation.
Total cost = fixed cost + total variable cost
TC = cf +vcv
Total revenue = volume x Price
TR = vp
Profit = total revenue – total cost
Z = TR – TC
= vp – (Cf + vcv)

Where Cf = fixed cost


V = volume (i.e., number of units produced and sold)
cv= variable cost per unit
p = price per unit

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In selecting a process, it is useful to know at what volume of sale and production we can expect to earn
a profit. We want to make sure that the cost of producing a product does not exceed the revenue we
will receive from the sale of the product. By equating total revenue with total cost and solving for v, we
can find the volume at which profit is zero. This is called the breakeven point. At any volume above the
breakeven point, we will make a profit. A mathematical formula for the breakeven point can be
determined as follows:

TR = TC
vp = cf + vcv
vp - vcv = cf
v(p - cv) = cf
Cf
v = 𝑝−𝐶𝑣

Example 1 – Break even Analysis


Travis and Jeff own Up Right Paddlers, a new start-up company with the goal of designing, making,
and marketing stand-up paddle boards for streams and rivers. A new fitness craze, stand-up paddle
boards are similar to surfboards in appearance, but are used by individuals to navigate down rivers in
an upright position with a single long pole (or paddle), instead of sitting in tubes or rafts and floating
down. The boards are constructed from heavy-duty raft material that is inflatable, rather than the
fibreglass material used in surfboards.
Unlike surfboards that market for $500 to $1 000 each, paddle boards are typically sold for between
$100 and $400. Since Travis and Jeff are just starting out and the demand for paddle boards on the
East Coast has not been firmly established, they anticipate selling their product for $100 each. Travis
estimates the fixed cost for equipment and space will be $20 000, and the material and labour costs will
run $50 per unit.
What volume of demand will be necessary for Travis and Jeff to break even on their new venture?
(Russel and Taylor, 2014:182).

Solution
Fixed cost = cf = $2000
Variable costs = cv =$50 per load
Price = p = & $100 per board
Cf 2000
V = = = 40 units
p-Cv 100-50

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The solution can also be shown graphically as in the Figure 4.2.

Dollars

$5,000
Total cost line

$4,000

$3,000

$2,000
Total revenue
$1, line
0000

10 20 30 40 50 Units

Figure 4.2 Breakeven analysis Breakeven point


Source: (Russel and Taylor, 2014:183)

Example 2 – Using break even analysis to guide process selection


When evaluating different degrees of automation for instance, breakeven analysis is very useful. More
automated processes have higher fixed costs but lower variable costs. The best processes depend on
the anticipated volume of demand for the product and the trade-offs between fixed and variable costs.
Jeff, the more optimistic of the two owners of UpRight Paddlers, believes that demand for paddle
boards will exceed the breakeven point of 40 units calculated in example 1.

He proposes spending $10 000 in fixed costs to buy more automated equipment that would reduce the
materials and labour cost to $30 per board.
The boards would sell for $100, regardless of which manufacturing process is chosen. Compare the
two processes and determine for what level of demand each process would be preferred. Label Travis’s
proposal as Process A and Jeff’s proposal as Process B (Russel and Taylor, 2014).

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Solution
Process A Process B
$2,000 + $50v = $10,000 + $30v
$20v = $8000
v = 400 units

If demand is less than or equal to 400 boards, the alternative with the lowest fixed cost, Process A
should be chosen. If demand is greater than or equal to 400 boards, the alternative with the lowest
variable cost, process B will be selected. Our decision can thus be confirmed be examining the next
graph. Note that because the boards will be sold for $100 per piece regardless of which process is
used to make them, no revenue line is needed (Russel and Taylor, 2014).

$45,000
Total Cost of
$40,000 Process A

$35,000
Process A
$30,000
Process B
Total Cost of
$25,000
Process B

$20,000

$15,000 Choose
$10,000 Process B

$5,000 Choose
Process A
$0

0 200 400 600 800

Point of Indifference = 400 units


Figure 4.3 Break even analysis
Source: (Russel and Taylor, 2014:184)

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4.5 PROCESS ANALYSIS


Heizer and Render (2014:315) advises that when analysing and designing processes to transform
resources into goods, the following questions should be asked:

 Is the process that is designed to achieve competitive advantage in terms of differentiation,


response or low cost?
 Does the process eliminate steps that do not add value?
 Does the process maximize customer value as perceived by the customer?
 Will the process win orders?

Heizer and Render (2014:315-318) highlight the following tools that can be used to understand the
complexities of process analysis and design:

Flow Diagrams
This is a schematic drawing of the movement of people, materials or product. These diagrams are
useful in understanding the analysis and communication of a process. An example of a flow diagram is
depicted below:

Frame tube Frame-building Frame Hot-paint


bending work cells machining frame painting
THE ASSEMBLY LINE
TESTING Engines and
Incoming parts
28 tests transmissions
From Milwaukee
on a JIT arrival
Air cleaners Oil tank work cell schedule

Fluids and mufflers Shocks and forks

Fuel tank work cell Handlebars

Wheel work cell Fender work cell


Roller testing
Crating

Figure: 4.4 Example of a Flow Diagram


Source: (Heizer and Render, 2014:306)

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Time-function Mapping
This is similar to a flow process chart, but with time added to the horizontal axis. With time-function
mapping, notes indicate the activities and arrows indicate the flow direction, with time on the horizontal
axis.
(a) “Baseline” Time Function Map

Order Receive
Customer product product

Process
Sales order

Production Wait
control

Plant A Print

Warehouse Wait Wait Wait

Plant B Extrude

Transport Move Move

12 days 13 days 1 day 4 days 1 day 10 days 1 day 0 day 1 day


52 days

Figure 4.5 “Baseline” Time function map.


Source: (Heizer and Render, 2014:316)

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(b) “Target” Time-function Map

Order Receive
Customer
product product

Process
Sales order

Production
control Wait

Plant Print Extrude

Warehouse Wait

Transport Move

1 day 2 days 1 day 1 day 1 day


6 days

Figure 4.6 “Target” Time function map.


Source: Heizer and Render (2014:316)

Value-stream Mapping
Helps managers understand to add value in the flow of material and information through the production
process. Value-Stream Mapping (VSM) takes into account not only the process but also the
management decisions and information systems that support the process.

Process Charts
Process charts use symbols and sometimes time and distance to provide an objective and structured
way to analyse and record activities that make up a process. They allow you to focus on value-added
activities.

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Service Blueprinting
A process analysis technique is one that that lends itself to a focus on the customer and the provider’s
interaction with the customer. An example of a Service blueprint is shown below:

Personal Greeting Service Diagnosis Perform Service Friendly Close


Level Customer arrives
#1 for service Customer departs

Customer pays bill


Determine Notify
Warm greeting specifics customer
and obtain No and recommend
service request an alternative
Standard provider
request Can
Level service be
#2 done and does No
Direct customer customer
to waiting room approve? Notify
customer the
car is ready

Yes Yes
Perform
Level required work
#3

Potential failure point


Prepare invoice

Figure 4.7 Example of a service blueprint

4.6 PROCESS STRATEGIES


Heizer and Render (2011:284) argues that there are basically four process strategies that an
organisation can use, and they are:
1. Process focus
2. Repetitive focus
3. Product focus
4. Mass Customisation

Process Focus
According to Heizer and Render (2014:308-311), almost 75% of all global production is devoted to
making low-volume, high-variety products in a job shop environment. Such facilities are organised
around performing processes. In a factory, these processes might be departments such as welding,
grinding, assembly and painting. In an office environment, the processes include accounts payable,
sales and salaries department.

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In a restaurant, it may be the bar, kitchen, grill and bakery. Such facilities are process-focused in terms
of equipment, layout and supervision. They provide high degrees of product flexibility. Each process is
designed to perform a wide variety of activities and to handle frequent changes. Therefore they are
sometimes called intermittent processes. These facilities have high variable costs with extremely low
utilisation of facilities.

Repetitive Focus
Repetitive processes use modules, which are parts or components that have been previously prepared.
The repetitive process line is usually an assembly-line producing goods such as cars and household
appliances amongst other things. It is more structured and therefore has less flexibility than a process-
focused facility. Fast food outlets are examples of repetitive processing. There is a certain amount of
pre-processing done e.g. meat, cheese, sauce, onions are prepared in advance.

Product Focus
High-volume, low variety processes are referred to as product focus. The facilities are organised around
products and it also known as continuous processing. Products including glass, paper, tin sheets, light
bulbs, beer and canned foods are made via a continuous process. It is through standardisation and
effective quality control that companies have established product-focused facilities. The specialised
nature of the facility requires high fixed cost, but low variable cost.

Mass Customisation
Rapid low-cost production that caters to constantly changing unique customer desires. Mass
Customisation brings us the variety of products traditionally provided by low-volume manufacture (a
process focus) at the cost of standardised high-volume (product focused) production.

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Table 4.2: Comparison of process choice

PROCESS FOCUS REPETITIVE FOCUS PRODUCT FOCUS


(e.g. Dorbyl Ship Builders) (e.g. Toyota Manufacturing) (e.g. South African
Breweries)

1. Small quantity and large variety of 1. Long runs usually a 1. Large quantity and
products are produced. standardised product. small variety of
2. Equipment used is general purpose. 2. Special equipment used in the products are produced.
3. Operators are broadly skilled. assembly line. 2. Special purpose
4. There are many job instructions 3. Employees are properly equipment used.
because each job changes. trained. 3. Operators are less
5. Raw material inventories are high 4. Repetitive operations reduce broadly skilled.
relative to the value of the product. changes in job instruction. 4. Work orders are few
6. Work-in-progress is high compared 5. Just-in-Time techniques are because they are
to output. used. standardised.
7. Units move slowly through the plant. 6. Just-in-Time reduces the need 5. Raw material
8. Finished goods are made to order for carrying high stock. inventories are low.
and not stored. 7. Movement is measured in 6. Inventory of work-in-
9. Scheduling of orders is complex. hours and in days. progress is low.
10. Fixed costs are low and variable 8. Finished goods are made to 7. Swift movement of
costs are high. frequent forecasts. units through the plant.
11. Costing is estimated prior to doing 9. Scheduling is based on building 8. Finished goods are for
the job. various models. stock.
10. Fixed costs are dependent on 9. Scheduling is relatively
the flexibility of the plant. simple.
11. Costs are usually known prior 10. Fixed costs are high
to starting the job. and variable cost low.
11. Costs are dependent
on utilisation of
capacity.

Source: Heizer and Render (2014: 312)

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4.7 PROCESS MEASURES


To measure processes appropriate performance metrics should be used. The following metrics are
commonly used:

Table 4.3 Process measures

Measure Definition
1. Throughput time Average amount of time product takes to move
through the system.
Throuput time
2. Process velocity = Value−added time A measure of wasted time in the system.

3. Productivity =
Output A measure of how well a company uses its
Input
resources.
Time a resource used
4. Utilisation = Time a resource available The proportion of time a resource is actually used.

Actual output
5. Efficiency = Standard output Measures performance relative to a standard.

6. Operating time =
Setup time The proportion of time actually used for operating.
Run Time

4.8 SUMMARY
Critical issues in process design include types of processes, process planning, analysis, process
innovation and technology decisions. The type of production and operations process selected depends
on the volume and degree of product standardisation. Projects are produced one at a time to customer
order. Batch production is used to process a variety of low volume jobs. Mass production produces
large volumes of standard product for a mass market. Continuous production is used for very-high-
volume commodity products (Russel and Taylor, 2014)

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook Chapters and journal articles listed.

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QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To
adequately address these questions you will need to have completed all the ‘essential
reading’ listed at the beginning of this chapter.)

ACTIVITY 1
Jackson Custom Machine Shop has a contract for 130 000 units of a new product. Sam
Jumper, the owner, has calculated the cost for three process alternatives. Fixed costs will be:
for General-Purpose Equipment (GPE), R150 000; flexible manufacturing (FMS), R350, 000;
and dedicated automation (DA), R950 000. Variable costs will be: GPE, R10; FMS, R8; and
DA, R6. Which should he choose? Solve Problem 1 graphically.

ACTIVITY 2
Using either your analytical solution found in Problem 1, or the graphical solution found in
Problem 2, identify the volume ranges where each process should be used.

ACTIVITY 3
Jack’s Grocery is manufacturing a “store brand” item that has a variable cost of $0.75 per unit
and a selling price of $1.25 per unit. Fixed costs are $12,000. Current volume is 50 000 units.
The Grocery can substantially improve the product quality by adding a new piece of equipment
at an additional fixed cost of $5,000. Variable cost would increase to $1.00, but their volume
should increase to 70,000 units due to the higher quality product. Should the company buy the
new equipment?

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Solutions to Reflection Questions


Activities 1 and 2
Solve Problem 1 graphically

Solve for the crossover between GPE and FMS:


10X + 150000 = 8X + 350000
Or
2X = 200000
x = 100,000 units
Solve for the crossover between FMS and DA:
8X + 350000 = 6X + 950000
Or
2X = 600000
X = 300000
Therefore, at a volume of 130,000 units, FMS is the appropriate strategy.

Below 100,000 units use GPE, between 100,000 and 300,000 use FMS, above 300,000 uses DA

Activity 3
If Jackson Custom Machine is able to get the customer to extend the contract for another two years, the
owner would certainly wish to take advantage of the savings using Dedicated Automation.

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CHAPTER 5: PROCESS IMPROVEMENT: LEAN


OPERATIONS AND JUST-IN-TIME SYSTEMS

Learning objectives

 After working through this chapter you should be able to:


 Define just- in- time and lean operations.
 Explain JIT partnerships.
 Discuss lean operations.

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ESSENTIAL READING
Learners are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbook Relevant Chapter Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 16, pp.
659-678.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 16, pp. 530-555.

(South African Textbook – Relevant Chapter / Pages)


 Grütter (2010). Introduction to Operations Management. A strategic Approach. First
edition, Pearson Education, South Africa, Cape Town. Chapter 12, pp. 270-285.

Journal Articles & Reports


 Nenni, Giustiniano and Pirolo (2014). Improvement of Manufacturing Operations through a lean
Management Approach: A Case Study in the Pharmaceutical Industry. International Journal of
Engineering Business management Special Issue: Innovations in Pharmaceutical Industry, Vol.
6, No. 24, pp. 1-5.
 Noori, Pescarmona and Kimura (2013). Lean Manufacturing and Business Performance in
Brazilian Firms. Journal of Operations and Supply Chain Management, Vol. 6, No. 1, pp. 91-
105.
 El-Namrouty, AbuShaaban (2013). Seven wastes elimination targeted by lean manufacturing
case study “gaza strip manufacturing firms” International Journal of Economics, Finance and
Management Sciences, Vol. 1, No. 2. Pp. 68-80.
 Nordin Md Deros and Abd Wahab (2010). A Survey on lean Manufacturing Implementation in
Malaysian Automotive Industry. International Journal of Innovation Management and
Technology, Vol. 1, No. 4, pp. 374-380.

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These articles are available on Google and at the Mancosa Library.

5.1 INTRODUCTION
This Chapter discusses just-in-time (JIT) and lean operations as approaches used for continuous
improvement that lead to world-class operations. Heizer and Render (2014: 662) discuss that JIT is an
approach of continuous and forced problem solving through focus on throughput and reduced
inventory. Lean operations supplies the customer with precisely what they want at the time when the
customer wants, without waste, and via continuous improvement. The “pull” system thus drives the
workflow under lean operations. Lean operations are driven by orders initiated by customers through
“pull” systems. Lean operations’ emphasis is on understanding the customer and by contrast JIT
system emphasises forced problem solving.

5.2 ELIMINATE WASTE


Heizer and Render (2014:662) state that lean producers set their sights on perfection. They want to
produce no bad parts, no inventory but only value adding activities. Hence any activity which does not
add value is viewed as waste in the eyes of the customer. Lean operations are driven by orders
initiated by customers through “pull” systems. Lean operations seek to eliminate waste (Ohno’s seven
wastes) such as:
I. Overproduction
Production should not be more than what the customer wants and it should also not be
earlier than demanded. Inventory in any form is waste.
II. Queues
All idle time, storage, and waiting are wastes because they do not add value.
III. Transportation
Moving of materials and handling of materials more than once is a form of waste.
IV. Inventory
All material that is not essential, work in process (WIP), finished goods and any excess
operating supplies add no value and as such they are waste.
V. Motion
Movement of people or equipment that does not add value is a form of waste.
VI. Over-processing
These are unnecessary steps which do not add value to the organisation.
VII. Defective product
Product returns, warranty claims, rework, and scrap are a waste.

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Operations managers have according to Heizer and Render (2014:663) pursued “housekeeping” for a
neat, orderly and efficient work place. Thus a checklist has been established that focuses on the 5Ss.
These are:
(i) Sort/Segregate: Only keep what is needed and remove everything else in a work area, if
you have doubts regarding its usefulness throw it out. Because they add no value,
removing them from the work area avails space and improves work flow.
(ii) Simplify/Straighten: Arrange the workflow to improve flow. Also use methods analysis
tools for improving work flow and reduce motion. Ergonomics should be taken into account
both for the short and long term consideration. Labelling and display should be geared for
easy use of only what is required in the work area.
(iii) Shine/Sweep: Clean daily, eliminate all types of dirt, contamination, and clutter from the
work area.
(iv) Standardise: ensure that variation is removed from the process by creating standard
operating procedures and checklists. The standards should be good so that they can make
whatever is abnormal obvious.
(v) Sustain/Self-Discipline: Review periodically to recognise efforts and motivate any
progress. Communicate via visuals where you can. In the US, managers have added two
more Ss.
(vi) Safety: This ensures that good safety practices are established.
(vii) Support/Maintenance: Reduce variability, unplanned down time, and costs. Coordinate all
daily tasks with preventive maintenance.

5.3 REMOVE VARIABILITY


Heizer and Render (2014:663) argue that managers seek to eliminate variability caused by internal and
external factors. They define variability as any deviation from the optimum process that delivers perfect
product on time, every time. The less problems (variability), the better the system, meaning the less
waste there is in the system. Variability usually accumulates from tolerating waste.
The sources of variability include:
(i) Poor production processes that allow for the production of improper quantities by both
employees and suppliers, later non-conforming units.
(ii) Unknown customer demands.
(iii) Incomplete or inaccurate drawings, specifications, and Bills of Material (BOM).

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5.4 IMPROVE THROUGHPUT


Heizer and Render (2014:664) define throughput as the rate at which units move through a production
process. Allowing products to remain on the books for any length of time, costs accumulate and
competitive advantage is lost. Manufacturing cycle time is the time an order is in the shop. It is the time
between the arrival of materials and the shipping of completed products.

A technique used to improve throughput is the pull system. A pull system “pulls” a unit where it is
needed just as it is needed. Thus pull systems are standard tools for lean operations. They therefore
act as signals to request production as well as delivery from supplying stations. A pull system avoids
inventory build-up, hence eliminating waste. When inventory is removed, clutter around the work area is
removed.

5.5 JIT PARTNERSHIPS


Heizer and Render (2014:665) state that JIT partnerships exist when a supplier and a purchaser work
together with open communication and a goal of eliminating and reducing costs. Close relationships
and trust are crucial to the successful implementation and success of a JIT system. Some goals of JIT
are:
(i) Removal of unnecessary activities, such as receiving, incoming inspection, and paperwork
related to bidding, invoicing, and payment.
(ii) Removal of in-plant inventory by ensuring deliveries in small lot sizes to the department
that directly uses them
(iii) Removal of in-transit inventory by fostering suppliers to locate nearby and provide frequent
small shipments. This ensures that inventory does not build up. Obtain improved quality
and reliability through long-term commitments, communications and cooperation.

Leading organisations take the view that suppliers are extensions of their own businesses and they
expect suppliers to commit to continuous improvement. Supplier concerns Heizer and Render
(2014:666) include the following:
1. Diversification – suppliers may not want to be bound by long-term contracts with one customer.
This makes them reduce the risk of being tied to one supplier.
2. Scheduling – A good number of suppliers have little faith in the purchaser’s ability to produce
orders to a smooth, integrated schedule.

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3. Lead time-Engineering work or change in specifications can cause serious problems with JIT
because of insufficient lead times for suppliers to implement changes.
4. Quality: Suppliers restrictions on budgets, processes or technology may limit the organisation’s
ability to respond to product and quality changes.
5. Lot sizes: It mays seem as the purchase of small lot sizes is an attempt by the buyer to transfer
buying costs to the supplier.

5.6 JIT LAYOUT


JIT reduces the other type of waste – movement – i.e. the movement of material on a factory floor.
Thus flexible layouts are encouraged. Movement of material or even paper in an office adds no value to
business processes. Thus according to JIT principles, materials must be placed in the place where they
are needed.
Heizer and Render (2014:667) discuss the following “JIT layout tactics”
(i) Distance Reduction
The use of work cells, work centres and focussed factories help reduce distance. Work
cells are often U-shape arranged. Long single production lines are being discarded. The
works cells are based on group technology codes. These codes help identify components
with similar characteristics such that they can be grouped into families. So, work cells are
built for the identified families. Each work cell produces goods only if they have been
ordered.
(ii) Increased Flexibility
Work cells nowadays are designed so that they can be easily rearranged to conform to
changes in volume, product improvements or even new designs. The idea of layout
flexibility is important. Almost nothing is bolted down to ensure flexibility. All office furniture
and equipment is moveable. Equipment is modular. This makes provisions for both product
and process improvement.
(iii) Impact on Employees
A JIT system allows for cross-trained employees to be flexible and efficient at the work cell.
Employees working together can share problems and opportunities for improvement. Since
layouts are sequential, feedback on operations is immediate. Because units are produced
at a time, defects can be checked and avoided as they produce the next unit. Machines are
built to self-test and thus detect defects and stop automatically to avoid defects. These
functionalities are called Poka-Yoke. No buffers exist in a JIT system because inventory is
eliminated.
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(iv) Reduced Space and Inventory


Since JIT layouts are meant to reduce distance travelled, they reduce inventory too by
eliminating space for inventory. Where little space exists, inventory is moved in very small
lots or even as single units. All units are always moving because there is no storage.

5.7 JIT INVENTORY


The existence of inventory in production and distribution is attributed to the anticipation that something
might go wrong so that the excess inventory can be used to cover production problems caused by
variations. Heizer and Render (2014:668) emphasise that what is needed is “JIT” not “just in case” we
run out of inventory, what should we do? They therefore propose useful JIT inventory tactics as follows:

(i) Reduce inventory and variability


To move towards JIT, operations managers have to eliminate inventory. Variability in the
production system has to be removed. This helps to uncover the “rocks” in the production
system. With inventory reduced, management chips away at the exposed problems.
Managers can therefore carry on lowering inventory levels step by step and until there is
finally no inventory.
(ii) Reduce lot sizes
JIT has also meant the elimination of waste since investment in inventory is avoided. The
key here is to produce goods in small lot sizes. Batch sizes are reduced and thereby
reducing inventory costs.
(iii) Reduce set up costs
Inventory and the cost to hold it go down as investment in re-order quantity and the
maximum inventory level drops. Thus the way to drive down lot sizes and reduce average
inventory is by reducing the set up cost. In the end this lowers the optimum order size.

5.8 JIT SCHEDULING


According to Heizer and Render (2014:670) JIT is well supported by effective schedules, that are
communicated within and outside the organisation. These better schedules enhance the ability to meet
customer orders, drive down inventory by allowing smaller lot sizes, and reduce work-in-process. The
scheduling system is crucial as it transmits information. To achieve proper scheduling two aspects must
be considered and these are:
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(i) Level schedules


Level schedules process frequent small batches rather than a few large levels using many
small batches. The operations manager has to move small lot sizes so as to have an
economical level schedule
(ii) Kanban
The Kanban approach achieves small lot sizes by moving inventory through the shop only
when it is needed instead of pushing it to the next work station. Recall that when inventory
is moved when it is needed this is called a “push” system. The ideal lot size is in fact one.
Kanbans coined by the Japanese, allow arrivals at a work centre to match or at least nearly
match the process. Kanban in Japanese means “card”. The Kanban is used to “pull”
inventory through work centres.
They use the Kanban to signal the need for another container of material. The card
authorises the next container of material to be produced. The Kanban is a signal for each
container needed. Therefore an order for each container is initiated via a Kanban. It is
“pulled” from the supplying department. A system of Kanbans “pull” the material required
through the system. Kanbans have taken many forms in recent times. In some instances,
an empty position on the floor is enough to indicate that the next container is required.
Even a flag is used for this purpose or a rag.

5.9 JIT QUALITY


There is a relationship between JIT and Quality and this is so in three ways argues Heizer and Render
(2014:674). Firstly, the costs of getting good quality are cut down. This happens because rework, scrap
and inventory investment and costs of damage are buried in inventory. Since JIT reduces inventory,
fewer defects are produced. JIT therefore, exposes bad quality. Secondly JIT enhances quality. As JIT
reduces queues and cycle time, it keeps evidence of errors fresh and restricts the number of potential
sources of error. In this way, JIT creates an early warning system for quality problems so that there are
fewer bad units and there is immediate feedback.

The third one implies that better quality leads to fewer buffers. A better, easier-to-employ JIT system
can exist. Most times the reason for keeping inventory is to protect against unreliable quality. When
quality levels are consistent, a JIT system allows firms to reduce costs related to inventory.

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5.10 SUMMARY
Lean production has really changed the face of manufacturing and transformed the global economy.
Originally it was called just-in-time and it started out at Toyota Motor Corporation with a view to
eliminating waste; and large inventories. Lean production is a philosophy as well as a collection of
management methods and techniques. Workers in a lean system are multifunctional and can perform
different tasks.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
Chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

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QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)
ACTIVITY 1

ABC Analysis

Stock Number Annual R Volume Percent of Annual R Volume

J24 12,500 46.2

R26 9,000 33.3

L02 3,200 11.8

M12 1,550 5.8

P33 620 2.3

T72 65 0.2

S67 53 0.2

Q47 32 0.1

V20 30 0.1

= 100.0

What are the appropriate ABC groups of inventory items?


ACTIVITY 2
1. A firm has 1,000 “A” items (which it counts every week, i.e., 5 days), 4,000 “B” items (counted every 40
days), and 8,000 “C” items (counted every 100 days). How many items should be counted per day?
ACTIVITY 3
2. Assume you have a product with the following parameters:
Demand = 360 Holding cost per year  $1.00 per unit Order cost := $100 per order
What is the EOQ?
ACTIVITY 4
3. Given the data from Activity 3, and assuming a 300-day work year; how many orders should be

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processed per year? What is the expected time between orders?

Solution to Reflection Questions


Activity 1

ABC Groups

Class Items Annual Volume Percent of R Volume

A J24, R26 21,500 79.5

B L02, M12 4,750 17.6

C P33, T72, S67, Q47, V20 800 2.9

= 100.0

Activity 2

Item Class Quantity Policy Number of Items to Count Per Day

A 1,000 Every 5 days 1000/5 = 200/day

B 4,000 Every 40 days 4000/40=100/day

C 8,000 Every 100 days 8000/100=80/day

Total items to count: 380/day

Activity 3

2 * Demand * Order cost 2 * 360 * 100


EOQ    72000  268 items
Holding cost 1

Activity 4

Demand 360
N   134
. orders per year
Q 268

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Working days
T  300 / 134
.  224 days between orders
Expected number of orders

CHAPTER 6: PROCESS QUALITY MANAGEMENT


At the end of this chapter, you should be able to:

Describe the Concepts of TQM

 Examine and appreciate Costs associated with Quality.


 Comment on how TQM would apply to the Service Industry.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:

(International Textbooks – Relevant Chapter Pages)


 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 6, pp. 241-271
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition. John
Wiley & Sons Singapore Pte.Ltd. Chapter 2, pp. 29-67.

(South African Textbook – Relevant Chapter / Pages)


 Grütter (2010). Introduction to Operations Management. A strategic Approach. First edition,
Pearson Education, South Africa, Cape Town. Chapter 11, pp. 242-258.

Journal Articles & Reports


 Sokovic, M., Pavletic, D., and Pipan, K.K., (2010). Quality Improvement Methodologies – PDCA
Cycle, RADAR Matrix, DMAIC and DFSS. Journal of Achievements in Materials and
Manufacturing Engineering, Vol. 43, no. 1 pp. 476-483.
 Sousa, R., and Voss, C.A., (2002). Quality management re-visited: a reflective review and
agenda for future research. Journal of Operations Management, Vol.20, no 1, pp. 91-109.
These articles are available on Google and at the Mancosa Library.

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6.1 INTRODUCTION TO TOTAL QUALITY MANAGEMENT


Total Quality Management (TQM) is perhaps the most significant of the new ideas that have swept
across the operations management scene over the last few years. There are two reasons for this: first
the ideas of TQM have great perceptive attraction for many people – most of us want to achieve ‘high
quality’, and secondly, a TQM approach to improvement can sometimes result in dramatic increases in
operational effectiveness.

6.2 THE ORIGINS OF TQM – THE QUALITY GURUS


 Armand Feigenbaum was a doctoral student at the Massachusetts Institute of Technology in
the 1950s. He defined TQM as “an effective system for integrating the quality development,
quality maintenance and quality improvement efforts of the various groups in an organisation
so as to enable production and service at the most economical levels which allow for full
customer satisfaction”.

 W.E. Deming was considered as the father of quality management in Japan. Deming
introduced the 14 points for quality improvement whereby he emphasised the need for
statistical quality control, participation, education, openness and purposeful improvement.

 J.M. Juran was also a key educator in the Japanese quality management systems. He
advocated that although a dangerous product could conform to specification, it would not be fit
to use. He coined the phrase “fitness for use”. He advocated the motivation and involvement of
the workforce in quality improvement activities.

 K. Ishikawa based his work on that of Deming, Juran and Feigenbaum and has been credited
with originating the concept of quality circles and the cause-and-effect diagram (fishbone).
Ishikawa realised that worker participation was the key to the successful implementation of
TQM.

 G. Taguchi was the director of the Japanese Academy of Quality and was concerned with
engineering quality into the product through the optimisation of product design. His concept of
Quality Loss Function (QLF) included such factors as warranty costs, customer complaints and
loss of customer goodwill.
P.B. Crosby is best known for his work in trying to quantify the costs of quality. He stated that
many organisations did not know how much they spend on quality.

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6.3 WHAT IS TQM?


According to Pycraft, Singh, Phihlela, Slack, Chambers, Harland, Harrison and Johnson (1997), TQM is
a philosophy, a way of thinking and working, that is concerned with meeting the needs and
expectations of customers. It tries to move the focus of quality away from being a purely operations
activity into a major concern for the entire organization. Through TQM, quality becomes the
responsibility of all departments and chapters in the organization. It also targets the costs of quality by
trying to reduce particular failure costs. TQM also espouses the process of continuous improvement.

TQM places the customer in the forefront of decision-making. It also looks at the concept of internal
customer and supplier. It advocates that everyone in the organisation is a customer and consumes
goods and services provided by other internal suppliers.

6.4 TQM CONCEPTS


Heizer (2014: 248-262) suggests the following in implementing a TQM programme:

 Continuous Improvement
TQM requires a never-ending process of continuous improvement that embraces people, suppliers,
material, equipment and procedures. The argument of this philosophy is that every aspect of an
operation can be improved – the end objective is perfection, which is always sought but seldom
achieved.
The Japanese use the word kaizen to describe this on-going process of improvement. In continuous
improvement it is not the size of each step which is important – rather it is the likelihood that
improvements will be ongoing. We can therefore say it is not the rate of improvement but the
momentum of improvement.

 Six Sigma
This is a programme designed to reduce defects to help lower costs, save time, improve quality and
improve customer satisfaction.

 Employee Empowerment
This refers to the involvement of the workforce in every step of the production process. To design
equipment and processes that consistently produce the desired quality would require the involvement
of those who understand the shortcomings of the system.

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People working on the system on a daily basis understand it better than anyone else does. Techniques
for building employee empowerment include:

(i) Building communication networks that include employees.


(ii) Developing open, supportive supervisors.
(iii) Moving responsibility from both managers and staff to production employees.
(iv) Building high-morale organisations.
(v) Creating formal organisation structures such as teams and quality circles.

 Benchmarking
This is an approach that some companies use to compare their operations with those of other
companies (preferably the best in the world). It is partly concerned with being able to judge how well an
operation is doing. Benchmarking involves selecting a demonstrated standard of products, services,
costs or practices that represent the very best performance for processes or activities very similar to
your own. The steps for developing benchmarks are:

(i) Determine what to benchmark.


(ii) Form a benchmark team.
(iii) Identify benchmarking partners.
(iv) Collect and analyse benchmarking information.
(v) Take action to match or exceed the benchmark.
(vi) Creating formal organisation structures such as teams and quality circles.

Types of Benchmarking
According to Pycraft et al. (1997), the following are some of the types of benchmarking one can use:

 Internal benchmarking is a comparison between operations or parts of operations which are within
the same organisation.
 External benchmarking is a comparison between an operation and other operations that are part of
a different organisation.
 Non-competitive benchmarking is benchmarking against external organizations that do not compete
directly in the same markets.

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 Competitive benchmarking is a comparison directly between competitors in the same or similar


markets.
 Performance benchmarking is a comparison between the levels of achieved performance in
different operations.
 Practice benchmarking is a comparison between an organisation’s operations practices, or ways of
doing things, and those adopted by another operation.

 Just-in Time
JIT systems are designed to produce or deliver just and when they are needed. If implemented, JIT can
reduce the amount of inventory that a firm has on hand by establishing quality and purchasing controls
that bring stock into the firm just-in-time for use. JIT is related to quality in the following manner:

(i) JIT cuts the cost of quality – this happens because scrap and rework, damaged and lost/stolen
stock is directly related to inventory on hand.
(ii) JIT improves quality – as JIT reduces lead times, it keeps records of mistakes and sources of
error.
(iii) Better quality means less inventory and a better, easier to use JIT system. One of the reasons
for holding inventory is to protect against poor production performance resulting from unreliable
quality. If consistent quality exists, JIT allows organisations to reduce all the costs associated
with inventory.

6.5 Steps in implementing TQM

1 Obtain CEO Commitment


2 Educate Upper-Level Management
3 Create Steering Committee
4 Outline the Vision Statement, Mission Statement, & Guiding Principles
5 Prepare a Flow Diagram of Company Processes
6 Focus on the Owner/Customer (External) & Surveys
7 Consider the Employee as an Internal Owner/customer
8 Provide a Quality Training Program
9 Establish Quality Improvement Teams
10 Implement Process Improvements
11 Use the Tools of TQM
12 Know the Benefits of TQM
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6.6 THE HIGH COST OF POOR QUALITY

Facts to consider when counting the high cost of poor quality are:

Waste is the opposite of quality.

What is poor quality costing you?

Four types of quality cost

The four types of quality cost are:

Prevention cost: All costs associated with error prevention in a product, process or service.

Appraisal cost: All costs associated with the assurance to conformance of quality standards
requirements, inspection, testing, observation etc.

Internal failure cost: All costs associated with the evaluation and correction of the design before it
is released for construction and all costs for rework on a project before it is turned over to the
owner.
External failure cost: Similar to internal failure costs except that they occur after the “output” has been
turned over to the next processor or user. External failure costs often include significant intangible costs
of lost reputation and goodwill.

To empower employees and implement TQM everyone in the organization must be trained in the
techniques of TQM. Heizer (2014:254) suggest seven tools or techniques that can aid the TQM drive:

(i) Check Sheets – a check sheet is any kind of a form that is designed to record data. In many
cases the recording is done so the patterns are easily seen while the data are being taken.
Check sheets help analysts find the facts or patterns that may aid subsequent analysis. An
example might be a drawing that shows a tally of the areas where defects are occurring or a
check sheet showing the type of customer complaints.

(ii) Scatter Diagrams – show the relationship between two measurements. An example is the
positive relationship between length of a service call and the number of trips a repairperson
makes back to the truck for parts.

(iii) Cause and Effect Diagrams: are another tool for identifying quality issues and inspection
points. This type of diagram is also known as Ishikawa or fish-bone chart.

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clean pillows
Machinery

Insufficient

& blankets
Material

not available
on--board

equipment
Deicing
on
Inadequate
Mechanical delay
supply of
magazines on plane
Inadequate special Broken luggage
meals on-
on-board carousel
Dissatisfied
Airline
Overbooking policies Understaffed Customer
crew
Bumping policies Understaffed

Poorly trained
check--in

ticket counters

attendants
Poor check
policies
Mistagged
bags

Methods Manpower

Figure 6. 1 Cause and effect diagram


Source: (Heizer and Render. 2014:255)

(iv) Pareto Charts – a graphic way of identifying the few critical items as opposed to several less
important ones.

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Data for October


– 100
70 – – 93
– 88
60 – 54
Frequency (number)

Cumulative percent
– 72
50 –
40 –
Number of
30 –
occurrences
20 –
12
10 –
4 3 2
0 –
Room svc Check-
Check-in Pool hours Minibar Misc.
72% 16% 5% 4% 3%
Causes and percent

Figure 6.2 Pareto analysis


Source: (Heizer and Render. 2014:256)

(v) Flowcharts – graphically represent a process or system using annotated boxes and
interconnected lines. They are a simple, but great tool for trying to make sense of a process or
explain a process.

(vi) Histograms – show the range of values of a measurement and the frequency with which each
value occurs. They show the most frequently occurring readings as well as the variations in the
measurements.

(vii) Statistical Process Control – is used to monitor standards, making measurements and
taking corrective action as a product or service is being produced.

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Plots the percent of free throws missed

20% Upper control limit

10% Coach’s target value

0% | | | | | | | | |
Lower control limit
1 2 3 4 5 6 7 8 9

Game number

Figure 6.3 Control chart


Source: (Heizer and Render. 2014:258)

ACTIVITY
Identify the TQM concepts that your organisation incorporates/utilises.

6.6 THE COST OF QUALITY


The costs of quality can be categorized as prevention costs, appraisal costs, internal failure costs and
external failure costs. Let us examine each of these:

 Prevention Costs – these are costs incurred in trying to prevent problems, failures and errors
from occurring in the first place and include:
Identifying potential problems and rectifying them before poor quality occurs.
Improving the design of products, services and processes to reduce quality problems.
Training and developing personnel in the best way to perform their jobs.
 Appraisal Costs – are those costs associated with controlling quality to check if problems have
occurred during or after the production process? They include:
 The setting up of statistical process control programmes and acceptance sampling plans.

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 The time and effort required to inspect outputs, inputs and processes.
 Obtaining processing inspection and test data.
 Investigating quality problems and providing quality reports.
 Conducting customer surveys and quality audits.
 Internal failure costs – are costs associated with errors whilst the product is within the
operation, and include:
Costs of scrapped parts and material.
Reworked parts and material.
Lost production time as a result of errors.
Lack of concentration due to time spent trouble-shooting rather than improvement.
 External failure costs – are those which are associated with errors that have reached the
customer. These costs include:
Loss of customer goodwill.
Aggrieved customers.
 Litigation.
 Guarantee and warranty costs.
THINK POINT

Can you quantify in financial terms the cost of quality within your company?

6.7 TQM IN SERVICE


It is more difficult to measure quality in services than that of manufactured goods. Heizer and Render
(2014:261) identify ten general attributes or determinants of service quality.
(i) Reliability – performing the service right the first time and honouring your promises.
(ii) Responsiveness – willingness or readiness of employees to provide a service.
(iii) Competence – possessing the required skills and knowledge to perform the service.
(iv) Access – involves ease of contact.
(v) Courtesy – politeness, respect and consideration.
(vi) Communication – keeping customers informed in a language they understand.
(vii) Credibility – trustworthiness and honesty.
(viii) Security – freedom from danger, risk or doubt.
(ix) Understanding – knowing the customer, and
(x) Tangibles – include the physical evidence of the service.

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6.8 SUMMARY

The most important quality perspective is that of the customer; how they perceive the products or
services. Products and services must be designed to meet customer expectations and needs for
quality. A total commitment to quality must start with top management and filter through to the lower
levels of the organisation and this must be across all areas or departments. Employees must be active
participants in the process. They must feel free to initiate programmes for improvements.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the
textbook chapters and journal articles listed in the “Essential Reading” list at the
beginning of this chapter. It is essential that you read all of the textbook chapters and journal articles
listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To
adequately address these questions you will need to have completed all the ‘essential
reading’ listed at the beginning of this chapter.)
ACTIVITY 1
What techniques would you use and what conclusions can you draw about defects in the accounts
receivable department?

Category Frequency
Invoice amount does not agree with the check amount 108
Invoice not on record (not found) 24
No formal invoice issued 18
Check (payment) not received on time 30
Check not signed 8
Invoice number and invoice referenced do not agree 12

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ACTIVITY 2
Prepare a flow chart for purchasing a Big Mac at the drive-through window at McDonalds.

ACTIVITY 3
Draw a fishbone chart detailing reasons why a part might not be correctly machined.

Solutions to Reflection Questions

ACTIVITY 1

Category Frequency Percent


Invoice amount does not agree with the check amount 108 54
Invoice not on record (not found) 24 12
No formal invoice issued 18 9
Check (payment) not received on time 30 15
Check not signed 8 4
Invoice number and invoice referenced do not agree 12 6
= 200 100

Use a Pareto chart to organise the defects and conclude that the obvious problem (about half the
defects) is the failure of the check to agree with the company’s records as to the correct amount. Other
problems are late payments and an apparent invoice-filing problem in the office. Notice that 27% of
these common errors appear to be the result of procedural problems within accounts receivable
(invoice not on record, no invoice issued, and invoice numbering problems). This value could be
considerably higher depending on how much of the problem of disagreement between invoice and
check amounts is the result of accounts receivable process problems.

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Activity 2

Distance Symbol Activity


-- Pull up to speaker

-- Press button

-- Wait for response

-- Verbalise order

-- Get confirmation of order and cost

20 Move car up in line

-- Wait

20 Move car up in line

-- Wait

-- Verify order and cost

-- Pay and receive order

-- Leave

-- Realise they forgot the extra catsup!

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Activity 3

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CHAPTER 7: PROCESS QUALITY MANAGEMENT II


Upon completion of this chapter you should be able to
 Define a process.
 Examine and analyse a quality process in your company.
 Recommend a better quality process improvement plan.

ESSENTIAL READING
Learners are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbooks – Relevant Chapter / Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 6, pp.
241-271
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd.

(South African Textbook – Relevant Chapter / Pages)


 Grütter (2010). Introduction to Operations Management. A strategic Approach. First
edition, Pearson Education, South Africa, Cape Town.

Journal Articles & Reports


Hoyle David (2009). Systems and Processes – is there a difference? Unpublished article.

These articles are available on Google and at the Mancosa Library.

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7.1 INTRODUCTION
This Chapter also aims to promote consistency in the description of processes and use of process
related terminology. The process approach enhances an organisation’s effectiveness and efficiency in
achieving its defined objectives. This, in relation to ISO 9001:2008, implies enhancing customer
satisfaction by meeting customer requirements.

This Chapter is meant to provide an appreciation of concepts, intent and the application of the “process
approach” to the ISO 9000 family of Quality Management System standards. It may also be used to
apply the process approach to management systems regardless of the type or size of the organisation.
This includes but is not limited to the management systems for:
 Environment (ISO 14 000 family).
 Occupational Health and Safety.
 Business risk.
 Social responsibility.

7.2 BENEFITS OF THE PROCESS APPROACH


 Integration and alignment of processes to enable achievement of desired outcomes.
 Ability to focus on process effectiveness and efficiency.
 Provision of confidence to customers, and other interested parties, about the consistent
performance of the organisation.
 Transparency of operations within the organisation
 Lower costs and creation of shorter cycle times, through the effective use of resources.
 Improved, consistent and predictable results.
 Provision of opportunities for focused and prioritised improvement initiatives.
 Encouragement of the involvement of people and the clarification of their responsibilities.

7.3 WHAT IS A PROCESS?


A “Process” can be defined as a “set of interrelated activities, that transforms inputs into outputs”.
These activities require allocation of resources such as people and materials. The process approach
has a major advantage when compared to other approaches and that is management is able to control
the interactions between these processes and the interfaces between the functional hierarchies of the
firm.

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Effectiveness of
process = Ability to
achieve desired
results

Interrelated or Output
INPUT
Requirement Specified (These interacting activities Requirement Satisfied
include resources) and control methods (Result of a process)

Efficiency of
process= results
achieved vs.
resources

Figure 7.1 Process depictions


Source: ISO 9001: 2008

Inputs and identified outputs may be tangibles like equipment, materials or components. But they may
also be intangibles such as waste or pollution. Each process has customers and their interested
parties. These may be internal or external to the firm. They all have expectations and needs about the
process, that define the required outputs of the process. A system has to gather data to provide
information about the process performance, which should then be analysed to determine if there is any
need for corrective action or improvement.

All processes should be aligned with the objectives, scope and complexity of the organisation and
should be designed to add value to the organisation. Process effectiveness and efficiency can be
assessed through an internal or external review process.

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7.4 TYPES OF PROCESSES


ISO 9001:2008 states: In sub clause 0.1 General: “The design and implementation of an organisation’s
quality management system is influenced by: its business environment, changes in that environment, or
risks associated with that environment; its varying needs; its particular objectives; the products it
provides; the processes it employs; its size and organisational structure of the quality management
systems or uniformity of documentation.”

In sub clause 0.2 Process Approach: “The application of a system of processes within an organisation,
together with the identified and interactions of these processes, and their management to produce the
desired outcome, can be referred to as the “process approach”.

In sub clause 4.1 General requirements: “The organisation shall establish, document, implement and
maintain a quality management system and continually improve its effectiveness in accordance with
requirement of this International Standard”. The organisation shall:
a) Determine the processes needed for the quality management system and their application
throughout the organisation.
b) Determine the sequence and interaction of these processes.
c) Determine criteria and methods needed to ensure that both the operation and control of these
processes are effective.
d) Ensure the availability of resources and information necessary to support the operation and
monitoring of these processes.
e) Monitor, measure ( where applicable), and analyse these processes, and
f) Implement actions necessary to achieve planned results and continual improvement of these
processes.

These processes shall be managed by the organisation in accordance with the requirements of this
International Standard. Based on the above, the organisation ought to define the number of processes
needed to fulfil business objectives. It is allowed for a process, as required by ISO 9001:2008, to be
part of a process (or processes) that is already established by the organisation, or even to be defined
by the organisation in terms of a different standard from ISO 9001.

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7.4 TYPICAL TYPES OF PROCESSES CAN BE IDENTIFIED


Organisations need to define the number of processes and the type of processes needed to fulfil their
business objectives. Although these are unique to organisations, typical ones include the following:

 Processes for the management of an organisation - These include processes relating to


strategic planning, establishing policies, setting objectives, ensuring communication, and
availability of resources for the other organisation’s quality objectives and desired outcomes
and for management reviews.
 Processes for managing resources - These include all the processes that are necessary to
provide the resources needed for the organisation’s quality objectives and desired outcomes.
 Realisation processes – These include all processes that provide desired outcomes of the
organisation.
 Measurement, analysis and improvement processes - These include the processes required to
measure and gather data for performance analysis and improvement of effectiveness and
efficiency. They include measuring, auditing, performance analysis and improvement
processes such as corrective and preventive actions.

7.5 UNDERSTANDING THE PROCESS APPROACH


A process approach is a powerful way of organising and managing activities to create value for the
customer and other parties. Organisations are thus quite often structured into functional units.
Organisations are usually managed vertically with responsibility for intended outputs being divided
among functional units. Therefore the end customer or the other interested party is not always visible to
all involved. Thus problems that occur at the interface boundaries are often not prioritised as compared
to short-term goals of the units. This leads to little or no improvement made to the interested party, as
actions are usually focused on the functions, rather than on the intended output.

The process approach is said to introduce horizontal management, crossing the barriers between
different functional units and creating unity in focusing on goals of the firm. The performance of the firm
improves via the use of the process approach. This is because processes are managed as a system
defined by the network of the processes and their interactions. This creates a better understanding of
added value.

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7.6 IMPLEMENTING THE SYSTEM


This system outline below is not prescriptive. It is a guide. This involves:
(i) Identifying the processes of the organisation
(ii) Planning the process
(iii) Implementation and measurement of the process
(iv) Analysis of the process
(v) Corrective action and improvement of the processes

7.7 SUMMARY
The management of quality via processes is a formidable way to manage quality in organisations. It
improves both effectiveness and efficiency.
Adapted from: ISO 9001: 2008.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter on an reflect on the following questions. (To
adequately address these questions you will need to have completed all the ‘essential
reading’ listed at the beginning of this chapter.)
ACTIVITY 1
Evaluate the external value of ISO 9001 for your organisation.

ACTIVITY 2
Examine and comment on cost implications for implementing ISO standards.

ACTIVITY 3
Why is process thinking important in operations management? Think of yourself as an “operations
manager” for your education. How could process thinking improve your performance as a student?

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Solutions to Reflection Questions


Activity 1
External Benefits
Similarly, there are many potential external benefits. The first is that company prestige increases.
Companies following ISO 9000 series standards are perceived as “good corporate citizens” that
produce higher quality products. Thus, they gain prestige that can help retain old customers and attract
new ones.

Second, it improves customer satisfaction. Higher quality means higher customer satisfaction. Further,
the manufacturer of a product is certified, a customer may feel better about the product even if it is, in
fact, of no higher quality than that of a non-certified manufacturer.

Third, it creates a higher level of trust. Customers perceive a certified company as being more
trustworthy than a non-certified company.

Fourth, it reduces the need for customer audits. With certification, a company has already been
audited. Therefore, customers will not feel a need to audit every time they want to do business with a
company. This can result in major savings. For example, it is reported that in some industry segments
in the United States, a facility may be subject to dozens of audits per year; in some cases as many as
30 per month.

Fifth, it can help a company increase its market share. Certified companies gain access to markets that
require ISO certification and they can deepen penetration of existing markets. Finally, the company can
respond more quickly to market needs. With better quality procedures, it is easier to develop and
market new product lines. Being the first to reach a market results in higher profits for the company.

Activity 2

There are costs in time and money for companies becoming certified to an ISO 9000 series standard.
For example, an ISO program may take three months to over one year to implement, and it requires
continual efforts to review progress and pursue improvement. Further, it costs money to develop a
certification program and attain certification. There may be benefits in terms of increased sales resulting
from public perception that the firm produces quality goods, but sometimes non-ISO certified
companies may be able to produce a similar product more cheaply.

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ISO certification does not mean that a firm's product is better than that of a non-ISO certified firm. For
example, ISO 9000 series certification does not prevent design defects. To reiterate, the ISO series
9000 standards are process standards; they are not product standards.

The quality of an audit performed for ISO certification purposes depends on the qualifications and
honesty of the auditor, and whether the auditor is acting in a first, second, or third party capacity. In
addition, there are numerous problems inherent in the third party certification process.

First, the ISO does not have standard procedures for certification. As a result, various countries have
developed different certification procedures. For example, in the United States, the national body of
accreditation is the Registrar Accreditation Board (RAB) (RAB). At present, the European Union (EU)
does not regulate registrars. Instead, they are accredited through national certification boards. This
divergence contributes to a lack of understanding of the certification process. Without an international
certification procedure, companies and members of the public are uninformed about what is involved in
certification. And, of course, standards for certification are not uniform.

Second, certification is not always recognised across countries’ borders.Therefore, a registrar should
be chosen in view of the company's customer base. One practice that facilitates operations of
companies in various countries is that some U.S. registrars have signed memoranda with registrars in
Europe. As a result of such agreements, a company can become ISO-certified in several countries
through the completion of a single certification process.

Third, there is no centralised record of registrations. This makes proof of certification difficult, and
potential customers must rely on documents in the possession of the certified firm or the auditing firm
hired by the firm.

Fourth, certification is costly. It costs from $10,000 to $20,000 or more, and may take six to 18 months
to perform, depending on the size of the company. This can be prohibitive for small companies and for
companies with severely limited resources. Such companies tend to come, in disproportionate
percentages, from developing countries as compared to companies from industrialised countries.

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Another set of objections to the ISO 9000 series standards is based on the assertion that the standards
function as a non-tariff barrier to trade. The adoption of ISO 9000 series by the EU is viewed by some
commentators as a trade barrier to companies from outside the EU. In other cases, it has been
asserted that, as ISO 9000 certification becomes a de facto requirement for doing business, it operates
as a non-tariff barrier to trade with respect to struggling companies from developing countries.

This argument is based on the premise that ISO certification is an expense that is beyond the means of
firms with extremely limited funds

Activity 3

Process thinking is important since processes describe “how work gets done and performance
objectives are achieved” in all functional areas such as finance and human resource management, and
industries such as government, health care, forestry, manufacturing, and education.

At this early point in the course students know only a little bit about primary, support, and general
management processes so you may have to do a tutorial using the student’s example. However,
students perform many processes, such as studying for an exam and managing multiple reading and
homework assignments on a daily basis. Getting them to think of the process they use to accomplish
such tasks helps them to understand the role of process thinking.

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CHAPTER 8: FORECASTING DEMAND


On the completion of this chapter, you should be able to:

Examine and analyse the features common to all forecasts.

 Differentiate between Quantitative and Qualitative Forecasting Techniques.


 Use various approaches to conduct forecasting.

ESSENTIAL READING
Learners are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbook – Relevant Chapter / Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 6, pp.
241-271.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte. Ltd.

(South African Textbook – Relevant Chapter / Pages)


 Grütter (2010). Introduction to Operations Management. A strategic Approach. First
edition, Pearson Education, South Africa, Cape Town.

Journal Articles & Reports


 Fransoo, C., and Bertrand, J.W.M. (2002). Modelling and Simulation. Operations
Management Research Methodologies Using Quantitative Modeling. International
Journal of Operations and production Management, Vol.22, no. 2, pp. 241-264.
These articles are available on Google and at the Mancosa Library.

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8.1 INTRODUCTION TO FORECASTING?


Heizer and Render (2014:140) describe forecasting as the art of predicting future events. This usually
involves taking historical data and projecting them into the future using a mathematical model
sometimes adjusted by a manager’s good judgement. We must also note that what works best in one
firm under one set of conditions may be a complete disaster in another organization. There are also
limits as to what can be expected from forecasts. We must remember that forecasts are seldom, if ever,
perfect and are costly and time-consuming to prepare and monitor.

However, we cannot afford to avoid the process of forecasting by adopting a wait-and-see attitude.
Effective forecasting in both the short and long term will depend on the demand for your company’s
products or services. Business forecasts are used to predict sales, profits, costs, prices, interest rates,
and other variables. In spite of the use of computers and sophisticated mathematical models in
forecasting, it is not an exact science. Experience, judgement and technical expertise all play a role in
developing useful forecasts.

In most organisations, the responsibility for preparing the demand forecasts lies with the marketing or
sales department, rather than operations. Since forecasts are a major input for operations managers, it
is wise to harness their input.

Features Common to all Forecasts


There are certain features common to all forecasts and Stevenson (2007) explains them as follows:
 Forecasting techniques generally assume that the same underlying casual system that existed in
the past will continue to exist in the future.
 Forecasts are rarely perfect; actual results may differ from predicted values – therefore allowances
should be made for inaccuracies.
 Forecasts for group items are more accurate than forecasts for individual items.
 Forecast accuracy decreases as the time period covered by the forecast increases.

 ACTIVITY
Investigate the types of forecasts that your organisation uses and classify them into:
1. Short-term
2. Medium-term, and
3. Long-term.

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8.2 FORECASTING TIME-HORIZONS


Forecasts can fall into three categories:
 Short-range forecast – has a time span up to one year but is generally less than three months. It is
used for planning purchasing, job-scheduling, workforce levels, job assignments and production
levels.
 Medium-range forecast – lasts from three months to three years. It is useful in sales planning,
production planning and budgeting, cash budgeting and analysing various production plans.
 Long-range forecast – is generally of a duration of three years or more. It is used in planning for
new products, capital expenditure, facility location or expansion and research and development.

Types of forecasts

Heizer (2014:141) concludes that there are three major types of forecasts in planning future operations:

 Economic forecasts: address business cycles by predicting inflation rates, money supplies and
economic indicators.
 Technological forecasts: concerned with rates of technological progress which can result in the
birth of exciting new products, requiring new plants and equipment.
 Demand forecasts: projections of demand for a company’s products or services. These forecasts
are also known as sales forecasts, which determine a company’s production capacity and
scheduling systems and serve as inputs to financial, marketing and personnel planning.

The Strategic Importance of forecasting

We must remember that forecasts are only an estimate of demand until actual demand becomes
known. Forecasts of demand, therefore, impact upon several areas of operations:
 Human Resources
Hiring, training and laying-off the workforce depend on anticipated demand. One needs to give ample
warning to the Human Resources Department to hire, train or lay off workers. Inadequate training could
result in poor quality products or services.

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 Capacity
If capacity is inadequate, our ability to meet customer orders may be compromised which could result in
loss of customers, loss of market share and loss of goodwill. On the other hand, if excess capacity is
built, we could end up in a situation whereby huge amounts of capital are tied up with little or no return.
 Supply-Chain Management
Good supplier relations and price discounts for materials and parts depend on accurate forecasting.
The forecast must strive to get the right amount of material at the right time in the right quantity at the
right price.

Steps in the Forecasting Process


Forecasting follows the seven basic steps:
 Determine the use for the forecast. What are our objectives? This will provide an indication to the
level of detail required in the forecast, the amount of resources we are willing to commit
(manpower, computer time, rands) and the level of accuracy necessary.
 Select the items to be forecasted. Are we going to forecast for individual or group items?
 Determine the time horizon of the forecast. Is it short, medium or long term? Keep in mind that
accuracy decreases as the time horizon increases.
 Select the forecasting technique.
 Gather data to make the forecast. Identify any assumptions that are made in conjunction with
preparing and using the forecast.
 Make the forecast.
 Monitor the forecast to see if is performing in a satisfactory manner. If not, re-examine the method,
assumptions, validity of data, and other significant issues, and perhaps prepare a revised forecast.

Approaches to forecasting
There are two general approaches to forecasting: qualitative and quantitative. Qualitative methods
consist mainly of subjective inputs and incorporate such factors as the decision maker’s intuition,
emotions, and personal experiences amongst other things. Quantitative forecasts use a variety of
mathematical models that are determined by historical data. In practice either or both approaches are
used to determine a forecast.

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Overview of Qualitative Methods


 Forecasts based on judgements or opinions
Under this method, the opinions of a group of high level experts or managers, often in combination with
statistical models are grouped to arrive at an estimate of demand. This approach is often used as part
of long-range planning and new product development.
 Sales force composite
The sales staff is often a good source of information because of their direct contact with customers.
Thus, they may be aware of customer’s future plans. In this approach, each salesperson estimates
what projected sales will be in his or her area or region.
 Customer surveys
This method solicits inputs from customers or potential customers regarding future purchasing plans. It
can assist in not only preparing a forecast but also in improving product/service design and planning for
new products. You should ensure you exercise a great deal of care in constructing a survey,
administering it and correctly interpreting the results in order to obtain valid information.
 Outside opinion
Occasionally, outside opinions are needed to make a forecast. These may include advice on political or
economic conditions within the region or in a global environment.
 Delphi Method
There are three different types of participants in the Delphi Method: decision makers, staff personnel
and respondents. Decision-makers usually consist of a group of five to ten experts who will make the
actual forecast.

Staff personnel assist decision-makers by preparing, distributing, collecting and summarising a series of
questionnaires and survey results. The respondents are a group of people, located in different places,
whose judgement is highly respected. This group provides input to decision-makers before the forecast
is made.

 SELF ASSESSMENT ACTIVITY


Discuss the qualitative methods of forecasting.

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Overview of Quantitative Methods


Five quantitative forecasting methods, all of which use historical data will be described. They fall into
two categories:
Category A - Time-series models: These models predict on the assumption that the future is a
continuation of the past. In other words, they look at what has happened over a period of time and use
a series of past data to make a forecast. These include:
1. Naïve approach
2. Moving averages
3. Exponential smoothing

Category B - Casual model: incorporate the variable or factors that might influence the quantity being
forecast. If the cause-effect relationship between variables can be modelled, then predictions of the
factors, which influence whatever we are trying to forecast, will enable a forecast to be made.

1. Trend projection
2. Linear regression

Forecasting based on Time Series Data


A time series is based on a sequence of evenly spaced data points (daily, weekly, monthly, quarterly,
and annuallyetc.). Forecasts using time series data means that future values are predicted only from
past values and other variables, no matter how valuable they are, may be ignored.
Analysis of time series data requires you to identify the underlying behaviour of the series. This can
often be done by merely plotting the data and visually examining the plot or graph.
These behaviours can be described as follows:

 ‘Trend’ refers to a gradual, long-term movement in the data over time. Changes in income,
population, age distribution or cultural views may account for movement in trend.
 ‘Seasonality’ is a data pattern that repeats itself after a period of days, weeks, months or years.
Restaurants, supermarkets and theatres experience weekly or even daily ‘seasonal’ variations.
 ‘Cycles’ are patterns in the data that occur every several years. These are often related to a variety
of economic and political factors or even agricultural conditions.
 ‘Random’ or ‘irregular variations’ are due to unusual circumstances such as severe weather
conditions, strikes, or a major change in a product or service.

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Trend
component
Demand for product or service Seasonal peaks

Actual
demand

Average
demand over
Random four years
variation
| | | |
1 2 3 4
Year

Figure 8.1 Random and irregular forecasting


Source: (Heizer and Render. 2014:145)

Naïve Approaches
This is a forecasting technique that assumes demand in the next period is equal to demand in the most
recent period. For example, if Vodacom sold 1550 cellular phones in January, then we assume that
they will sell 1550 cellular phones in February.

Moving Averages
This is a forecasting method that uses an average of the n most recent periods of data to forecast the
next period. If n represents 3 months, then we simply add up the actual sales in the last three months
and divide by 3.

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8.1 shows how moving averages are calculated.

Table 8.1 3-month moving average

MONTH ACTUAL SALES 3-MONTH MOVING AVERAGE


January 10
February 12
March 13
April 16 (10+12+13) /3 = 11.67
May 19 (12+13+16) /3 = 13.67
June 23 (13+16+19) /3 = 16
July 26 (16+19+23) /3 = 19.33
August 30 (19+23+26) /3 = 22.67
September 28 (23+26+30) /3 = 26.33
October 18 (26+30+28) /3 = 28
November 16 (30+28+18) /3 = 25.33
December 14 (28+18+16) /3 = 20.67

Exponential Smoothing
This is a weighted moving-average forecasting technique in which data points are weighted by an
exponential function. It is useful when very little past data is available. The formula can be shown as
follows:

New forecast = last period’s forecast +  (last period’s actual demand – last period’s forecast), where 
is a weight, or smoothing constant, chosen by the forecaster, that has a value between 0 and 1. This
equation can be written mathematically as:

Ft = Ft-1 + (At-1 – Ft-1) where

Ft = new forecast

Ft-1 = previous forecast

 = smoothing constant (0    1)

At-1 = previous period’s actual demand.

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Example 1
In January a car dealer predicted February demand for 142 new cars. Actual February sales were 153
new cars. Using a smoothing constant chosen by management of  = .20, we can forecast March
demand using the exponential smoothing model.

New forecast for March demand = 142 + .2(153 – 142)

= 144.2

Therefore our March demand for new cars is rounded off to 144.

8.14 TRENDS PREDICTIONS


This is a time series forecasting method that fits a trend line to a series of historical data points and
then projects the line into the future for forecasts. Figure 8.2 depicts the Least Squares Method for
finding the Best-Fitting Straight Line, Where the Asterisks are the Locations of the Seven Actual
Observations or Data Points.
Values of Dependent Variable

Actual observation Deviation7


(y value)

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1
Deviation2 ^ = a + bx
Trend line, y

Time period

Figure 8.2 Time predictions


Source: (Heizer and Render. 2014:156)

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8.15 REGRESSION ANALYSIS


Linear Regression Analysis is a straight-line mathematical model used to describe the functional
relationships between independent and dependant variables. We use this technique to verify whether
our sales might be related to our advertising budget, our prices, competitor’s prices or promotional
strategies. We use the equation

y = a + bx
where y = value of the dependant variable (e.g. Sales)
a = y-axis intercept
b = slope of the regression line
x = independent variable

Example 1

The values of y and their corresponding values of y are shown in the Table below:

x 0 1 2 3 4

y 2 3 5 4 6

a) Find the least square regression line y = ax + b.


b) Estimate the value of y when x = 10.

We use a table to calculate a and b.

x y xy x2

0 2 0 0

1 3 3 1

2 5 10 4

3 4 12 9

4 6 24 16

x = 10 y = 20 x y = 49 x2 = 30

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We now calculate a and b using the least square regression formulas for a and b.

a = (nx y - xy) / (nx2 - (x)2) = (5*59 - 10*20) / (5*30 - 102) = 1.9.

b = (1/n)(y - a x) = (1/5)(20 - 1.9*10) = 0.2.

b) Now that we have the least square regression line y = 1.9 x + 0.2, substitute x by 10 to find the value
of the corresponding y.

y = 1.9 * 10 + 0.2 = 19.2.

Example 2

The sales of a company (in million dollars) for each year are shown in the Table below:

x (year) 2005 2006 2007 2008 2009

y (sales) 12 19 29 37 45

a) Find the least square regression line y = ax + b.

b) Use the least squares regression line as a model to estimate the sales of the company in 2012.

We first change the variable x into t such that t = x - 2005 and therefore t represents the number of
years after 2005. Using t instead of x makes the numbers smaller and therefore manageable. The table
of values becomes.

t (years after 2005) 0 1 2 3 4

y (sales) 12 19 29 37 45

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We now use the Table to calculate a and b included in the least regression line formula.

t y ty t2

0 12 0 0

1 19 19 1

2 29 58 4

3 37 111 9

4 45 180 16

x = 10 y = 142 xy = 368 x2 = 30

We now calculate a and b using the least square regression formulas for a and b.

a = (nΣt y - ΣtΣy) / (nΣt2 - (Σt)2) = (5*368 - 10*142) / (5*30 - 102) = 8.4.

b = (1/n)(Σy - a Σx) = (1/5)(142 - 8.4*10) = 11.6.

b) In 2012, t = 2012 - 2005 = 7

The estimated sales in 2012 are: y = 8.4 * 7 + 11.6 = 70.4 million dollars.

 INTERNET EXERCISE
Institute for Business Forecasting
http://www.ibforecast.com

Obtain a sample from the journal of Business Forecasting. Read the article and provide a short report
on the main points.

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8.16 SUMMARY
Forecasting of product demand is a necessity for almost all aspects of operational planning. Short–term
demand forecasts determine the daily resources requirements needed for production, including labour
and material, as well as for the development of work schedules and shipping dates and controlling
inventory levels. Long-term forecasts are needed for the development of new products for development
and changes in existing products and to acquire the plant, equipment, personnel, resources, and supply
chain necessary for future operations. A number of forecasting methods have been presented including
qualitative and quantitative. Quantitative methods are easy to understand and are not costly. Also
understand that the forecast are estimates that aid in decision-making.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)
ACTIVITY 1
Auto sales at Carmen’s Chevrolet are shown below. Develop a 3-week moving average.

Week Auto Sales


1 8
2 10
3 9
4 11
5 10
6 13
7 -

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ACTIVITY 2
Carmen’s decides to forecast auto sales by weighting the three weeks as follows:

Weights Applied Period


3 Last week
2 Two weeks ago
1 Three weeks ago
6 Total

ACTIVITY 3
A firm uses simple exponential smoothing with   0.1 to forecast demand. The forecast for the week
of January 1 was 500 units whereas the actual demand turned out to be 450 units. Calculate the
demand forecast for the week of January 8.

ACTIVITY 4
Exponential smoothing is used to forecast automobile battery sales. Two value of  are examined,
  0.8 and   0.5. Evaluate the accuracy of each smoothing constant. Which is preferable?
(Assume the forecast for January was 22 batteries.) Actual sales are given below:

Month Actual Battery Sales Forecast


January 20 22
February 21
March 15
April 14
May 13
June 16

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ACTIVITY 5
Use the sales data given below to determine: (a) the least squares trend line, and (b) the predicted
value for 2003 sales.

Year Sales (Units)


1996 100
1997 110
1998 122
1999 130
2000 139
2001 152
2002 164

Solutions to Reflection Questions


Activity 2

Weighted moving average =


 (weight for period n)(demand in period n)
 weights
Week Auto Three-Week Moving Average
Sales

1 8

2 10

3 9

4 11 [(3*9) + (2*10) + (1*8)] / 6 = 9 1/6

5 10 [(3*11) + (2*9) + (1*10)] / 6 = 10 1/6

6 13 [(3*10) + (2*11) + (1*9)] / 6 = 10 1/6

7 14 [(3*13) + (2*10) + (1*11)] / 6 = 11 2/3

Activity 3

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Ft  Ft 1   (A t 1  Ft 1 )  500  0.1(450  500)  495 units

Activity 4

Month Actual Rounded Absolute Absolute Rounded Absolute Absolute


Battery Forecast with a Deviation Error2 with Forecast Deviation Error2 (with
Sales =0.8 with a (0.8 Alpha) with a with a 0.5 Alpha)
=0.8 =0.5 =0.5

January 20 22 2 22 = 4 22 2 22 = 4

February 21 20.4 0.6 0.62= 0.36 21 0 02 = 0

March 15 20.88 5.88 5.882 = 21 6 62 = 36


34.5744

April 14 16.176 2.176 2.1762 = 18 4 42 = 16


4.734976

May 13 14.4352 1.4352 1.43522 = 16 3 32 =9


2.05979904

June 16 13.28704 2.71296 2.712962 = 14.5 1.5 1.52 =2.25


7.360151962

Sum of Sum of
Absolute Absolute
Error2 = Error2 =
53.089327 67.25

S= S = 16.5
14.80416

MAD = ⅀ Absolute deviations / n


2.46736 2.75

MSE = ⅀(Forecast errors)2 / n 8.848221167 11.20833333

On the basis of this analysis, a smoothing constant of a = 0.8 is preferred to that of a = 0.5 because it
has a smaller MAD and a smaller MSE.
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Activity 5

Year Time Period (X) Sales (Units) (Y) X2 XY

1996 1 100 1 100

1997 2 110 4 220

1998 3 122 9 366

1999 4 130 16 520

2000 5 139 25 695

2001 6 152 36 912

2002 7 164 49 1148

S X = 28 S Y =917 S X2=140 S XY = 3961

x
 x  28  4
n 7

y
 y  917  131
n 7

b
 xy  nxy  3961  (7)(4)(131)  293  10.46
 x  nx
2 2
140  (7)(4 ) 2
28
a  y  bx  131  (10.46  4)  8916
.

Therefore, the least squares trend equation is:


y  a  bx  8916
.  10.46 x

To project demand in 2003, we denote the year 2003 as x = 8, and:


Sales in 2003  8916
.  10.46* 8  172.84

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CHAPTER 9: PRODUCT DESIGN


On completion of this chapter, you should be able to:

Generate new Product Opportunities

 Discuss the Life Cycle of a Product.

 Apply the Design Process.

ESSENTIAL READING
Learners are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
 (International Textbooks – Relevant Chapter / Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 6, pp.
241-271
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd.

 (South African Textbook – Relevant Chapter / Pages)


Grütter (2010). Introduction to Operations Management. A strategic Approach. First edition,
Pearson Education, South Africa, Cape Town.

Journal Articles & Reports


 Herstatt, C., and Hippel E. V. (1991). Developing New Product Concepts Via the Lead User
Method: A Case Study in a “Low Tech” Field” Journal of Product Innovation Management,
Vol. 1992, no 9, pp. 213-221.
 Chou, J., and Hsiao, S., (2004). A creative-based design process for innovative product
design. International Journal of Industrial Ergonomics, Vol. 34, no.1, pp. 421- 443.
 Julian, F., Mendez, A, Espinach F.X. and Verdaguer, N., (2012). BioResources, Vol.7, no.
4, pp. 5829-5842.
These articles are available on Google and at the Mancosa Library.

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9.1 INTRODUCTION TO DESIGNING OF GOODS AND SERVICE


Global firms know that the basis for an organisation’s existence is the goods or services it provides to
society. Great products are the keys to great success. To maximise the potential for success, top
companies tend to focus on a few key products and spend enormous amounts of time and resources in
improving them. Because most products have limited or even predictable life cycles, companies must
be constantly on the lookout for new products to design, develop and introduce to the market. Good
operations managers insist on strong communications between customers, products, processes and
suppliers.

An effective product strategy links product decisions with investment, market share and product life
cycle. The objective of product design is to develop and implement a product strategy that meets the
demands of the market place with a competitive advantage. Product strategy often focuses on
developing a competitive advantage through product differentiation, low cost, rapid response, flexibility
or a combination of these.

9.2 OBJECTIVES OF PRODUCT AND SERVICE DESIGN


Stevenson (2007) asserts that the objectives are:

 To bring new or revised products or services to the market as quickly as possible.


 To design products/services which have customer appeal.
 To increase the level of customer satisfaction.
 To improve quality.
 To reduce costs.

9.3 GOODS AND SERVICE SELECTION


Generation of new product Opportunities
Product selection, definition and design takes place on a continuing basis because so many new
product opportunities exist. Heizer and Render (2014) concludes that the following factors can influence
market opportunities:

 Understanding the customer is the premier issue in new product development. Many
commercially important products are initially thought of and even prototyped by users rather
than producers.

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 Economic change, which brings increasing levels of affluence in the long run, but economic
cycles and price changes in the short run.
 Sociological and demographic change which may occur as a result of decreasing family
size, for example AIDS.
 Technological change, which makes possible everything from home computers to cellular
phones to artificial hearts.
 Political/legal change, which brings about new trade agreements, tariffs and government
contract requirements.
 Other changes, which may be brought about through market practice, professional standards,
suppliers and distributors.

THINK POINT

Can you think of ideas to generate new products?

9.4 THE DESIGN PROCESS


The design process begins with a motivation for a design. Ultimately, the customer is the driving force
for product and service design. Failure to satisfy customers can result in customer complaints, returns,
and warranty/guarantee claims, amongst other things. Ideas for new or improved designs come from a
variety of sources including:
 Customer – the marketing department can tap this source of ideas through focus groups, surveys
and an analysis of buying patterns.
 Research and development – which is an organized effort to increase scientific knowledge or
product innovation.
 Competitors – by studying our competitor’s product or service, we can learn a great deal in
improving our own products.
 Reverse engineering – dismantling and inspecting a competitor’s product.

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Ideas for new or improved design cannot work in isolation. We must ensure that we have the capability
of production which includes equipment, skills, and types of material, technology and special abilities.

Manufacturability is a key concern for manufactured goods. Ease of assembly is important for costs,
productivity and quality. In general, design, marketing and production must work closely together,
keeping each other informed and taking into account the needs of the customer.

 ACTIVITY
Compile a catalogue of your organization’s products and then identify into which stage of the product
life cycle it falls.

9.5 PRODUCT LIFE CYCLE


Many new products exhibit a product life cycle. Heizer and Render (2014) contends that there are four
stages in product/service life cycles and these are:
 Introduction
When an item is first introduced it may be treated as a curiosity. Demand is generally high
because potential buyers may not be familiar with the product/service.
 Growth
As products or services survive the rigours of their introduction to the market, they will begin to be
more widely accepted. Increasing numbers of customers accept the value of the product or service
and volume starts to grow.
 Maturity
After a period of rapid growth, customers may become bored with products or services. Demand
starts to level off as many customers have already been supplied.
 Decline
Sales start to decline and the product life cycle is at the end. No new capital investments are made
in the product.

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The strategies and issues within the product life cycle are depicted in Figure 9.1:

Introduction Growth Maturity Decline


Product design Forecasting Standardization Little product
and critical Less rapid differentiation
development Product and product changes Cost
OM Strategy/Issues

critical process – more minor minimization


Frequent reliability changes Overcapacity
product and Competitive Optimum in the
process design product capacity industry
changes improvements Increasing Prune line to
Short production and options stability of eliminate
runs Increase capacity process items not
High production Shift toward Long production returning
costs product focus runs good margin
Limited models Enhance Product Reduce
Attention to distribution improvement capacity
quality and cost cutting

Fiqure 9.1 Product life circle


Source: (Heizer and Render. 2014)

9.6 PRODUCT DEVELOPMENT STAGES


Product concepts are developed from a variety of sources, both external and internal to the firm.
Concepts that survive the product idea stage progress through various stages, with nearly constant
review, feedback and evaluation in a highly participative environment to minimise failure.

Key Terms
 Product Development teams are responsible for moving from market requirements for a product to
achieving product success.

 Concurrent Engineering uses participating teams in the design and engineering activities.

 Computer-Aided Design (CAD) is the use of a computer to interactively develop, design and
document products.

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 Modular Design is parts or components of a product which are subdivided into modules that are
easily interchanged or replaced.

 Robust Design is a design that can be produced to requirements even with unfavourable conditions
in the production process.

 Value Analysis is a review of successful products that takes place during the production process.

 Standardization is the extent to which there is absence of variety in the product, service or process.

 Quality Function Deployment (QFD) is a structured approach for integrating the customers’ needs
into the product development process. It is used to connect customer attributes to engineering
characteristics. This is typically done by a technique called the House of Quality.

 INTERNET EXERCISE
3M Company (http://www.3m.com)
After visiting this website, describe a new product that 3M has introduced.

9.7 SUMMARY
New product and service design improve a firm’s image, invigorates employees, and helps a firm to
grow and prosper. The design process starts with ideas formulated into product concepts. Once a
product concept passes through a feasibility study, performance specifications are given to designers
who then develop the test prototype designs for some of these prototypes. The specifications for design
and manufacturing are taken through to a pilot run where designs are finalised and the planning for
product launch begins.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chaptersource and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter (page 140). It is essential that you read all of the textbook chapters and journal articles listed.

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QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)
ACTIVITY 1
You wish to compete in the super premium ice cream market. The task is to determine the wants of the
super-premium market and the attributes/hows to be met by their firm. Use the house of quality
concept.

ACTIVITY 2
Market research has revealed that customers feel four factors are significant in making a buying
decision. A “rich” taste is most important followed by smooth texture, distinct flavour, and a sweet taste.
From a production standpoint, important factors are the sugar content, the amount of butterfat, low air
content, and natural flavours.

ACTIVITY 3
Prepare a bill-of-material for a ham and cheese sandwich.

ACTIVITY 4
Prepare an assembly chart for a ham and cheese sandwich.

ACTIVITY 4

Michael’s Engineering, Inc. manufactures components for the ever-changing notebook computer
business. He is considering moving from a small custom design facility to an operation capable of much
more rapid design of components. This means that Michael must consider upgrading his CAD
equipment. Option 1 is to purchase two new desktop CAD systems at R100, 000 each. Option 2 is to
purchase an integrated system and the related server at R500, 000. Michael’s sales manager has
estimated that if the market for notebook computers continues to expand, sales over the life of either
system will be R1, 000,000. He places the odds of this happening at 40%. He thinks the likelihood of
the market having already peaked to be 60% and future sales to be only R700, 000. What do you
suggest Michael do?

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Solutions to Reflections Questions


Activity 1
One possible solution for this problem is:

Activity 2
One possible BOM would be:

Bill of Material
Bread 2 slices
Ham 1 slice
Swiss Cheese 1 slice
Lettuce 1/26 head of lettuce
Mustard 2 teaspoon
Pickle relish 1 teaspoon
Paper plate 1
Paper napkin 1

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Activity 3
Based on the BOM in activity 2, an assembly chart might look like:

Activity 4

The EMV for the desktop systems is R620 000 vs. R320 000 for the integrated system. Therefore,
Michael should purchase the desktop systems

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CHAPTER 10: PLANNING FACILITIES AND CAPACITY


Learning objectives
After going through this chapter you should be able to:
 Evaluate different strategies for capacity expansion.
 Explain the concepts of economies of scale, best operating level, and capacity cushion.
 Describe the advantages and disadvantages of different types of layouts in both manufacturing
and service settings.

ESSENTIAL READING
Learners are required to read ALL of the textbook Chapters and journal articles
listed below.

Textbooks:
(International Textbooks – Relevant Chapter / Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 7, pp.
333.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 7, pp. 204-223.
(South African Textbook – Relevant Chapter / Pages)
 Grütter (2010). Introduction to Operations Management. A strategic Approach. First
edition, Pearson Education, South Africa, Cape Town. Chapter 5, pp. 108-118.
Journal Articles & Reports
 Sharifi, S., and Saberi, K. (2014). Capacity Planning in Hospital Management: An Overview.
Indian Journal of Fundamental and Applied Life Sciences, Vol4, no.2, pp. 515-521.
 Benjaafar, S., and Gupta, D. (1997). Scope versus Focus: Issues of Flexibility, Capacity, and
Number of Production Facilities.
 Rodin, M et al. (2009). Mathematical and Computer Modelling. Journal of Mathematical and
Computer Modelling Vol, 50, no. 9, pp. 1461-1473.

These articles are available on Google at the Mancosa Library.

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10.1 INTRODUCTION
This Chapter addresses matters of capacity and facilities planning. We will discuss both long - term
capacity panning, intermediate and short - term capacity planning. Russel and Taylor (2014:205) define
capacity is the maximum capability to produce. Capacity planning takes place at various levels of detail.
Long term capacity planning is a strategic decision meant to establish a firm’s overall level of
resources. The time horizon spanned by this term is long enough to get resources, usually a year or
even more for building or indeed expanding facilities or acquiring new businesses. Capacity decisions
do affect product lead times, customer responsiveness, operating costs, and a firm’s ability to compete.
Excess capacity can drain resources of a company and prevent investments on more attractive
ventures.

10.2 CAPACITY
Russel and Taylor (2014:205) discuss strategies for timing of capacity expansion in relation to a steady
growth in demand as follows:
(i) Capacity lead strategy – Capacity is expanded in anticipation of growth in demand. This
strategy is used to attract customers from competitors who have capacity constraints or
simply to obtain a foothold in a rapidly expanding market. It affords a company a chance to
respond to sudden surges in demand. The idea is to meet peak demand with high levels of
service.
(ii) Average capacity strategy – Capacity is expanded to coincide with average expected
demand. Managers anticipate selling a certain amount of output. Unmet demand periods
are endured. It may be observed that half the time capacity leads demand or that demand
leads capacity.
(iii) Capacity lag strategy – Capacity increases after documenting increases in demand. This
strategy is conservative and it produces a higher return on investment but it may lose
customers in the process. It is applied in industries with standard products and cost-based
or weak competition. The idea is that once capacity is expanded, lost customers will return.
Refer to page 206 of Russel and Taylor for diagrammatic presentations of capacity
strategies.

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Russell and Taylor (2014:206) make a point that capacity increase depends on (1) the volume and
certainty of anticipated demand and (2) strategic objectives in terms of growth, customer service,
and competition; and the costs of both expansion and operation. Small increments at a time can be
made for capacity although such increments are costly over time. They argue that the best
operating level for capacity is the percent of capacity utilisation that minimises average unit cost.
Capacity that operates at 100% is not very productive as productivity slows down in the end
because there is no room for capacity cushioning. In industries where demand varies a lot,
resource flexibility is low, and customer service is important, large capacity cushions are common.

A 20% capacity cushion is there ideal. This means that in these industries the best operating
capacity is at 80%. Capacity cushions take care of unexpected surges in demand or temporary
work stoppages. Capital intensive industries with less flexibility and higher costs keep the cushion
level at about 10%. Airlines maintain a negative cushion by overbooking flights. The best operating
levels can refer to the most economic size of a facility.

The best operating point is where the economies of scale have reached their peak and the
diseconomies of scale have not yet started. Economies of scale do occur when costs per unit to
produce or operate at high levels of output. This is true when:
 Fixed costs can be spread over a large number of units.
 Production or operating costs do not increase in a linear fashion in proportion to levels of
output.
 Quantity discounts are available for material purchases, and
 Operating efficiency increases as the workforce gains experience.
Russel and Taylor (2014:207) point out that capacity decisions have implications for new facility
locations and how the flow of work is arranged in a facility.

10.3 FACILITIES
Facilities can be a source of competitive edge asserts Russel and Taylor (2014:207). Facilities do make
a difference. For instance the bank of America has created an exemplary facility that showcases green
designs. Green designs can save energy costs and boost productivity. Facilities affect the efficiency
with which workers carry out their jobs. Decisions such as how much and how fast goods can be
produced are affected by capacity planning. Considerations such as product mix, how responsive the
system should be, and how difficult it is to automate are all affected by capacity planning. Facilities
must thus be well planned, located and laid out.
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Nowadays factories are T-shaped, so that deliveries can be made directly to the point of use within the
factory. For example, stores have portable kiosks for customers to be able to enquire and they also
have checkouts at various locations in the entire facility. Classrooms are designed to incorporate
moving desks for ease of repositioning to allow for different teaching styles. Effective layouts are meant
to achieve many objectives such as:
 Minimising movement and costs of materials handling.
 Using space efficiently.
 Using labour efficiently.
 Removing bottlenecks.
 Facilitating communication and interaction between workers, workers and their supervisors and
between workers and customers.
 Reduce manufacturing cycle time and customer service time.
 Removing wasted or redundant movements.
 Facilitating the entry, exit and placement of people, material and products.
 Incorporating safety and security measures.
 Promoting product and service quality.
 Encouraging good maintenance activities.
 Providing a visual control of activities.
 Providing flexibility to adapt to changing conditions.
 Increasing capacity.

10.4 BASIC LAYOUTS


Russel and Taylor (2014: 208) discuss three basic layouts as follows:

1. Process layout
These layouts also go by the name “functional layouts”. Similar activities in a department or
work centre are grouped together based on the process or function performed. For instance in
a machine shop, all drills can be located in one work centre, lathes can be in another work
centre and milling machines in yet another. Another example is a departmental store, where
women’s clothes, men’s clothes, children’s clothes, cosmetics, and shoes can be in separate
departments. This layout type lends itself to common use in service shops, job shops and in
batch production.

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These are intermittent operations that serve the various needs of customers. Usually the
volume of customer orders is low, and the sequence for performing each customer order can
differ. Equipment used in a process layout is usually general purpose. Workers are skilled at
operating departmental equipment. The advantage of this type of layout, according to (2014:
208) is that it is very flexible. The obvious disadvantage is inefficiency. Either customers or jobs
do not flow through the system in an orderly manner. Backtracking therefore takes place and
sometimes there are many non-value adding movements. It may also be required that an
operation be set differently for each new operation.

Though workers can operate different machines in their departments, their workloads may not
be optimised due to constant fluctuations. There are many queues for jobs and customers tend
to wait long times. This results in idle time between jobs and customers. It must be noted that
material storage and movement are directly affected by the type of layout adopted. This type of
layout results in a lot of in-process inventories building up in the system as materials move from
one work centre to another, awaiting processing. The challenge in this type of layout is on
where to locate machines and departments so that they can relate to each other. The aisles for
forklift movement require a lot of space.

2. Product layout
Also, called “assembly lines”; these arrange activities in a line according to the sequence of
operation that need to be performed in assembling a product. Therefore, each product has its
own assembly line. Flow of work is always orderly, and efficient. The operations proceed from
one work centre to another, down the assembly line until the final product comes off the
production line.

The product made or service is standard for a general market not for a particular customer. A
good example of this is the automobile industry. Due to high demands, product layouts are
highly automated. The workers role in this type of layout is different. The advantage of this type
of layout is that it is efficient and easy to use. The disadvantage is that it’s not flexible since it
suits only one type of product or service. Conveyors are used to control the speed or work
automatically. Aisles are narrow and hence there is enough space in this type of layout to
facilitate material flow.

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3. Fixed-position layout
These are typical of projects in which the product produced is very fragile, bulky or heavy to
move. Ships, houses and aircrafts are produced this way. The product is stationery for the
entire production cycle. People, materials and equipment are all brought to the production site.

10.5 DESIGNING PRODUCT LAYOUTS


Russel and Taylor (2014:219) argue that a product line ensures that machines or workers operate in
line for producing a certain product. Hence layouts are established by following the order of an
assembly line. Precedence relationships and requirements however, are important in the assembly of
products. Although, other factors may complicate decision-making. Product layouts are used for high
volume-volume production. To achieve the required output, jobs are broken down into smallest
indivisible portions called work elements. The elements are so small that they cannot be performed by
more than one worker. But one worker often performs several of these work elements. A workstation is
an area along an assembly line that requires at least one worker or one machine. If each work station
on the assembly line takes the same amount of time to complete the assigned work elements, then
products will move successively from workstation to workstation with no need for a product to wait or a
worker to be idle. The process of making the amount of work equal at each work station is called line
balancing.

10.6 HYBRID LAYOUTS


Russel and Taylor (2014:223) clearly state that hybrid layouts are a combination of both product and
process layouts. There are three hybrid layouts we are going to discuss.

10.6.1 CELLULAR LAYOUTS


Cellular layouts attempt to combine the flexibility of a process layout with the efficiency of a product
layout. Using group technology (GT) non-similar machines or activities are grouped together into work
centres called cells to process families of parts or customers with similar requirements.

10.6.2 FLEXIBLE MANUFACTURING


A flexible manufacturing system (FMS) consists of numerous programmable machine tools connected
by an automated materials handling system. It is controlled by a common computer network. It is
different from traditional automation in the sense that the machine is fixed and although fixed machines
are efficient, they are not flexible.

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10.6.3 MIXED MODEL ASSEMBLY LINES


Although traditional assembly line can be used to process different models, they are not efficient. To
avert the ramifications of changing production runs such as frequent shutdowns from one model to the
other, one of the solutions has been the development of a mixed model assembly lines. It reduces the
time required to change over the line to produce different models. Workers are trained to perform a
variety of tasks and are allowed to work at more than one work station and finally the arrangement and
organisation of the work schedule is changed as well.

10.7 DESIGNING PRODUCT LAYOUTS


Table 10.1 A comparison of Product and Process Layouts
Product Layout Process Layout
1. Description Sequential arrangement of Functional grouping of activities
activities
2. Type of process Continuous, mass production, Intermittent, job shop, batch
mainly assembly production, mainly fabrication
3. Product Standardised, made to stock Varied, made to order
4. Demand Stable Fluctuating
5. Volume High Low
6. Equipment Special purpose General purpose
7. Workers Limited skills Varied skills
8. Inventory Low in-process, high finished High in-process finished goods
goods
9. Storage space Small Large
10. Materials handling Fixed path (conveyor) Variable path (forklift)
11. Aisles Narrow Wide
12. Scheduling Part of balancing Machine location
13. Layout decision Line balancing Machine location
14. Goal Equalise work at each station Minimise material handling cost
15. Advantage Efficiency Flexible

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10.8 SUMMARY
Capacity planning is the process of establishing the overall level of productive resources for the firm. It
involves long-term strategic activities such as the acquisition of new facilities, technologies or
businesses which take a year or more to complete. Capacity expansion can either lead or lag demand.
The best operating level should include a capacity cushion. Facility decisions are essential parts of the
firm’s strategy.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)
To be discussed in groups
ACTIVITY 1
Take a tour of two production or distribution facilities in your area. Look for the basic and hybrid layouts
discussed in this chapter. Also, look for bottlenecks and smooth flow. Write an essay comparing the
two.
ACTIVITY 2
Case Study: People Square Subway Restaurant Flow Optimisation
A new fast-food restaurant has opened up in Shanghai’s People Square subway station. The subway
station is busy 24 hours a day, seven days a week so the fast–food restaurant is a welcome addition
and money-making proposition. The success of the restaurant has resulted in crowds of people trying
to figure out what to buy, how to order it, where to pick things up, and where to pay for their purchase.
The restaurant manager knows if they can improve the flow of people, they can serve more people, the
customers will be happier; happier people tend to return more often and spend more money, and the
restaurant will make a greater profit. Over the first three months, a detailed study of the customer’s
purchase experience was conducted. The following table identifies 25 of the typical customers.

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Customer Bakery Fountain Soups Bottle Fresh Salads Sandwiches Tea or Total
Drinks Drinks Fruit Cookies Time
(min)
1 X X X 4
2 X X 1
3 X X X 3
4 X X 3
5 X X X 6
6 X X 9
7 X X X 5
8 X X 5
9 X X X 5
10 X X X 10
11 X X X 7
12 X X X 3
13 X X X 4
14 X X X 5
15 X 9
16 X 3
17 X X X 8
18 X X 7
19 X X 7
20 X X X X 6
21 X X 1
22 X X 1
23 X X 9
24 X X 7
25 X X X 1

Recommend changes you would make in the layout so that the restaurant can be successful at serving
more people.

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Fountain Drinks Bottled drinks, fruit, salads


Sandwich and fresh food
corner

Bakery items

Coffee Trays
and
Cookies

CKout Ckout

Figure 10.1 People Square Subway Restaurant facility Layout


Source: (Russel and Taylor, 2014:238)

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CHAPTER 11: LOCATION DECISIONS


When you complete this chapter, you should be able to:

 Discuss general procedure for making location decisions.

 Comment on the factors that affect location decisions.

 Evaluate location alternatives.

ESSENTIAL READING
Learners are required to read ALL of the textbook chapters and journal articles
listed below.
Textbooks:
 (International Textbooks – Relevant Chapter / Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter8, pp.
361.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 7, pp. 204-23.

 (South African Textbook – Relevant Chapter / Pages)


Grütter (2010). Introduction to Operations Management. A strategic Approach. First edition,
Pearson Education, South Africa, Cape Town. Chapter 5, pp.102-105.

Journal Articles & Reports


 MacCarthy, B., and Atthirawong (2001). Critical Factors in International Location Decisions:
A Delphi Study. Proceedings of the Twelfth Annual Conference of the Production and
Operations Management society, POM-2001, March 30-April 2, 2001, Orlando F1.
 Reynolds Jonathan (2010). Location Decision-Making in Retail Firms: Evolution and
Challenge.
 School of Management, University of Surrey, Guildford, Surrey, GU2 7XH, UK.
 Wang, B., Fu, X., Chen, T., and Zhou, G., (2014). Modeling Supply Chain Facility Location
Problem and Its Solution Using a Genetic Algorithm. Journal of Software, Vol. 9, no. 9, pp.
2335-2341.

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 Serdar-Asan, Seyda (2012).A Review of Supply Chain Complexity Drivers. Proceedings of


the 41st International Conference on Computers and Industrial Engineering.
 Memon, M.S., Lee, Y, H., and Mari S.I (2014). Sustainable and Resilient Supply Chain
Design under Disruption Risks. Journal of Sustainability, Vol. 6, no.1, pp. 6666-6686.
These articles are available on Google at Mancosa Library.

11.1 INTRODUCTION TO LOCATION STRATEGIES

Organisations become involved in location decisions for many reasons. Many firms including banks,
retailers, fast-food chains and supermarkets view location as part of a marketing strategy and they look
for locations that will assist them to expand their respective markets.

A similar situation occurs when an organisation experiences a growth in demand for its products that
cannot be satisfied with the expansion of current facilities. Some firms are forced to relocate because of
the depletion of their markets e.g. fishing, mining or logging operations. For other firms, a shift in their
markets would force them to relocate.

Location options include:


 Expanding a current facility instead of moving.
 Maintaining current sites whilst adding another facility elsewhere.
 Closing the current facility and moving elsewhere.

11.2 GENERAL PROCEDURE FOR MAKING LOCATION DECISIONS

The way in which an organisation approaches location decisions often depends on its size and the
nature of its operations. New and small organisations tend to adopt rather informal approaches to
location decisions. Stevenson (2007) infers that the general procedure for making location decisions
consist of the following steps:

 Decide on the criteria that will be used to evaluate location alternatives, such as increased
revenues or community service.
 Identify factors that are important, such as location of markets or raw materials.
 Develop location alternatives.
 Evaluate alternatives and make a selection.

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11.3 FACTORS AFFECTING LOCATION DECISIONS

Selecting a facility location is becoming much more complex due to the rapid globalisation of many
countries. Many factors can influence location decisions, and these include:

Regional Factors
The primary regional factors involve raw materials, markets and labour considerations.

Locations of Raw Materials – there are three primary reasons why firms locate near the source of raw
materials: necessity, perishability and transport costs.

Location of Markets – firms tend to locate in close proximity to the markets they intend to serve as part
of their competitive strategies.

Labour Factors
This relates to availability and cost of labour (wage/salary rates) in an area, or if there is a serious
potential problem with the unions. Skills of potential employees may also be a factor.
Other factors one has to consider, include:
- Climate and taxes
- Business and personal income tax
- Cost of energy and services
- Tax incentives
- Tariff protection
- Effectiveness of governments
- Housing
- Educational systems
- Local customs
- Language
- Exchange rates
- Municipal by-laws
- Proximity to suppliers
- Environmental regulations
- Site/ Land costs
- Availability of transport

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11.4 TRENDS IN LOCATION STRATEGIES

Recent trends in locating manufacturing facilities reflect a combination of competitive and technological
factors. One such trend is for foreign producers, especially Japanese automotive firms, to locate
factories in the United States. One reason for this is the fact that the United States represents a
tremendous market for Japanese cars, trucks and recreational vehicles. By locating in the United
States, these firms can reduce delivery times and costs. Furthermore, they can avoid any tariffs or
quotas that may be applied to imports.

Another trend is Just-in-Time manufacturing techniques, which encourages suppliers and customers to
locate in close proximity to each other in order to reduce lead times. We can expect to see the
establishment of micro-factories with narrow product focuses that will be located near major markets in
order to reduce response times. Advances in information technology have enhanced the ability of
companies to gather, track and distribute information. With the introduction of the internet, many
companies are now global players.

THINK POINT

In terms of strategic objectives, how do goods producing and service location decisions differ?

11.5 METHODS OF EVALUATING LOCATION ALTERNATIVES

Heizer and Render (2014:369) suggest four methods that can be used to solve location problems:

 The Factor-Rating Method


This is a location method that instils objectivity into the process of identifying hard-to-evaluate costs. It
has six steps as identified by Heizer and Render (2014:369):
(i) Develop a list of relevant factors.
(ii) Assign a weight to each factor that reflects its relative importance in the company’s objectives.
(iii) Develop a scale for each factor (for example 1 to 10 or 1 to 100).
(iv) Have management score each location for each factor, using the scale in step (iii).
(v) Multiply the score by the weights for each factor and the total score for each location.
(vi) Make a recommendation based on the maximum point score.

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 The Locational Break-Even Analysis


This is a cost-volume analysis to make an economic comparison of location alternatives. There are
three steps:
(i) Determine the fixed and variable costs for each location.
(ii) Plot the costs for each location, with costs on the vertical axis of the graph and the annual
volume on the horizontal axis.
(iii) Select the location that has the lowest total cost for the expected production volume.

Refer to Example 2 in Heizer and Render (2014:370-371), for a typical Locational Break-Even Analysis
scenario.

 Centre-of-Gravity Method
This is a mathematical technique used for finding the best location for a single distribution point that
services several stores in the area.

Refer to Example 3 in Heizer and Render (2014:372-373), for a typical Centre-of-Gravity Method
application.

 Transportation Model
The objective of the transportation model is to determine the best pattern of shipments from several
points of supply (sources) to several points of demand (destinations).

 ACTIVITY
Discuss the methods of evaluating location alternatives.

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11.6 SUMMARY

Location may determine up to 50% of operating expense. Location is also a critical element of the
determination of revenue in service, retail or professional firms. Industrial firms need to consider both
tangible and intangible costs. Industrial location problems are typically addressed through a factor
rating method, location cost-volume analysis, the centre of gravity methods and the transportation
method of linear programming.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)

ACTIVITY 1
A major drug store chain wishes to build a new warehouse to serve the whole Midwest. At the moment,
it is looking at three possible locations. The factors, weights, and ratings being considered are given
below:
Ratings
Factor Weights Peoria Des Moines Chicago
Nearness to markets 20 4 7 5
Labour cost 5 8 8 4
Taxes 15 8 9 7
Nearness to suppliers 10 10 6 10
Which city should they choose?

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ACTIVITY 2
Balfour’s is considering building a plant in one of three possible locations. They have estimated the
following parameters for each location:

Location Fixed Cost Variable Cost


Waco, Texas R300,000 R5.75
Tijuana, Mexico R800,000 R2.75
Fayetteville, Arkansas R100,000 R8.00
For what unit sales volume should they choose each location?

ACTIVITY 3
Our main distribution center in Phoenix, AZ is due to be replaced with a much larger, more modern
facility that can handle the tremendous needs that have developed with the city’s growth. Fresh
produce travels to the seven store locations several times a day making site selection critical for
efficient distribution. Using the data in the following table, determine the map coordinates for the
proposed new distribution center.

Store Locations Map Coordinates (x,y) Truck Round Trips per Day
Mesa (10,5) 3
Glendale (3,8) 3
Camelback (4,7) 2
Scottsdale (15,10) 6
Apache Junction (13,3) 5
Sun City (1,12) 3
Pima (5,5) 10

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ACTIVITY 4
A company is planning on expanding and building a new plant in one of three countries in Middle or
Eastern Europe. The general manager, Patricia Donegal, has decided to base her decision on six
critical success factors: technology availability and support, availability and quality of public education,
legal and regulatory aspects, social and cultural aspects, economic factors, and political stability. Using
a rating system of 1 (least desirable) to 5 (most desirable) she has arrived at the following ratings (you
may, of course, have different opinions). In which country should the plant be built?

Critical Success Factor Turkey Serbia Slovakia


Technology availability and support 4 3 4
Availability and quality of public education 4 4 3
Legal and regulatory aspects 2 4 5
Social and cultural aspects 5 3 4
Economic factors 4 3 3
Political stability 4 2 3

ACTIVITY 5
Assume that Patricia decides to use the following weights for the critical success factors:
Technology availability and support 0.3
Availability and quality of public education 0.2
Legal and regulatory aspects 0.1
Social and cultural aspects 0.1
Economic factors 0.1
Political stability 0.2
Would this change her decision?

ACTIVITY 6
Patricia’s advisors have suggested that Turkey and Slovakia might be better differentiated by either
(a) doubling the number of critical success factors, or (b) breaking down each of the existing
critical success factors into smaller, more narrowly defined items e.g., Availability and quality of public
education might be broken into primary, secondary, and post-secondary education. How would you
advise Ms. Donegal?

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Solutions to Reflection Questions

Activity 1

Ratings Weighted Ratings


Des Des
Factor Weights Peoria Chicago Peoria Chicago
Moines Moines
Nearness to
20 4 7 5 80 140 100
markets
Labour cost 5 8 8 4 40 40 20
Taxes 15 8 9 7 120 135 105
Nearness to
10 10 6 10 100 60 100
suppliers
Sum of Weighted ratings: 340 375 325

Therefore, it appears that based upon the weights and rating, Des Moines should be chosen.

Activity 2

Transition between Waco and Tijuana:


300, 000  (5.75 x)  800, 000  (2.75 x)
3x  500, 000
x  166, 000

Transition between Waco and Fayetteville:


300, 000  (5.75 x)  100, 000  (8.00 x)
200, 000  2.25 x
88,888  x

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Activity 3

New Distribution Center should be located at:

(10*3)  (3*3)  (4* 2)  (15*6)  (13*5)  (1*3)  (5*10) 255


Cx    7.97
3  3  2  6  5  3  10 32

(5*3)  (8*3)  (7 * 2)  (10*6)  (3*5)  (12*3)  (5*10) 214


Cy    6.69
3  3  2  6  5  3  10 32

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Activity 4

Critical Success Factor Turkey Serbia Slovakia


Technology availability and support 4 3 4
Availability and quality of public education 4 4 3
Legal and regulatory aspects 2 4 5
Social and cultural aspects 5 3 4
Economic factors 4 3 3
Political stability 4 2 3
= 23 19 22

Based upon her ratings of the critical success factors, Patricia should choose Turkey. From a
practical perspective, given the small difference between the scores for Turkey and Slovakia,
and the subjectivity of the ratings themselves, Patricia would be better advised to develop
additional critical success factors, more carefully weigh the individual factors; or, in general, to
acquire more information before making her decisions.

Activity 5

Critical Success Factor Weight Turkey Serbia Slovakia


Technology availability and support 0.3 4 1.2 3 0.9 4 1.2
Availability and quality of public 0.2 4 0.8 4 0.8 3 0.6
education
Legal and regulatory aspects 0.1 2 0.2 4 0.4 5 .5
Social and cultural aspects 0.1 5 0.5 3 0.3 4 0.4
Economic factors 0.1 4 0.4 3 0.3 3 0.3
Political stability 0.2 4 0.8 2 0.4 3 0.6
= 3.9 3.1 3.6

No, in this case, use of the weighting factors does not change the recommendation. One might again
suggest that additional information be considered in making the decision.

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Activity 6

(a) Doubling the number of critical success factors. There are two issues here. First, from a practical
perspective there are a limited number of truly “critical” success factors – and these should be the
ones presently being considered. Any additional factors should be of secondary or tertiary
importance. Second, given the subjective nature of the rating process, adding additional factors
would also increase the overall margin of error of the final ratings to a degree that may eliminate
any gain in differentiation arising from the use of the additional factors. The use of a maximum of
seven to nine critical success factors is usually appropriate.

(b) Given that one’s ability to estimate or rate an aggregate is usually better than one’s ability to
estimate or rate the individual components of the aggregate, this approach is unlikely to provide
much help.

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CHAPTER 12: DESIGNING THE SUPPLY CHAIN


Upon completion of this chapter, you will be able to:

 Describe the key characteristics and management strategies of the modern supply chain.

 Discuss supply chain practices and the impact of the environment on supply chain integration.

 Describe the role of information technology in supply chains, and the need for supply chain
integration.

ESSENTIAL READING
Learners are required to read ALL of the textbook Chapters and journal articles
listed below.

Textbooks:
(International Textbooks – Relevant Chapter / Pages)
 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply
Chain Management. Eleventh Edition. Pearson Education Limited, England.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 10, pp. 319.

(South African Textbook – Relevant Chapter / Pages)


 Grütter, A. (2010). Introduction to Operations Management. A strategic Approach.
First edition, Pearson Education, South Africa, Cape Town. Chapter 10, pp. 230-232.

Journal Articles & Reports


 Miguel, P., (2011). Supply Chain Management measurement and its influence on
Operations Performance. Journal of Supply Chaim Management, Vol. 4, no. 2, pp. 56 – 70.
 Cecere, L. (2014). The Supply Chain Shaman’s Journal, Vol. 2, no. 2, pp. 5-85.
 De Brito, M., and Van der Laan, E., (2010). Supply chain Management and Sustainability:
Procrastinating Integration in Mainstream Research. Journal of sustainability, Vol. 2, no. 1
pp. 859-870.
These articles are available on Google at the Mancosa Library.

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12.1 INTRODUCTION
Globalisation and the evolution of information technology according to Russel and Taylor (2014:320)
have catalysed supply chain management to become the strategic means of companies to manage
quality, satisfy customers and remain competitive. A supply chain encompasses all activities associated
with the flow and transformation of goods and services. Suppliers are referred to as upstream members
while end-users are referred to as downstream members.

12.2 THE SUPPLY CHAIN

Russel and Taylor (2014) discuss modern value chains as follows:


Supply chains for service providers - these are different from the supply for products in that there are no
physical goods provided to the customer. Thus the supply chain does not focus much on the flow of
items but on the human resources and the support services required to provide its own service. Hence
distribution networks are non-existent. Instead, supply chains for services are hubs.
Value chains - the term value chain and demand - driven value chain recently entered the supply chain
lexicon.
Supply chain has the following sets of processes:
 Procurement (source)
 Production (make)
 Distribution (deliver)
 Information.
All these processes have to interact to provide sound supply chain systems. A demand driven value
chain is considered to be a global supply.

12.3 THE MANAGEMENT OF SUPPLY CHAINS


Supply Chain Management (SCM) focuses on integration and management of the flow of goods and
services and information throughout the supply chain so that there is responsiveness to customer
needs while at the same time reducing total costs. In a global supply chain a company counts on the
coordinated effort of all members of the supply chain. Supply chains need the collaboration,
cooperation, and communication of all members in order to be effective. Thus suppliers and their
customers must share information. Customers need to be able to count on the quality and timeliness of
the products and services of the suppliers (Russel and Taylor, 2014; 324-325).

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Supply chain uncertainty and inventory - Companies want to synchronise the upstream flow of
incoming materials, parts, subassemblies, and services with production and distribution downstream so
they can respond to uncertainty in customer demand without increasing inventory costs. Businesses
use inventory to insure themselves against uncertainties in demand. In other words demand
fluctuations are catered for through inventory kept as safety stock. Thus supply chain members carry
buffer stock at various stages of the supply chain. This deals with many issues such as delays in supply
if ordered parts do not arrive on time. This way, the supplier can still serve their customers from safety
stock.
(Russel and Taylor 2014:325).

The Bullwhip Effect - if information is distorted, inaccurate demand data or forecasts from the
customer can end up with a back ripple effect on the upstream of the supply chain and magnify demand
variability at each stage. This would lead to higher buffer inventories, poor customer service; missed
production schedules wrong capacity plans, inefficient shipping and high costs. The bullwhip effect
occurs when slight to moderate demand variability gets magnified and demand information is
transmitted back upstream in the supply chain.

Risk management - Russel and Taylor argue that when supply chains are stretched over long
distances and multiple locations around the world, uncertainty and risk increases. This is where lean
manufacturing makes a lot of sense in that there is little redundancy and slack, that is carried as
inventory. Carrying inventor to take care of uncertainty is an expensive option. As a consequence, a
number of top firms in supply chain now engage in risk management to cope with uncertainty in supply
chain. This requires due diligence to evaluate and anticipate the likelihood and possibility of impact of
unexpected supply chain disruptions which can be economic, marketplace or natural and to plan ahead
of them.

This type of planning is called resiliency (or continuity) into the supply chain. Circumstances that cause
disruptions are identified in advance. Events are monitored worldwide to anticipate disruptions and
develop contingency plans. Risk pooling is an approach to managing risks where an attempt is made to
aggregate risks to reduce the impact of individual risks. One way to pool risks is to combine inventories
from multiple at risk locations into few, or one location like a warehouse or distribution centre, in a more
risk free environment.

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12.4 SUPPLY CHAIN SUSTAINABILITY


Russel and Taylor (2014) state that sustainability; also referred to ss “going green” has become one of
the most visible recent trends in operations and supply chain management. The United Nations defines
sustainability as meeting the present needs without compromising the ability of future generations to
meet their needs. The challenge for many companies is that they view sustainability as a way to be
environmentally friendly and socially conscious rather than being competitive.

12.5 INFORMATION TECHNOLOGY: A SUPPLY CHAIN ENABLER


Information essentially links all supply chain processes and members. Computer and information
technology allows real-time, online communications throughout the supply chain (Russel and Taylor
2014). Supply chain managers therefore, say that in modern supply chain management, inventory has
been replaced by information.

Electronic Business- E-business replaces physical processes with electronic ones. E-business supply
chain is conducted via a variety of electronic media, including data interchange (EDI), email, electronic
funds transfer (EFT), electronic publishing, image processing, electronic bulletin boards, shared
databases, bar coding, fax, and automated voice mail, CD-ROM catalogues, the Internet, websites, and
so on. Companies are able to automate the process of moving information electronically between
suppliers and customers thereby saving labour costs and time.

12.6 SUPPLY CHAIN INTEGRATION


Russel and Taylor (2014:336) propose that one of the keys to successful, efficient supply chain is to get
the various supply chain members to collaborate and work together that is referred to as getting
“synchronised.” This type of coordination is called supply chain integration. Information technology is
thus a key part of getting the supply chain integrated and it is done in four areas – information sharing,
collaborative planning, work coordination, and adoption of new models and technologies.

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Table 12.1 Supply Chain integration


Information sharing among supply chain members
Reduced bullwhip effect
Early problem detection
Faster response
Builds trust and confidence
Collaborative planning, fostering, replenishment, and design
Reduced bullwhip effect
Lower costs (material, logistics, operating, etc.)
Higher capacity utilisation
Improved customer service levels
Coordinated workflow, production and operations, procurement
Production efficiencies
Fast response
Improved service
Quicker to market
Adopt new business models and technologies
Penetration of new markets
Creation of new products
Improved efficiency
Mass customisation

12.7 SUMMARY
Supply chain management is one of the most important strategic aspects of operations management.
This is so because it incorporates many functions. Who to buy materials from, how to transport goods
and services, and constitutes much of an organisation’s strategic planning. Contracting the wrong
suppliers can result in poor materials and late deliveries. Selecting the wrong transport mode or carrier
can imply late deliveries to customers that will need high, costly inventories to offset.

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Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)
To be discussed in groups
ACTIVITY 1
Compare the supply chains, in general terms, for McDonald’s and for Toyota.

ACTIVITY 2
Discuss, in general, the differences in the supply chains of service providers and manufacturing
companies.

ACTIVITY 3
Identify three service businesses in your community and discuss their supply chains

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CHAPTER 13: MANAGING INVENTORY

Learning Objectives

On completion of this chapter, you should be able to:

 Identify the requirements for effective inventory management.

 Determine the costs associated with inventory.

 Establish when to re-order inventory.

 Classify inventory into A, B and C classes.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbooks – Relevant Chapter / Pages)

 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply


Chain Management. Eleventh Edition. Pearson Education Limited, England. Chapter
13, pp. 423-448.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte. Ltd.
(South African Textbook – Relevant Chapter / Pages)
 Grütter, A. (2010). Introduction to Operations Management. A strategic Approach. First
edition, Pearson Education, South Africa, Cape Town. Chapter 10, pp. 227.

Journal Articles & Reports


 Ann, I.O., Victoria, O.I., and Ukpere, W., (2014). The Impact of Effective Inventory
management on Organisational Performance: Study of 7 up Bottling Company Nile Mile
Enugu, Nigeria. Mediterranean Journal of Social Sciences, Vol.5 no 10, pp. 2039-9340.
 Lwiki, T., Ojera, P.B., Mugenda, N.G., and Wachira, V.K. (2013). The impact of Inventory
Management Practices on Financial Performance of Sugar Manufacturing Firms in Kenya.
International Journal of Business Humanities and Technology, Vol. 3, no. 5, pp. 75-85.
 Mabert, V.A., and Showalter, M., (2010). Logistics of the American Circus: The Golden
Age. Production and Inventory Management Journal, Vol. 46, no.1, pp. 74 – 90.

These articles are available on Google and at the Mancosa Library.

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13.1 INVENTORY MANAGEMENT


An inventory is a stock or store of goods. Inventory can take various forms and these include:
 Raw Material Inventory – what has been purchased, but not processed?
 Work-in-Process inventory (WIP), which is incomplete products or components that are no longer
considered raw material but have yet to become finished products.
 Maintenance, repair and operating materials which are supplies necessary to keep machines and
processes productive.
 Finished goods inventory which comprise end items, ready to be sold.

13.2 FUNCTIONS OF INVENTORY


There are six basic functions of inventory:
(i) To provide a stock of goods to meet expected customer demand.
(ii) To de-couple components from the production-distribution system.
(iii) To take advantage of quantity discounts as purchases in larger quantities may reduce the costs
of goods or delivery.
(iv) To strike a balance against inflation and upward price changes.
(v) To protect against delivery variation due to weather, supplier shortages, quality problems or
improper deliveries.
(vi) To permit operations to continue easily.

13.3 REQUIREMENTS FOR EFFECTIVE INVENTORY MANAGEMENT


Management has two basic functions with respect to inventory. One is to establish a system of
accounting for items in inventory, and the other is to make decisions on how much to order and when to
order. To be effective, companies should have the following:

(i) A system to keep track of inventory on hand and on order.


(ii) A reliable forecast of demand that includes the forecast error.
(iii) Knowledge of lead times and lead-time variability.
(iv) Reasonable estimates of inventory holding costs, shortage costs and order costs.
(v) A classification system for inventory items.

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13.4 INVENTORY ACCOUNTING SYSTEM


Inventory accounting systems can be periodic or perpetual. Under a periodic system, a physical count
of inventory items is made at periodic intervals (weekly, monthly, quarterly etc.) in order to decide how
much to order of each item. A perpetual inventory system keeps track of removals from inventory on a
continuous basis, so that the system can provide information on the current level of inventory for each
item. When the amount of inventory reaches a certain level, an order is triggered. The Two-Bin system
is a very simplified system. It involves the use of two containers for inventory. Items are withdrawn from
the first bin, when its contents are finished, it’s time to order. Cycle counting is a continuous
reconciliation of inventory with inventory records.

THINK POINT
Is inventory an advantage or disadvantage?

13.5 COST INFORMATION


There are three basic costs associated with inventory:

Holding or Carrying Costs


These relate to physically holding items in storage. They include insurance, interest, depreciation,
obsolescence, deterioration, spoilage, pilferage, and warehousing costs (electricity, services, security
and rent, rates, staff… right down to cleaning materials, coffee/tea/milk/water usage).

Ordering Costs
These are costs associated with the ordering and receiving of inventory. It includes determining how
much is needed, typing up invoices, inspecting goods upon arrival for quantity and quality and moving
goods to temporary storage.

Shortage Costs
This often results when demand exceeds the supply of inventory on hand. The costs can include the
lost opportunity of not making a sale, loss of customer goodwill, lateness charges etc. Shortage costs
are usually difficult to measure.

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13.6 CLASSIFICATION SYSTEM


Operations managers need to establish systems for managing inventory. We will briefly investigate two
systems: (1) how inventory items can be classified, and (2) how to accurately maintain inventory
records.

ABC Analysis
This method classifies inventory into three categories according to some measure of importance with
the intention of allocating control efforts accordingly. The idea is to establish inventory policies that
focus resources on a few critical inventory parts and not the many trivial ones. It is not realistic to
monitor inexpensive stock with the same intensity as very expensive items.

We classify items into three categories; class A items (very important); B (moderately important) and C
(least important) based on annual rand value.

The following is a graphic representation of ABC Analysis


Percent of annual dollar usage

A Items
80 –
70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percent of inventory items

Figure 13.1 ABC analysis


Source: Heizer and Render (2014:514)

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The ABC analysis divides on hand inventory into three classifications on the basis of annual rand
volume. ABC analysis is an inventory application of what is known as the Pareto principle (named after
Wilfred Pareto, a 19th century Italian economist). It states that there are a “critical few and trivial many”
inventory items. The idea then, is to establish policies that focus resources on the few critical inventory
items and not the many trivial ones. It does not make sense to manage trivial items with the same
intensity as critical ones. Class A items are those on which the annual Rand demand volume is high.
These items represent about 20 percent of the items. Class B items represent medium annual rand
volume and represent about 30 percent of the items. Class C items have lo annual rand volume and
represent about 50 percent of the stock items

 ACTIVITY
Suppose you have the following information:
Use the ABC approach to classify the inventory items in your Company.

Table 13.1 ABC analysis


Item Stock Number Annual volume in units Unit cost (R)
# 10286 1000 90.00

# 11526 500 154.00

# 12760 1550 17.00

#10867 350 42.86

# 10500 1000 12.50

# 12572 600 14.17

# 14075 2000 0.60

# 01075 100 8.50

# 01307 1200 0.42

# 10572 250 0.60

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To conduct an ABC analysis properly, students are always encouraged follow the following steps:
 Create a Table with nine columns.
 Obtain the annual rand value by multiplying the annual volume (demand in units with their
respective costs).
 Add all annual volume in rand value.
 Express each annual volume in rand value as a percentage of the total of annual rand value
you obtained in step 3.
 Rank importance based on percentage of annual demand.
 Then re arrange stock items to reflect the new priority. (Notice that in this example
coincidentally the stock items are not re arranged since importance has not changed. This is an
important point to observe. It will not be like this in all cases).
 Determine the percentage of items in each category of the ABC classes (that is 20% to belong
to class A, 30% to class B and 50% to class C).
 Worked as [Class A: 20/100 X 10 stock items = 2; Class B 30/100 x 10 stock items = 3; and
class C 50/100 x 10 stock items = 5.

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Now, this means that because your stock items are re-arranged according to priority, all you do is place
the first two items in A class; the next three are in B class; and the rest in C class. Refer to the Table
13.2.
Table 13.2 ABC Analysis
Item Stock Annual Unit cost Sales % of total Ranking Re- Cumulative ABC Class
Number Volume in (R) /demand sales / arranged values of %
units (annual demand Stock of demand
volume in (annual number
rand value) rand value) based on
ranking

#10286 1000 90.00 90000 38.8% 1 #10286 38.8% A

#11526 500 154.00 77000 33.2% 2 #11526 72% A

#12760 1550 17.00 26350 11.3% 3 #12760 83.2% B

#10867 350 42.86 15001 6.4% 4 #10867 89.6% B

#10500 1000 12.50 12500 5.4% 5 #10500 95% B

#12572 600 14.17 8502 3.7% 6 #12572 98.7% C

#14075 2000 0.60 1200 0.5% 7 #14075 99.2% C

#01036 100 8.50 850 0.4% 8 #01036 99.6% C

#01307 1200 0.42 504 0.32% 9 #01307 99.8% C

#10572 250 0.60 150 0.1% 10 #10572 99.9% C

Record Accuracy

Good inventory policies are meaningless if management does not know what inventory items are on
hand. Accuracy of records is a critical ingredient in production and inventory systems. Record accuracy
allows organisations to focus on items of inventory that are needed. Only if organisations can
accurately determine what it has on hand, can it make precise decisions about ordering, scheduling
and distribution. To ensure accuracy, proper documentation must be kept of incoming and outgoing
stock. It is important to have a well-organised warehouse that has limited access and good security
systems. Computerisation, bar coding, scanning equipment, tracking technology and automatic storage
and retrieval systems have greatly enhanced inventory management.

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13.7 ECONOMIC ORDER QUANTITY MODELS

The Economic Order Quantity (EOQ) model is one of the oldest, most commonly known inventory-
control techniques. EOQ models identify the optimal order quantity in terms of minimising the sum of
certain annual costs that vary with order size. This technique is relatively easy to use and is based on
several assumptions:

(i) There is only one product involved.


(ii) Annual usage (demand) requirements are known.
(iii) Usage is spread evenly throughout the year so that the usage rate is reasonably
constant.
(iv) Lead time does not vary.
(v) Each order is received in a single delivery.
(vi) There are no quantity discounts.

The Inventory Cycle

Objective is to minimize total costs


Curve for total
cost of holding
and setup

Minimum
total cost
Annual cost

Holding cost
curve

Setup (or order)


cost curve
Optimal Order quantity
order
quantity

Figure 13.2 EOQ


Source: Heizer and Render (2014:520)

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We use the formula below to calculate this technique:

Q0 = 2DS
H
Where:
D = Demand usually expressed as units per year
Q = Order quantity in units
S = Order costs in rands
H = Holding costs usually in rands per unit per year.

The formula for the number of orders per year is shown as:
D
Q0
The formula for the length of the order cycle is shown as:
Q0
D

Example:
A local distributor for a national tyre company expects to sell approximately 9600 steel radial tyres of a
certain size and tread design next year. Annual carrying costs are R16.00 per tyre and the order cost is
R75.00. The distributor works 288 days per year.

a) Determine the EOQ.


b) How many times per year does the store re-order?
c) Determine the length of the order cycle.

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Solution:
D = 9600 tyres
H = R16 per unit per year
S = R75

a) Q0 = 2DS
H

= 2x9600x75
 16
= 300 tyres
b) Number of orders per year = D
Q0
= 9600
300
= 32 orders

c) Length of order cycle = Q0


D
= 300
9600
= 3.125% x 288 days per annum
= 9 days
When to Reorder
EOQ models generally answer the question of how much to order, but not when to order. To answer
the question of when to reorder, we must first determine the reorder point (ROP). The reorder point
occurs when the quantity on hand reaches a predetermined amount. This amount includes expected
demand during lead time and safety stock. There are four determinants of the reorder point quantity:

(i) The rate of demand.


(ii) The length of lead time.
(iii) The extent of demand and lead time variability.
(iv) The degree of stock out risk acceptable to management.

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Lead time is defined as the time between placing an order and actually receiving it.
Safety stock is extra stock to allow for uneven demand (or buffer stock). Figure 13.3 depicts the re-
order point curve.

Q*
Inventory level (units)

Slope = units/day = d

ROP
(units)

Time (days)
Lead time = L

Figure 13.3 Reorder point


Source: Heizer and Render (2014:524)

13.8 SUMMARY

The two types of manufacturing systems for inventory are continuous and periodic. The fixed order
quantity model for determining order size and reorder points for determining when to order. The
objective was to determine optimal trade-off between inventor carrying costs and ordering costs that
would minimise total inventory costs. Management should continually strive to reduce inventory costs
despite the suggestion by the model that minimal costs are struck by balancing costs to order and costs
to carry.

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Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter, source and work through the
textbook chapters and journal articles listed in the “Essential Reading” list at the
beginning of this chapter. It is essential that you read all of the textbook chapters and journal articles
listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)

Activity 1
ABC Analysis
Stock Number Annual R Volume Percent of Annual R Volume
J24 12,500 46.2
R26 9,000 33.3
L02 3,200 11.8
M12 1,550 5.8
P33 620 2.3
T72 65 0.2
S67 53 0.2
Q47 32 0.1
V20 30 0.1
= 100.0

What are the appropriate ABC groups of inventory items?

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Activity 2
A firm has 1,000 “A” items (which it counts every week, i.e., 5 days), 4,000 “B” items (counted every
40 days), and 8,000 “C” items (counted every 100 days). How many items should be counted per
day?

Activity 3

Assume you have a product with the following parameters:


Demand  360 Holding cost per year  $1.00 per unit Order cos t:  $100 per order
What is the EOQ?

Activity 4

Given the data from Activity 3, and assuming a 300-day work year; how many orders should be
processed per year? What is the expected time between orders?

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Solutions to reflection questions

Activity 1

ABC Groups

Class Items Annual Volume Percent of R Volume

A J24, R26 21,500 79.5

B L02, M12 4,750 17.6

C P33, T72, S67, Q47, V20 800 2.9

= 100.0

Activity 2

Item Class Quantity Policy Number of Items to Count Per Day

A 1,000 Every 5 days 1000/5 = 200/day

B 4,000 Every 40 days 4000/40=100/day

C 8,000 Every 100 days 8000/100=80/day

Total items to count: 380/day

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Activity 3

2 * Demand * Order cost 2 * 360 * 100


EOQ    72000  268 items
Holding cost 1

Activity 4

Demand 360
N   134
. orders per year
Q 268

Working days
T  300 / 134
.  224 days between orders
Expected number of orders

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CHAPTER 14: AGGREGATE SCHEDULING AND


MATERIALS REQUIREMENTS PLANNING (MRP II)
Learning Objectives

On completion of this chapter, you should be able to:

 Discuss how Aggregate Scheduling is done.


 Examine and analyse demand and capacity options Operations Managers have at their
disposal.
 Clarify the formal and informal techniques that can be used.
 Give an overview of the MRP and MRPII concepts.
 Discuss and conduct MRPII.
 Discuss the Master Production Schedule.
 Define the Bill of Materials (BOM).

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ESSENTIAL READING
Students are required to read ALL of the textbook chapters and journal articles
listed below.
Textbooks:
(International Textbooks – Relevant Chapter / Pages)

 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply


Chain Management. Eleventh Edition. Pearson Education Limited, England. Chapter
13, pp. 553.

 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 14, pp. 457.

(South African Textbook – Relevant Chapter / Pages)


 Grütter, A. (2010). Introduction to Operations Management. A strategic Approach.
First edition, Pearson Education, South Africa, Cape Town.

Journal Articles & Reports


 Mula, J., Poler, R., Garcia-Sabater, J.P., and Lario, F.C (2006). Models for production
planning under uncertainty: A Review. International journal of Production Economics, Vol
103, no.1, pp. 271-285.
 Sultana, M., Shohan, S and Sufian, F. (2014). Aggregate Planning using Transportation
Method: A case Study in Cable Industry. International Journal of Managing and Supply
Chains, Vol. 5, no. 3, pp. 19-35.
 Hanczar, P., and Jakubiak, M., (2011). Aggregate planning in manufacturing Company
Linear Programming Approach. Total Logistics management, Vol.1, no. 4, pp. 69-76.

These articles are available on Google and at the Mancosa Library.

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14.1 INTRODUCTION TO AGGREGATE SCHEDULING


Aggregate scheduling, also known as aggregate planning, is essentially a ‘big picture’ approach to
planning. The main focus is to determine the quantity and timing of production for the intermediate
future – between three and 18 months. Operations managers try to determine the best way to meet
forecasted demand by adjusting production rates, labour levels, inventory levels, overtime work,
subcontracting rates and other controllable variables. The objective of aggregate planning is to
minimise costs over the planning period. According to Heizer and Render (2011:544), four requirements
are needed for aggregate planning:
(i) A logical overall unit for measuring sales and output.
(ii) A demand forecast for the intermediate planning period.
(iii) A method of determining the various costs.
(iv) A model that combines forecasts and costs so that scheduling decisions can be made for the
planning period.

Often aggregation is done by product groupings, where products (or services) with similar requirements
are lumped together for planning purposes. As an example, let’s consider how aggregate planning
might work in a large departmental store. The manager may decide to allocate 20% of the available
space to men’s clothing, 50% to female clothing 20% to children’s clothing and 10% to cosmetics. As
you can conclude from this example no mention is made as to what type, size, colour, etc. of clothing is
to be stocked.

Corporate strategies Economic, competitive Aggregate demand


and policies and political conditions forecasts

Business Plan Establishes production and


capacity strategies
Production Plan
Establishes production capacity

Master schedule Establishes schedules for specific


products

Figure 14.1 Aggregate scheduling


Source: Stevenson (2003:605)

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 ACTIVITY
Discuss the three levels of planning thatoperations managers are involved in, and explain what
kind of decisions are made at each level.

14.2 THE PURPOSE AND SCOPE OF AGGREGATE SCHEDULING

Aggregate planning seeks to address the balance between supply and demand. If supply and demand
are not in balance, the organisation will incur cost penalties. There will be added costs of adjusting the
system as well as opportunity costs.

Demand Options
The basic demand options are as follows:

 Pricing
Adjusting of prices is commonly used to shift demand from peak periods to off-peak periods.
Hotels, for example, offer lower rates for off-peak periods. Some restaurants offer specials for
children’s meals.

 Promotion
Advertising and other forms of promotion, such as displays and direct marketing, can be extremely
effective in shifting demand so that it matches existing capacity.

 Back-orders
Using this system, orders are taken in one period and deliveries promised for a later period. The
success of this approach depends on how willing customers are to wait for deliveries.

 New Demand
Organisations try to influence demand by creating a new demand for its product or service. For
example, demand for bus transportation is more intense during morning and afternoons. In this
case, bus companies need to create new demand during the off-peak period by offering their buses
for school trips, senior citizen groups and other facilities.

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CAPACITY OPTIONS

 Varying Workforce size by Hiring and Laying off staff


One way to alter capacity is to hire or lay off workers to match production rates. We must
remember that as new employees need to be trained, productivity tends to decrease, as they are
absorbed into the operations.

 Working Overtime / Short-time


Using overtime or short-time is a less severe way of changing capacity than hiring and firing
workers. The use of overtime is fairly attractive when dealing with seasonal demand peaks.
Overtime permits the company to maintain a skilled workforce base and gives employees an
opportunity to increase their earnings. It is advisable to use short time when demand is less than
capacity. Some organisations use this time for training workers, assisting in general maintenance
of plant and equipment etc.

 Part-time or Casual Workers


In some cases, the use of part-time workers is a viable option. Seasonal work that requires low or
moderate skills lends itself to part-time workers, who generally cost less than regular workers do.
Department stores, restaurants and supermarkets make extensive use of part-time workers. In
South Africa, this has been made very difficult by labour unions.

 Inventories
By using finished goods, inventory firms can produce goods in one period and sell or deliver them
later. This, however, carries a cost penalty, as you would incur storage or holding costs. This
strategy lends itself to manufacturing, as it is relatively easy to store tangible products. One cannot
use this approach in a service industry, as services can’t be stored.

 Outsourcing
Outsourcing enables planners to acquire temporary capacity. The question of hiring someone else
to do your work generally depends on factors such as available capacity, relative experience,
quality considerations, costs and the stability of demand.

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14.3 AGGREGATE SCHEDULING STRATEGIES

Arising out of the above, we can conclude that operations managers have a wide range of decision
options that they can they can consider to achieve a balance between demand and capacity. Some of
the strategies used according Heizer and Render (2014:559) are:

 Maintaining a level workforce.


 Maintaining a steady output rate.
 Matching demand period-by-period.
 Using a combination of decision variables.

Under a level capacity strategy, variations in demand are met by using some combination of
inventories, overtime, part-time workers, backorders and outsourcing. Matching capacity to demand
implies a chase demand strategy, which is the planned output for a period, is set at the expected
demand for that period.

14.4 TECHNIQUES FOR AGGREGATE SCHEDULING

Several techniques have been developed to help decision-makers with the tasks of aggregate
scheduling. These generally fall into one of two categories: informal trial-and-error techniques and
mathematical techniques. In practice, informal techniques are more commonly used. A general
procedure for aggregate planning consists of the following steps:

(i) Determine the demand for each period.


(ii) Determine the capacities for each period – this includes regular time, overtime, sub-contracting
etc.
(iii) Identify company or departmental policies that apply (e.g. the amount of safety stock that the
organisation has to carry, employment/ retrenchment policies and other issues).
(iv) Calculate the unit cost for regular time, overtime, sub-contracting, carrying stock, retrenchments
and other related issues.
(v) Develop alternative plans and calculate the cost for each plan.
(vi) Select the plan that best satisfies the objectives.

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THINK POINT

Is there a need for aggregate scheduling in your organisation? Logically explain and qualify your
answer.

INFORMAL TECHNIQUES

Informal techniques consist of developing simple tables or graphs that enable operations managers to
visually compare projected demand requirements with existing capacity. Frequently, graphs can be
used to guide the development of alternatives.

7,000 –

6,000 – Reduction
Cumulative demand units

of inventory
5,000 – Cumulative level
production using
4,000 – average monthly
forecast
requirements
3,000 –

2,000 – Cumulative forecast


requirements
1,000 –
Excess inventory


Jan Feb Mar Apr May June

Figure 14.2 Projecting demand requirements


Source: Heizer and Render (2014:565)

 INTERNET
Visit the following website for additional reading on Aggregate Scheduling:
http:/168.20.197.60/~williamsc/prod/chapter13.html

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MATHEMATICAL TECHNIQUES

Several mathematical techniques have been developed to deal with aggregate scheduling. These
include:
 Linear Programming
These are mathematical models used to obtain optimal solutions to problems involving the allocation of
scarce resources in terms of cost minimisation or profit maximisation.
 Linear Decision Rule
This is an optimisation technique that seeks to minimise combined costs, using a set of cost
approximating functions to obtain a single quadratic equation.
 Simulation Models
Computerised models that can be tested under different scenarios to identify acceptable solutions to
problems.
 Management Coefficient Models
This is a formal planning model built around a manager’s experience and performance.

14.5 AGGREGATE SCHEDULING IN SERVICES

Services occur in industries such as banking, transport, hospitals, education, fast foods, etc. There are
several issues relating to the differences between manufacturing and services:

(i) Services occur when they are rendered. Services cannot be stored but they can be delayed.
This removes the option of building up inventories during slack periods in anticipation of future
demand.
(ii) Demand for service can be difficult to predict. The volume of demand for services is often quite
variable. In some instances, customers may require prompt service such as ambulances,
police, fire services and other related emergency disciplines, whilst in others, they simply want
prompt service e.g. pizza deliveries, and may go elsewhere if their demands are not met.
(iii) Capacity availability can be difficult to predict. Processing requirements for services can also
be extremely variable. Bank tellers, for example, are often called upon to handle a wide variety
of transactions and requests for information thus making it difficult to establish a suitable
measure of their capacities.

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The flexibility of labour can be an advantage in services, although South Africa has prohibitive rules for
labour. Service providers are capable of handling a wide variety of service requirements and therefore
planning is easier. Material planning is the very heart of an MRPII system for a manufacturing company.
It is important to first understand where it fits into the overall system and the part the Bills and Routings
play in material planning. The diagram below is a simplified flow chart of the manufacturing portion of
an MRPII system.

MARKETING STRATEGIC PLAN FINANCIAL PLAN


PLAN

PRODUCTION RESOURCE
PLAN REQUIREMENTS

INVENTORY PLANNING

RULES MASTER ROUGH – CUT


PRODUCTION CAPACITY
BILLS OF
SCHEDULE PLANNING
MATERIAL
MATERIALS MATERIALS PLAN
REQUIREMENTS
PLANNING

CAPACITY CAPACITY PLANS


REQUIREMENTS
PLANNING

KANBAN PRODUCTION
ACTIVITY
CONTROL

DISPATCH INPUT -
LISTS OUTPUT
CONTROL
MRPII Flow Chart

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14.6 PRODUCTION PLAN

Production plan is a formal plan of where the company is going, created by the company executive.
The main inputs comprise the forecast or marketing plan, the long-term or strategic plan and the budget
or financial plan. The production plan is defined in family groups and in coarse time periods (months or
quarters). It is the executive’s plan for the master scheduler to turn into a manufacturing plan. Therefore
it must be signed off to authorise the commitment for purchasing material to meet the plan.

The production plan is the agreed-upon to plan that it created by the company management. It uses
family groups and covers the horizon of the Master Production Schedule (MPS) in monthly periods and
the time required to change the resources in quarters. It is used by the Master scheduler to create the
Master Production Schedule. The activity to create this plan is now being referred to as ‘production
planning’ or ‘sales and operations planning’.

Resource Requirements Planning (RRP)

As the executive sitting in the boardroom generates the production plan, how practical is it?

Resource Requirements Planning Objectives


Resource requirements planning is the capacity or resource check of the production plan
using load profiles for each family group. It allows you to:
 Anticipate the long-term resource requirements.
 Picture the load at critical work centre.
 Balance the requirements across the available capacity.
 Check out the plan to verify if it will give you the required performance measurements.

The Calculation
Resources requirements planning calculate the resources required by taking the quantities per time
product family and multiplying these by the contents of the load profile. Each load profile identifies the
key resources and quantities needed for one of that family. This is calculated for each family group. The
total requirements are then added for each resource per time period. The total is then compared to that
which is stated to be available in the work centre or resource file. The result is a comparison report that
can be produced and that indicates the amount of a resource that is required against that which is
available.

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THINK POINT
How can MRP contribute to improving productivity as a theoretical query, or as in your own
organisation in a practical manner?

14.7 MASTER PRODUCTION SCHEDULE (MPS)

This is performed by the master scheduler and is the act of converting the production plan into a
detailed manufacturing plan.

The MPS is defined normally at the finished goods part number level in much finer time periods, either
actual dates or weeks. The master production schedule is the plan on which all subsequent plans are
built.

The MPS is often termed ‘the anticipated build schedule’. This first short definition sums up the whole
concept of the MPS. It is what we believe we will need to build in order to meet the company’s
objectives.

The Master Production Schedule in the MRP 1 Schematic

Customer Orders Forecast Demand


Master Production
Schedule

Materials
Bill of Materials Inventory Records
Requirements Planning

Purchase Orders Materials Plan Works Order

Source: Pycraft et al (1997:501)


The purposes of MPS

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The MPS is the key to an MRPII success because everything else within the system is working to meet
this plan. The MPS is where marketing and sales meet manufacturing and the link person is the master
production scheduler. The concept is that order entry and customer promises are made from
information on the MPS, and the task of the manufacturing department is to meet the schedule, which
will then result in satisfied customers.

Whilst the master production schedule will differ from company to company depending on the type of
software used, the manufacturing process, and the requirements of the particular industry, the overall
reasoning is similar.

Rough Cut Capacity Planning (RCCP)


One of the problems the master scheduler has when converting the production plan into the MPS is to
have a practical balanced schedule. Rough cut capacity planning is the capacity check module for the
MPS. It analyses the resources required by the MPS and uses load profiles for the critical resources.
Rough cut capacity planning is an interactive what-if approach.

Material Requirements Planning (MRP)


This part of the system is straightforward, in that it is based purely on arithmetic. It is the add-up, take-
away part, that calculates both the purchased material requirements and the lower level manufacturing
requirements. MRP creates planned orders in line with the inventory rules and goes out into the future
to the full horizon of the MRP.

 ACTIVITY
Discuss the types of resources that can be scheduled using MRPII.

Capacity Requirements Planning (CRP)


CRP is a comparison of the standard hours required with the hours stated to be available. This is
summarised in time periods but calculated on a date resolution by manufacturing order operation, per
work centre. The logic of CRP is that it receives all manufacturing orders from MRP and then breaks
each order down into individual operations. For each operation, the batch quantity is multiplied by the
standard time required. In this manner, a number of standard hours required per work centre per
operation can be calculated. This can be achieved for each manufacturing order operation. The sub-
totals can then be accumulated per work centre, per time period.

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The final figure can then be compared to that time which is stated to be available. Capacity
requirements planning is a comparison of the standard hours required to those stated to be available in
a summarised form, either as a histogram or as a percentage load report.

Production Activity Control (PAC)


This chapter was previously called ‘shop floor control’, but nowadays since it is fully realised that much
of the control is not situated on the shop floor but in the planning office, it is called Production Activity
Control.

This means that manufacturing managers need information so they can do their jobs better. They must
have the information to make logical decisions timeously.

Input/Output control is used to control the volume of work on the shop floor, and operation sequencing
makes detailed scheduling and priority control feasible.

14.8 KANBAN
The Japanese word ‘Kanban’ has become familiar to many of us in recent years. The kanban, or pull
system, serves two purposes:
 To get material for the ‘next point of use’.
 To authorise the producer to make more material.

The essence of this methodology is the standard container with a card attached. This creates a ‘pull
system’ in which work centres signal with a card that they wish to withdraw parts from feeding
operations or vendors. ‘Pull’ signifies the production of items only as demanded for use.
In practice, the kanban can be something other than a card, such as a returnable container, a
circle/square on the ground or a tag. When a kanban is empty or free, it authorises material to be
replenished. For example, when material is collected by the shop feeder of the assembly line, he/she
returns the empty container that held the parts they have already used. The receipt of the empty
container is the instruction to the producing work centre to make another container full.

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14.9 INVENTORY RULES


For any planning calculation to be made, the company’s batching, ordering and inventory rules must be
clearly stated so the system can use them to make the ordering plan both practical and in agreement
with the company’s policy. The rules normally have to be formally approved by the financial director as
they have serious consequences on the inventory holding and cash flow.

The inventory rules provide management with the means to dictate to the system how the company’s
policies should be applied. Various order methods are available to the user, such as order point, MRP,
time phased order point, and no system control (user planning and control). This means that you have
a choice in the method used by the system for the ordering of material.

You are given a choice in the method by which the order quantities are calculated, for example, least
total cost, and part period balancing or discrete. The most commonly used of all methods is period
order quantity, that is, a means of ordering a number of days’ supply instead of certain quantities. All of
these methods apply different parameters for the grouping of daily requirements for parts so that the
purchase orders, or manufacturing order quantities are economical or desirable’s quantities to be
ordered. To make the resulting quantities practical, batching rules are used.

Bill of Material (BOM)


For any calculation to be made to establish what material is required, the BOM must be available,
because it is in the BOM that the material content of each product is specified. For a works order to be
scheduled the operation lead times are needed, and these are found on the routing file.

The BOM consists of two elements: an item master file where the details of each part number used in
the system are identified, and the bill of material itself (or product structure record as it is sometimes
known), where the content of an assembly is defined. The routing file is where the operations that the
product must pass through during the manufacturing process are identified. The example on the
following page represents how to develop the product structure and “explode” it to reveal the
requirements for each component.

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Figure 14.3 Bill of materials


Source: Heizer and Render (2011:581)

The item master file is where the information about a part is held. It is not uncommon to find over 200
fields in this file. For example, it will hold engineering, planning, inventory, costing and stores related
data for each part number.

Each manufactured part or sub-assembly has a bill of material and a routing. A bill of material consists
of a record for each component or raw material used on that parent. The parent is the item to be made
and the raw materials or piece parts used are known as its components. A whole complex assembly is
built up of sub-assemblies and piece parts, but each sub-assembly is entered into the BOM and
controlled as an entity in itself. They are known as single level bills of material.

For each BOM there is routing which holds the detail of each operation, such as set-up time and unit
run time. It is from these times that the operation time is established for the order quantity, and is then
used for scheduling the work through the plant.

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Other MRPII Modules

A full MRPII system will either include or provide interface points to other modules which are needed to
run a manufacturing business. Such modules are:

 customer order entry


 accounts payable (creditors)
 accounts receivable (debtors)
 general ledger
 costing
 purchasing
 forecasting
 sales analysis
 CAD/CAM interfaces
 Distribution (DRP)

It depends on the particular software whether these are further modules of the MRPII package or if a
financial package is made to interface. A typical approach is to provide an interface to a well-known
specialised package as in the case of payroll.

MRPII Summary

It should be realised by now that MRPII is not just a production control system but a system which
provides the tools for people throughout the whole company to manage their business better. It alerts
you to potential problems to solve, before it is too late.

Why Material Planning?

As we have seen, material planning is at the heart of the MRPII system for manufacturing companies,
but perhaps the question is, why do we need MRPII anyway?

To obtain and implement an MRPII system is not a small job, so why do companies embark on this long
and expensive journey?

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It has been established internationally over the last few years that on average, the following benefits
can be gained if the implementation is taken seriously.

Tangible Benefits

 An inventory reduction of 20% or an increase in stock turnaround of 50% is normal. This obviously
depends on how well you have managed your inventory prior to the start of the implementation.
 A saving of 5% in purchased material cost due to working to a plan and knowing what is wanted
when.
 A company can expect productivity improvement from 10% to 30% depending upon complexity of
material requirements. In the electronics assembly business, with hundreds of components going
onto a printed circuit board, the problem has always been how to assemble at the right time.
Working to a plan and using MRPII to calculate the component requirements reduces the number
of material shortages considerably.
 The overtime used to overcome late shipments is typically reduced by 50%. By working to a plan,
the system can identify future problems and we can solve them before they affect production.
 Due to the fact that we will be able to produce to the master plan, we will be delivering what is
needed to the finished goods store on time. This will result in us having the correct items in stock
when needed. With the correct stock available, sales should increase by 5% for a company that
sells ex-stock.
 If we now apply each of these savings to the company, it will result in an overall profitability
increase of 30% or more.
These figures are not sales talk but well established over a number of years from companies that
have made a reasonable job of implementing MRPII.

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Intangible Benefits
Having looked at the hard numbers with the tangible benefits we now need to examine the intangible
benefits:

 Because we will now know what we have and what will be available when, it will mean that our
sales and customers service staff can talk more confidently to our customers and give more
realistic promises.
 Typically management can become ‘highly paid progress chasers’, as they are called upon to solve
supply problems with our suppliers integrated system. Much of this need will fall away and they can
then do what they are paid to do, which is to manage the business.
 The ‘what if’ facility will allow the company to manage its future growth effectively by computing
what resources will be required to meet the proposed plan.
 The MRP logic will allow us to manage the changes in business volumes and product mix before
they seriously affect the output programme and inventory levels.
 If it is a requirement to keep track of which ‘lot’ of material has been used to produce a particular
product, the ‘Lot Tractability Module’ will support this.
 Many hours are often spent in ‘Output Meetings’ where the main topic is not output but shortages.
Often, much time is wasted arguing whose figures are correct, when we are all getting our
information from the same common source. With the introduction of MRP, this problem will
disappear.

Overall, we can say that with everything moving in the same direction in a co-ordinated way, the
problems will reduce and subsequently the quality of life for everyone in the company will improve.
The Scheduling Problem
Having now stated what the benefits can be after implementing an MRPII system, we need to
understand what the main cause of our problem is. Generally in most manufacturing companies it can
be put down to the inability of scheduling to manage a continual stream of changes. Let’s examine what
can go wrong with scheduling:
 Schedules start with a forecast, and by definition they are only estimates so these will not
necessarily be accurate. It means that our basic material plan starts with unreliable numbers.
 We then find that the dates on which products are required keep changing and this plays havoc
with the material plan.

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 Our customers change their minds not only on what they want, but when they want it. This causes
multiple changes to the manufacturing plan and to the material requirements.
 The engineering design department keeps updating products and modifying them continually. To
inform every one of the alterations they produce what is known as an Engineering Change Notes
(ECNs). Effectively, they are telling the planner that the material he/she ordered is no longer
required but now they need something else urgently. Again the plan is being changed.
 Our manufacturing team does its part to upset the plan by scrapping the odd batch or so. This
results in more material being needed and an extra capacity requirement which has to be fitted into
an already busy schedule.
 Our cycle counters find errors with the stock balances so put through stock adjustment transactions
which alter the basic numbers on which our initial plans were built.
 The management team goes missing by attending conferences or courses or participants may
even be sick, but while they are away more alterations are made to the plan.
 Last, but not least is our group of suppliers which has been known to deliver late on the odd
occasion. When this occurs it requires the planner to re-schedule work that cannot be built but also
to bring in work that can be built.

With all these changes taking place on a daily basis, is it any wonder that scheduling is a problem,
MRPII is not going to stop this from happening, but the occurrences should be reduced and it will give
the means to manage them better.

What else do we need to do to improve the situation? As the changes are occurring by the hour in
manufacturing, at least our system must endeavour to keep up with them so at least we are working to
the latest information. This means that we need to run MRPII system nightly so that it can identify what
needs to be done each day, to keep on top of the ever-changing situation.

The Formal or Informal System


In many companies, although each person or department is trying his or her best, things still don’t work
out too well. No matter whom you ask, they will quickly tell you why they have not met their objectives
and which department is causing their problem. This is commonly known as ‘chronic finger pointing’. It
is a common ‘ailment’ that companies suffer from when their operations are not well coordinated.

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We also find that the numbers in the system are not reliable. For example, the stock balances on the
system do not reflect what is really in the stock bin. The purchase order file tells us that the following
quantities are due on certain dates, but in reality these orders were completed some weeks ago.

Overall, we call this the informal system and with it go the problem of accountability. Who is really
responsible for what, and do they have the means to be responsible and accountable for these
activities? When we take on MRPII we need to accept that if we want it to work then we must operate in
the formal system. This does not mean that the system takes over and stops us from doing what the
business needs, it means that we do things properly at the right time, in the agreed manner and we do
it ‘right’ the first time.

14.10 SUMMARY
Aggregate planning is critical for companies with seasonal demand patterns and services. Variations in
demand can be met by adjusting capacity or managing demand. Several mathematical techniques are
applied in aggregate planning including linear programming linear decisions rules, search decisions
rules, and management coefficient models.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

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QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)
ACTIVITY 1
The Hunicut and Hallock Corporation makes two versions of the same basic file cabinet, the TOL (Top-
of-the-line) five drawer file cabinet and the HQ (High-quality) five drawer filing cabinet.

The TOL and HQ use the same cabinet frame and locking mechanism. The drawer assemblies are
different although both use the same drawer frame assembly. The drawer assemblies for the TOL
cabinet use a sliding assembly that requires four bearings per side whereas the HQ sliding assembly
requires only two bearings per side. (These bearings are identical for both cabinet types.) 100 TOL and
300 HQ file cabinets need to be assembled in week #10. No current stock exists.

Develop a material structure tree for the TOL and the HQ file cabinets.

ACTIVITY 2
Develop a net material requirements plan for the TOL and HQ file cabinets in the previous problems
assuming a current on-hand finished goods inventory of 100 TOL cabinets. The lead times areas
follows:

Painting and final assembly of both HQ and TOL requires 2 weeks.

Both cabinet frames and lock assembly require 1 week for manufacturing.

Both drawer assemblies require 2 weeks for assembly.

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Solutions to Reflection Questions


Activity 1

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Activity 2
Week

Lead
1 2 3 4 5 6 7 8 9 10
Time

2
Required date 100
weeks
TOL
Order release
date

2
Required date 300
weeks
HQ
Order release
300
date

Required date 300 1 week


Cabinet
frame and
Order release
lock 300
date

150 2
Required date
0 weeks
HQ drawer
assembly
Order release 150
date 0

150 2
Required date
Drawer 0 weeks
frame
assembly Order release 150
date 0

150 2
Required date
0 weeks
HQ sliding
assembly
Order release 150
date 0

600 2
Required date
0 weeks
Bearings
Order release 600
date 0
Receipts: 300 cabinet frames and locks in week 8
1500 HQ drawer assemblies in week 8
1500 drawer frame assemblies in week 6
1500 HQ sliding assemblies in week 6
6000 bearings in week

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CHAPTER 15: MANAGING PROJECTS


Learning outcomes
On completion of this chapter, you should be able to:

 Critically discuss the elements of a project.

 Explain why certain projects are successful and others not.

 Appreciate and articulate the role and characteristics of a Project Manager.

 Apply Project Management Tools and Techniques.

ESSENTIAL READING
Students are required to read ALL of the textbook chapters and journal articles
listed below.
Textbooks:
(International Textbooks – Relevant Chapter / Pages)

 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England. Chapter 3, pp. 93.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition. John
Wiley & Sons Singapore Pte. Ltd. Chapter 9, pp. 268-303.

(South African Textbook – Relevant Chapter / Pages)


 Grütter, A. (2010). Introduction to Operations Management. A strategic Approach. First edition,
Pearson Education, South Africa, Cape Town. Chapter 9, pp. 201-212.

Journal Articles & Reports


 Cooke-Davies, T. (2002). The “real” success factors on projects. International journal of
Project management, Vol. 20, pp.185-190.
 Crawford, L., Pollack, J., and England, D. (2006). Uncovering the trends in project
management: Journal emphases over the last 10 years. International Journal of Project
Management, Vol.24, pp.175-184.
These articles are available on Google and at the Mancosa Library

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15.1 INTRODUCTION TO PROJECT MANAGEMENT


Pycraft et al (1997) defines a project as a set of related activities which have a definite starting point
and end state, which pursues a defined goal and uses a definite set of resources. The history of project
management can be traced back to the Manhattan Project which created the first atom bomb in the
1940s.

Examples of projects include:


 The Apollo moon programme
 An AIDS information campaign
 Producing a television programme
 Constructing the Channel Tunnel
 Designing a car, aeroplane, etc
 Relocating a factory
 Buying and moving into a new house
 Installing a new computerised system
 Conducting an election
 Co-ordinating a relief effort

15.2 THE ELEMENTS OF A PROJECT

All projects have some elements in common and these include:


 An objective. A definable end result, output or product, which is defined in terms of cost, quality
and timing.
 Complexity. Several tasks are required to be undertaken to achieve the objectives. The
relationship between all these tasks can be extremely complex.
 Uniqueness. A project is usually a one-off undertaking.
 Uncertainty. As all projects are planned before they are executed, they carry a certain amount
of risk.
 Life cycle. Projects normally go through three phases – planning, execution and phase-out.
 Temporary nature. Resources may be moved from one project to the next once the tasks have
been completed.

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15.3 REASONS FOR SUCCESSFUL PROJECT MANAGEMENT

Pycraft et al (1997) outlines the following factors that can contribute to the success of a project:
 Clearly defined goals. This should include the general project philosophy or general mission of the
project and a commitment to those goals on the part of the project team members.

 Competent project manager. A skilled leader who has the technical, interpersonal and
administrative skills.

 Top-management support. Senior management commitment for the project must be openly
displayed and communicated to all stakeholders.

 Competent project team members. Careful selection of team members is vital. Choose a
‘winning’ team.

 Sufficient resource allocation. Money, labour, machines, materials and other business related
items must be available in the required quantities.

 Adequate communication channels. Up-to-date information must be available to the project team
on a continual basis. Communication channels to the various role players must be established.

 Control mechanisms. A system to monitor actual events against planned outcomes must be set
up.

 Feedback capabilities. All parties involved in the project must be able to review the project status
on a regular basis and make suggestions and corrections through formal feedback channels or
review meetings.

 Responsiveness to clients. All stakeholders must be kept informed regularly on the projects
status.

 Trouble-shooting mechanisms. You need to set up a system or a set of procedures to tackle


problems when they arise and the ability to trace back to the root cause of the problem.

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 Project staff continuity. Key project personnel must be kept on for the duration of the project.
Frequent staff turnover results in the project losing the wealth of knowledge, which may have been
accumulated.

15.4 THE PROJECT MANAGER


The project manager bears the ultimate responsibility for the success or failure of the project. He/she
must be an organiser – a person who is capable of working through others to accomplish the objectives
of the project. The project manager is tasked with effectively managing the following duties:

(i) The work: so that all necessary activities are accomplished in the desired sequence.
(ii) The human resources: so that those employees working on the project have direction and
motivation.
(iii) Communication skills to disseminate information and keep all stakeholders informed.
(iv) High quality: so that performance objectives are realised.
(v) Time: so that the project is completed on time.
(vi) Costs: keeping the project within budget.

THINK POINT
Would you prefer to be a project manager or a production manager? Explain why, by noting the various
potential difficulties in each of their functions.

15.5 THE PROJECT LIFE CYCLE


Stevenson (2007) maintains the projects generally go through life cycles:
 Concept: where the organiSation recognizes the need for a project or responds to a request for a
proposal from a potential customer or client.
 Feasibility analysis: which examines the expected costs, benefits and risks of undertaking the
project?
 Planning: which spells out the details of work and provides estimates of the necessary human
resources, time and costs?
 Execution: during which the project itself is done. This phase often accounts for the majority of
time and resources consumed by the project.
 Termination: during which closure/finality is achieved.

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 ACTIVITY

You have been tasked with the construction of a house. Using the project life cycle stages, identify the
activities that must be performed at each stage.

Project management Techniques


There are several techniques that have been developed to assist project managers in ensuring the
successful completion of a project:

Work breakdown structure


As large projects usually involve numerous activities, planners need some way to determine exactly
what has to be done so that they can realistically estimate how long it would take to complete the
various elements and how much it would cost. This can be done by developing a Work Breakdown
Structure (WBS) which defines the project by dividing it into major sub components or tasks as reflected
in the example below.

Level ID
Level Number Activity
1 1.0 Develop/launch Windows Longhorn OS
2 1.1 Development of GUIs
2 1.2 Ensure compatibility with earlier
Windows versions
3 1.21 Compatibility with Windows ME
3 1.22 Compatibility with Windows XP
3 1.23 Compatibility with Windows 2000
4 1.231 Ability to import files

Figure 15.1 Work Breakdown Structure


Source: Heizer and Render (2014:98)

This methodology establishes a logical framework for identifying the required activities for the project.
Developing a good work breakdown structure can require substantial time and effort due to the
uncertainties associated with a project.

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15.6 GANTT CHARTS


The Gantt chart is a popular tool for planning and scheduling simple projects. It enables a manager to
initially schedule project activities and then to monitor progress over time by comparing planned to
actual progress. To construct a Gantt chart, major activities and their duration and the sequence needs
to be identified. Horizontal bars are drawn for each activity along a time line. The obvious advantage of
the Gantt chart is its simplicity and therefore it has become very popular. A simple Gantt chart is
depicted below:

Time
J F M A M J J A S

Design
Prototype
Test
Revise
Production

Source: Heizer and Render (2008)

An example of a Delta Jet Gantt Chart during a 60 minute layover is depicted In Figure 15.2

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 15 30 45 60
Minutes

Figure 15.2 Gantt chart


Source: Heizer and Render (2014:99)

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15.7 PERT AND CPM


PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are widely used
techniques for planning and coordinating large-scale projects.

According to Heizer and Render (2014:101) they follow six basic steps:
1) Define the project and prepare the work breakdown structure.
2) Develop the relationships among activities together with their sequence.
3) Compile the network connecting all activities.
4) Assign time or cost estimates to each activity.
5) Calculate the longest time path through the network. This is known as the critical path.
6) Use the network to help plan, schedule, monitor and control the project.

Finding the critical path is a crucial step in controlling the project. The activities on the critical path
represent the tasks that will delay the entire project unless they are completed on time.

PERT and CPM answer the following questions:


(i) When will the entire project be completed?
(ii) What are the critical activities – the ones that will delay the project if they are late?
(iii) What are the non-critical activities – the ones that can run late without delaying the
completion of the project?
(iv) What is the likelihood of the project being completed by a specific date?
(v) At any particular time, is the project behind, on or ahead of schedule?
(vi) Are we meeting our budget?
(vii) Are there sufficient resources available to complete the project?
(viii) If the project is to be completed in a shorter time period, what would it cost us?

15.8 THE NETWORK DIAGRAM


The network diagram of a project shows sequential relationships by use of arrows and nodes (circles).
The arrows represent the project activities and the nodes (circles) indicate events. The activities are
project tasks that consume resources and/or time, and the nodes (circles) indicate the starting or
finishing of events. A path is a sequence of activities that leads from the starting node to the finishing
node. The critical path is the longest path of the network. Critical activities are the activities on the
critical path. Dummy activities are inserted into the network to maintain the logic and sequence of the
network – they consume no time or resources.
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An example of a typical network diagram is as follows:

C
2 4
(Construct
Stack)
Co (Ins F

s) l
nt na
nt ta

ne er

(Build Burner)
om ld A ro ll
po Int ls
)
C ui

H
(B

E
1 Dummy 6 7
Activity (Inspect/
Test)
Ro (M B G
of odi all
/F fy
lo n st tion )
or (I llu ice
) 3
D
5 PoDev
(Pour
Concrete/
Install Frame)

Figure 15.3 Activity on arrow network diagram


Source: Heizer and Render (2014:104)

PERT (Program Evaluation and Review Technique)

For each activity in PERT we must specify an optimistic time, a most probable time and a pessimistic
time estimate. We then use these three time estimates to calculate an expected completion time and
variance for each activity. We can use the formula:

t = a + 4m +b and v = b – a 2

6 6
where: a = optimistic time for activity completion
b = pessimistic time for activity completion
m = most likely time for activity completion
t = expected time of activity completion
v = variance of activity completion time

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EXAMPLE
Compute the expected times and variances of completion for each activity based on the following time
estimates:
ACTIVITY a m b
(time in weeks) (time in weeks) (time in weeks)
Clear site 3 4 5
Dig foundation 1 3 5
Pour concrete 5 6 7
Build walls 6 7 8

Solution
ACTIVITY a+4m+b t b-a SQUARED
6
Clear site 24 4 2/6 4/36
Dig foundation 18 3 4/6 16/36
Pour concrete 36 6 2/6 4/36
Build walls 42 7 2/6 4/36

Using Microsoft Project to Manage Projects


MS Project is useful for project scheduling and control. First, the project is defined, next the activity
information is entered and finally the project can be viewed as a Gantt chart or as a Network. An
Example as represented in Heizer and Render (2011:115) is illustrated below:

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15.9 SUMMARY
Since the start of CPM/PERT in the 1990s, network analysis has been applied in a variety of
government fields concerned with project control, including the military agencies, NASA, the Federal
Aviation Agency (FAA). One reason for the popularity of network analysis is that it provides a visual
display of the project that is easy for manager and staff to understand and interpret. It is also a powerful
tool for identifying and organising activities. It is also used for control purposes.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To
adequately address these questions you will need to have completed all the ‘essential
reading’ listed at the beginning of this chapter.)
ACTIVITY 1
The following represent activities in a major construction project. Draw the network to represent this
project.
Activity Immediate Predecessor
A -
B -
C A
D B
E B
F C, E
G D
H F, G

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ACTIVITY 2
Given the following Time Chart and Network Diagram, find the Critical Path.
Activity a m b t Variance
A 2 3 4 3 1/9
B 1 2 3 2 1/9
C 4 5 12 6 16/9
D 1 3 5 3 4/9
E 1 2 3 2 1/9

ACTITIVITY 3
A project has an expected completion time of 40 weeks and a standard deviation of 5 weeks. It is
assumed that the project completion time is normally distributed.
(a) What is the probability of finishing the project in 50 weeks or less?
(b) What is the probability of finishing the project in 38 weeks or less?
(c) The due date for the project is set so that there is a 90% chance that the project will
be finished by this date. What is the date?

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Solution to Reflection Questions


Activity 1

Activity 2

Critical path: ACDE = 14

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CHAPTER 16: ROLE OF SERVICES IN AN ECONOMY AND


THE NATURE OF SERVICES
Learning Objectives

On completion of this chapter, you should be able to:

 Evaluate the impact of services on jobs and the economy.

 Appreciate and articulate the differences between products and services.

 Design service delivery processes.

 Map out service processes and suggest process improvements.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbooks – Relevant Chapter Pages)
 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply
Chain Management. Eleventh Edition. Pearson Education Limited, England.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth
edition. John Wiley & Sons Singapore Pte.Ltd. Chapter 5, pp. 146-154.
(South African Textbook – Relevant Chapter / Pages)
 Grütter, A. (2010). Introduction to Operations Management. A strategic Approach.
First edition, Pearson Education, South Africa, Cape Town.

Journal Articles & Reports


1. Gunawardane, G. (2008). A Comparison of Service Management Research in Operations
Management and Service Management Journals. California Journal of Operations
Management, Volume 6, No. pp. 79-86.
2. Correa, H. (2008). Changes in The Role of Production and Operations Management in the
New Economy. The Flagship Research Journal of International Conference of the
Production and Operations Management Society, Vol. 1, No. 1, pp. 1-11.
3. Johnston, R. (1998). Service operations management: return to roots. Journal of Operations
and Production management, Vol. 19, No. 2, pp. 104-124.
4. Paryani, K. (2011). Product quality, service reliability and management of operations at
Starbucks. International Journal of Engineering, Science and Technology, Vol. 3, No.7, pp.
1-14.

These articles are available on Google and at Mancosa Library.

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16.1 THE SERVICE ECONOMY


According to Russel and Taylor (2014:147148) services are the predominant force in our society.
Globally, services account for over 50% of economies of countries like Brazil, Russia, Japan, Germany,
India and China. The impact of supporting services on products has turned product producing
companies into service providers. Increased outsourcing of business services demands more in-depth
understanding of the service product and standards for quality. Service computing has prompted a new
level of understanding of customer requirements and design theory. Major societal problems, such as
education, healthcare, disaster relief, and government services, depend on complex customer-focussed
processes and benefit significantly from an innovative and interdisciplinary approach to their study and
analysis. This unprecedented shift in customer, corporate, and societal demand for services and the
management of corresponding resources has created a critical need for the study, analysis and design
of service systems. The rise of the service sector includes South Africa as well.

16.2 CHARACTERISTICS OF SERVICES


Services are acts, deeds, performances, or relationships that produce time, place form, or
psychological utilities for customers. A cleaning service saves the customer time from doing the chores
himself. Department stores and grocery stores provide many commodities for sale in one convenient
place. An online broker puts together information in a form more usable for the investor. A night out at a
restaurant or movie provides psychological refreshment in the middle of a busy workweek, Russel and
Taylor (2014: 148-149).

Services can also be defined in contrast to goods. A good is a tangible object that can be created and
held or used later. A service is intangible and perishable. It is created and consumed simultaneously.
Although these definitions may seem straightforward, the distinction between goods and services is not
always clear-cut. For example, when we purchase a car, are we purchasing a good or the service of
transportation? A flat-screen TV is a manufactured good, but what use is it without the service of
television broadcasting? When we go to a fast-food restaurant, are we buying the service of having our
food prepared for us, or are we buying goods that happen to be ready-to eat food items?

In reality, almost all purchases of goods are accompanied by facilitating services, and almost every
service is accompanied by facilitating goods. Thus, the key to understand the difference between goods
and services lies in the realisation that these items are not completely distinct but rather are two poles
on a continuum.

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Understanding the different characteristics of services can help to better design service activities and
the systems for their delivery. Services can be distinguished from manufacturing by the following eight
characteristics. Although not all services possess each of these characteristics, they do exhibit at least
some of them to some degree.

(i) Services are intangible

It is difficult to design something you cannot see, touch, store on a shelf, or try on for size. Services are
experienced, and that may be different for each individual customer. Designing a service involves
describing what the customer is supposed to “Experience,” which can be a very difficult task. Designers
begin by compiling information on the way people think, feel and behave (called psychographics).
Because of its intangibility, consumers perceive a service to be more risky to purchase than a product.

Cues (such as physical surroundings, server’s demeanour and service guarantees) need to be included
in service design to help form or reinforce accurate perceptions of the service experience and reduce
the consumer’s risk. The quality of a service experience depends largely on the customer’s service
expectation. Customers also have different expectations of various types of service providers. You
probably expect more from a department store than from a discount store, or from a car dealer’s service
centre than from an independent repair shop. Understanding the customer and his or her expectations
is essential in designing good service.

(ii) Service output is variable

This is true because of the various service providers employed and the variety of customers they serve,
each with his or her special needs. Even though customer demands vary, the service experience is
expected to remain consistent. According to a recent survey, the most important measures of service
quality to the customer are reliability and consistency. Service design, then, must strive for predictability
or robustness. Examples of services known for their consistency include McDonald’s and many others.

(iii) Services have higher customer contact

The service “encounter” between service provider and customer is the service in many cases. Making
sure that the encounter is a positive one is part of service design. This involves giving service providers
the skills and authority necessary to successfully complete a customer transaction..
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Studies show a direct link between service provider motivation and customer satisfaction. Moreover,
service providers are not motivated primarily by compensation but rather by concurrence with the firm’s
“service concept” and being able to perform their job competently. High customer contact can interface
with efficiency of a service and make it difficult to control its quality (i.e. there is no opportunity for
testing and rework). However, direct contact with customers can also be an advantage for services.
Observing customer experiencing a service generates new service ideas and facilitates feedback for
improvements to existing services.

(iv) Services are perishable

Because services cannot be inventoried, the timing and location of delivery are important. Service
design should define not only what is to be delivered but also where and when.

(v) The service and the service delivery are inseparable

That means service design and process design must occur concurrently. This is one area in which
services have an advantage over manufacturing – it has taken manufacturing a number of years to
realise the benefits of concurrent design.) In addition to deciding what, where, and when, service
design also specifies how the service should be provided. “How” decisions include the degree of
customer participation in the service process, which tasks should be done out of the customer’s sight
(called front-room activities) and which should be done out of the customer’s sight (back-room
activities), the role and authority of the service provider in delivering the service and the balance of
“touch” versus “tech” (i.e. how automated the service should be).

(vi) Services tend to be decentralised and geographically dispersed

Many service employees are on their own to make decisions. Although this can present problems,
careful service design will help employees successfully deal with contingencies. Multiple service outlets
can be a plus in terms of rapid prototyping. New ideas can be field-tested with a minimum disturbance
to operations to operations. McDonald’s consider each of its outlets a “laboratory” for new ideas.

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(vii) Services are consumed more often than products

There are more opportunities to succeed or fail with the customer. Jan Carlzon, former president of
SASD Airlines, calls these opportunities “moments of truth”. Services are confronted with thousands of
moments of truth each day. Careful design and redesign of the service encounter can help make each
moment of truth a positive experience. In a sense, the service environment lends itself more readily to
continuous improvement than does the manufacturing environment.

(viii) Services can be easily emulated

Competitors can copy new or improved services quickly. New ideas are constantly needed to stay
ahead of the competition. As a result, new service introductions and service improvements occur even
more rapidly than new product introductions.

16.3 THE SERVICE DESIGN PROCESS


Services that are allowed to just happen rarely meet customer needs. The following are world-class
services that come to mind: McDonald’s plans every action of its employees (including 49 steps to
making perfect French fries); Nordstrom creates pleasurable shopping environment with well-stocked
shelves, live music, French flowers in the dressing rooms, and legendary salespersons. FedEx designs
every stage of the delivery process for efficiency and speed; and Disney World in Japan was so well
designed that it impressed even the zero-defect Japanese.

Service design is more comprehensive and occurs more often than product design. The inherent
variability of service processes requires that the service system be carefully designed. Refer to figure
5.4 in your prescribed text book on page 152 (Russel and Taylor).

The service concept defines the target customer and the desired customer experience. It also defines
how service is different from others and how it will compete in the marketplace. Sometimes services are
successful because their service concept fills a previously unoccupied niche or differs from the
generally accepted mode of operation. For example Citibank offers 15 minute mortgage approvals
through online computer networks with real estate offices, credit bureaus, and builder’s offices, and an
expert system loan-application advisor. Amazon excels at customer service for online orders, and
eBay’s worldwide reach creates more lively auctions with a huge community of buyers and sellers.

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A service package is created from the service concept to meet customer needs. The package consists
of a mixture of physical items, sensual benefits, and psychological benefits. The physical items in a
restaurant consist of the facility, food, drinks, tableware, napkins, and other touchable commodities.
The sensual benefits include the taste and aroma of the food and the sights and sounds of the people.
Psychological benefits are rest and relaxation, comfort, status and a sense of wellbeing.

Effective service design recognises and defines all the components of a service package. Finding the
appropriate mix of physical items and sensual and psychological benefits, and designing them to be
consistent with each other and the service concept, are also important. A fast food restaurant promises
nourishment with speed. The customer is served quickly and is expected to consume the food quickly.
Thus, the tables, chairs, and booths are not designed to be comfortable, nor does their arrangement
encourage lengthy or personal conversation. The service package is consistent.

From the service package, service specifications are developed for performance, design and delivery.
Performance specifications outline expectations and requirements for general and specific customers.
Performance specifications and requirements are converted into design specifications and, finally,
delivery specifications (in lieu of manufacturing specifications).

Design specifications must describe the service in sufficient detail for the desired service experience to
be replicated for different individuals at numerous locations. The specifications typically consist if
activities to be performed, skilled requirements and guidelines for service providers, and cost and time
estimates. Facility size, location, and layout, as well as equipment needs are also included.

Delivery specifications outline the steps required in the work process including the work schedule,
deliverables, and the locations at which the work is to be performed.

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Table 16.1 Differences in Design for High-contact Service


Design Decision High-Contact Service Low-Contact Service
Facility location Convenience to customer Near labour or transport source
Facility layout Must look presentable, Designed for efficiency
accommodate customer
needs, and facilitate interaction
with customer
Quality control More variable since customer Measured against established
is involved in process ; standards; testing and rework
customer expectations and possible to correct defects
perceptions of quality may
differ; customer present when
defects occur
Capacity Excess capacity required to Planned for average demand
handle peaks in demand
Worker Skills Must be able to interact well Technical skills
with customers and use
judgement in decision making
Scheduling Must accommodate customer Customer concerned only with
schedule completion date
Service process Mostly front-room activities; Most back-room activities;
service may change during planned and executed with
delivery in response to minimal interference
customer
Service package Varies with customer; includes Fixed, less extensive
environment as well as actual
service

Source: (Russel and Taylor, 1014:154)

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16.4 TOOLS FOR SERVICE DESIGN


(i) Service Blueprinting

Service operations involve several different players (the customer, other customers in the system, the
primary service provider, and other service providers), both front and back room operations, and
different opportunities for interaction among the players during the service process. Service blueprinting
is the process of recording in graphical form the activities and interactions in a service process. The
term blueprinting is used to reinforce the idea that services need to be as carefully designed as a
physical product and documented with a blue print of their own. Refer to Figure 5.6 on page 155 in your
prescribed text book (Russel and Taylor).

A Service blueprint for a Coffee Shop

Influence/ph Customer WIFi Tour bus


ysical passes Lighting, Stops
evidence "Today's Couches, Coffee condiment
bar POS terminal
speed Tables, Chairs
Menu Loyal card
Line of Influence
Customer
actions Customer Customer Customer Customer pays Customer
Placesorder waits receives order pour in

Line of Interaction
Onstage/Fro Barista
Barista
nt Office Barist gives receipt
Completes
Readies order order

Line of Visibility
Backstage/B
ack offife Baristagoes to
stockroom, gets
last bag of cups

Line of support
Support Barista tells Online credit Barista asks
procecesses manager out of service for help
cups accessed; upfront
EFT

Figure 16.1 Service blueprint


Source: Russel and Taylor (2014:155)

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(ii) Front Office and Back-Office Activities

In manufacturing firms, the focus of activities is on the back office (i.e. producing products efficiently),
whereas in service firms, the focus is on the front office, interacting with the customer. Every firm needs
both a front and back office, but firms may structure these in different ways.

In the front office, the customer interface can be an individual, the service provider, or self-service kiosk
or machine. The interactions in the front office influence the customer’s perception of the service and
thus are critical to a successful design. Typical front office goals are courtesy, transparency,
responsiveness, usability and fun.

The back-office processes material or information to support the front-office needs. Typical goals of the
back office are efficiency, productivity, standardisation, and scalability. Obvious conflict exists between
front and back offices. Connecting the front and back offices in a meaningful way and encouraging the
flow of information and support are two of the challenges of service design. Designing the service with
an eye to the entire system will help alleviate some of the tensions. Mass customisation is an example
of a front/back compromise. Instead of giving customers the freedom to order anything they want,
present a menu of options from which the customer may choose. This provides some stability to the
back office, while also being responsive to the customer.

(iii) Servicescapes

It is precisely because services are so intangible that cues to service quality are needed. Servicecapes
design: (1) the space and function where the service takes place; (2) the ambient conditions, such as
music, temperature, décor, and noise; and signs, symbols, and artefacts. It is important that the
servicescape be consistent with the service concept, and that all the elements be consistent with each
other. Servicecapes have proved to be extremely important customer perceptions of service quality and
to their satisfaction with the service.

(iv) Quantitative Techniques

There are many quantitative techniques for improving the service process. One of the most common
and powerful is waiting line analysis, which we will cover next.

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16.5 SUMMARY
Services do represent a growing sector of the world economy and count for about two thirds of global
output. The most industrialised countries account for a much larger portion of services. Service design
and operations present a challenge due to the intangibility of the service; the inherent variability in
service delivery and co-production of value by the customer and the service provider.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)

ACTIVITY 1
Describe a customer experience you have personally encountered where the good or service or both
satisfactory (for example, defective product, errors, mistakes, poor service, service upsets, and so on).
How might the organisation have handled it better and how could operations management?

ACTIVITY 2
Choose one of the following services and explain, using specific examples, how each of the ways that
services differ from manufactured goods apply.
A. a family practice medical office
B. a fire department
C. a restaurant
D. an automobile repair shop

(Guidelines to Solutions)

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Activity 1

This question is designed to help students internalise the concept of customer satisfaction and
dissatisfaction, and potential operations management activities and decisions that can influence their
experiences. Graduate students can include work and business experiences, and personal experiences
such as home mortgages, vacations, and child care.

Activity 2
Generic differences between goods and services include:
Goods are tangible while services are intangible.
Customers participate in many service processes, activities, and transactions.
The demand for services is more difficult to predict than the demand for goods.
Services cannot be stored as physical inventory.
Service management skills are paramount to a successful service encounter.
Service facilities typically need to be in close proximity to the customer.
Patents do not protect services.

Services especially in the “front office” (at points of contact with the customer) require different skills
than producing physical goods, and therefore, it is difficult for firms to do both well. Yes, for example,
physical inventory can compensate for poor demand forecast accuracy while service capacity is a
surrogate for inventory. Therefore, services must be better at forecasting and demand/capacity
planning than goods-producing firms or they will miss a sale. Another good contrast is pure
production (backroom) skills versus service management (front room) skills, and how they differ and
which is more difficult for employees to do successfully. All of these differences, issues, and more can
be discussed for each of the four example service organizations.

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CHAPTER 17: SERVICE STRATEGY, NEW SERVICE


DEVELOPMENT AND TECHNOLOGY
Learning Objectives

On completion of this chapter, you should be able to:

 Formulate a strategic service vision.


 Critically discuss the competitive environment of services.
 Describe with examples, how a service company competes using the generic service strategies
of overall cost leadership, differentiation and focus.
 Discuss the new service development process.
 Discuss the role of technology in the service encounter.
 Describe the emergence of self service.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbook – Relevant Chapter Pages)
 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply
Chain Management. Eleventh Edition. Pearson Education Limited, England.
 Fitzsimons, J.A and Fitzsimons M.J. (2006). Service Management. Operations,
strategy, and Information Technology. International Edition. Fifth Edition. McGraw Hill.
USA. Chapter 2, pp. 17. Lovelock, C., and Wirtz, J., (2007). Service Marketing.
People, Technology, Strategy. 6th Edition. Pearson Prentice Hall. USA. Chapters 3
and 4, pp. 60-95.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd. Chapter 5, pp. 146-154.

(South African Textbook – Relevant Chapter / Pages)


 Grütter, A. (2010). Introduction to Operations Management. A strategic Approach. First
edition, Pearson Education, South Africa, Cape Town.

Journal Articles & Reports


 Shekar, A. (2007). An Innovative Model of Service Development: A process guide for
service managers. The Innovation Journal: The Public Sector Innovation Journal, Vol. 12,
no. 1, pp. 1-18.
 Nordas, H.K., (2010). Trade in goods and services: Two sides of the same coin? Journal of
economic Modeling, Vol. 27, no.1, pp. 496-506.

These articles are available on Google and at the Mancosa Library.

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17.1 INTRODUCTION
Slack et al. (2008:105) introduces service strategy by stating that the information age has transformed
the industrial economy into the service economy. Industries for collecting, processing and
communicating information have been greatly enabled by computers. Using this information,
companies can now access credit histories of clients and customers at an instant, thereby lowering the
risk of non-payment.

17.2 THE STRATEGIC SERVICE VISION


Unmet needs are at the heart of the purpose for the service organisation. This obviously, starts when
the entrepreneur recognises the opportunity. A number of questions need to be asked to formulate a
strategic vision. As an illustration, Southwest Airlines present a standard example in that they started by
only serving three cities in Texas, namely Dallas, Houston and San Antonio. The starting point in this
process is to analyse the target market first.

The target market - The target market comprised clients who were frustrated by poor service.

Service concept- Southwest Airlines realised that on-time performance and frequent departures were
critical and meals were unnecessary on short flights-mostly less than an hour.

Operating strategy - Southwest Airlines also realised that airport gate turnaround must be fast to make
productive use of aircraft and provide frequent departures. They had to invest hugely in aircraft
purchase and purposed that passengers would enjoy a relaxed flying experience; employees would
enjoy the workplace.

Service delivery system - In addition Southwest determined that its cabin crew should have
interpersonal skills to create a “fun’ atmosphere aboard the aircraft and assist in differentiating the
company from the major airlines.

17.3 UNDERSTANDING THE COMPETITIVE ENVIRONMENT OF SERVICES


Slack et al. (2008) argue that services companies operate in very difficult economic environments. The
reasons are varied. Among them are the following:
Relatively low entry barriers – service innovations are patentable and in most cases, services are not
capital intensive; rather they are labour intensive. This allows innovations to be copied quite easily.

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Minimal opportunities for economies of scale – Since production and consumption of service takes
place at the same time, the customers has to travel. This necessity of physical travel places a limit on
the market area and results in small-scale outlets.

Erratic sales fluctuations- Service demand varies greatly as a function of time of the day and the day of
the week in question. Arrivals are usually random.
No advantage of size in dealing with buyers or suppliers - Since many service companies are small,
they are placed at a disadvantage in bargaining with powerful buyers or suppliers. Exceptions do exist
though.

Product substitution – Product innovations can be a substitute for services, for example the home
pregnancy test. Therefore service firms must watch other service providers and also anticipate potential
product innovations that may render their service obsolete.

Customer loyalty – Most established companies use personalised service to create a loyal customer
base, which becomes a barrier to entry by would-be new service providers.

Exit barriers- Marginal service companies may carry on operating, despite low or even non-existent
profits. For instance a business that is privately owned may have the goal of employing family members
instead of maximising profits.

17.4 COMPETITIVE SERVICE STRATEGIES


Overall Cost leadership - An overall cost leadership needs efficient scale facilities, tight cost and
overhead control and often innovative technology. The low cost position is a defence against
competition, because less efficient competitors will suffer first from competitive pressures. The
investment in this strategy is usually high because state of the art equipment and aggressive pricing are
needed. The company will thus seek out low cost customers; standardise a customer service; reduce
the personal element in the service delivery; and taking service operations offline.

Differentiation- The essence of the differentiation strategy lies in creating a service that is perceived as
being unique. The many types of differentiation are: brand image, technology, features, customer’s
service reputation, dealer’s service. A differentiation strategy does not ignore costs, but the primary
thrust is on creating customer loyalty. Cost is achieved through some targeted customer who is willing
to pay. Attention is paid to making the intangible tangible; customising the standard product; reducing
perceived risk, giving attention to personal training; and controlling quality.

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Focus- The focus strategy is built around the concept of serving a particular target market very well and
that their specific needs are met. The market segment may in fact be a particular buyer group, service
and so forth. Ideas for service innovations can originate from many sources. Customers can offer
suggestions, as in menus for restaurants, front line employees can be trained to listen to customers
concerns. A customer database can also serve as another source. Trends in customer demographics
can suggest new services.

Slack et al. (2008) postulate that innovation is seen as the process of creating something new as well
as the actual product or outcome. What is sought is not entirely a new service but modifications to
existing services. Radical innovations are those that do not exist. Incremental offerings are changes to
existing services that are valued as improvements.

17.5 TECHNOLOGY IN SERVICES


Fitzsimons, J.A and Fitzsimons M.J., (2006) observe that advances in communication technology have
a profound effect on ways customers interface with service providers. The internet and airport kiosks
have altered customer expectations. The traditional approach to service provision has been the A mode
called technology-free service encounter. In this mode, the customer is in physical proximity to the
human service provider.
On the other hand the B mode is called technology-facilitated service encounter. The human service
provider is replaced with technology, entirely. Thus customers are able to self-serve. In an attempt to
reduce costs, Fitzsimons, J.A and Fitzsimons M.J., (2006) further observe that this mode is becoming
common. Scanning checkout, airport kiosks, bank ATMs and web site based information source.

17.6 SUMMARY
Service strategy covers strategic vision as a blueprint for implementing the service. The economic
nature of competition is at the fore of the provision of services. The service sector has many small – to
medium sized firms and this suggest that there is an opportunity for the entrepreneurs to enter the
industry, creating more competition. Three generic strategies are applied and these are the low cost;
differentiation and the focus strategy.
Have You Completed the ‘Essential Reading’ for this Chapter?
Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

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QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)
To be discussed in groups

ACTIVITY 1
One person operates the ticket booth on the Tech campus, selling tickets for the annual Tech versus
State football game on Saturday. The ticket seller can serve an average of 12 customers per hour
(Poisson distributed): on average, 8 customers arrive to purchase tickets each hour (Poisson
distributed). Determine the average time a ticket buyer must wait and the portion of the time the ticket
seller is busy.

ACTIVITY 2
The Peachtree Airport in Atlanta serves light aircraft. It has a single runway and one air traffic controller.
It takes an airplane 8 minutes to land and clear the runway (exponentially distributed). Planes arrive at
the airport at the rate of 5 per hour (Poisson distributed).
a. Determine the average number of planes that will stack up waiting to land
b. Find the average time a plane must wait in line before it can land
c. Calculate the time it takes a plane to clear the runway once it has notified the airport that it
is in the vicinity and wants to land.

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CHAPTER 18: SERVICE QUALITY AND SERVICE


FACILITY LOCATION
Learning Objectives

On completion of this chapter, you should be able to:

 Evaluate the components that affect service quality.


 Discuss the need for service quality in an organisation.
 Use a service framework questionnaire to determine the effectiveness of the service
 Discuss how a facility location is affected by selection of the criteria for judging customer
service.
 Describe how a geographic information system is used in service location decisions

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal
articles listed below.
Textbooks:
(International Textbooks – Relevant Chapter Pages)

 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply


Chain Management. Eleventh Edition. Pearson Education Limited, England.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth
edition. John Wiley & Sons Singapore Pte. Ltd.
 Fitzsimons, J.A and Fitzsimons M.J. (2006). Service Management. Operations,
strategy, and Information Technology. International Edition. Fifth Edition. McGraw
Hill. USA. Lovelock, C., and Wirtz, J., (2007). Service Marketing. People,
Technology, Strategy. 6th Edition. Pearson Prentice Hall. USA.
(South African Textbook – Relevant Chapter / Pages)
 Grütter, A. (2010). Introduction to Operations Management. A strategic Approach.
First edition, Pearson Education, South Africa, Cape Town.
Journal Articles & Reports
 Klose, A. and Drexl, A. (2003). Facility location models for distribution system
design. European Journal of Operations Research, Vol. xxx, No. xxx, pp. 1-12.
 Melo, T., Nikel, F and da Gama, F.S (2007). Facility Location and Supply Chain
Management – A comprehensive review. ITWM, No. 130.pp. 1-54.
 Roth A.V. and Menor, L.J (2003). Insights into Service Operations Management: A
Research Agenda. Journal of Production and Operations Management, Vo. 12, No.
2, pp. 145-164.
 Mwaniki, P.W and Okwiri O.A. (2015). Aligning Waiting Management Decisions with
Service Demand Context to Improve Perceived Service Quality

These articles are available on Google and at Mancosa Library.

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18.1 INTRODUCTION
Recent works on service quality have stressed that to deliver a quality service, a service quality system
is essential according to Stephen W et al (1991). Services lie at the hub of economic activity in society
Fitzsimmons, J. A., and Fitzsimmons M.J (2006). This chapter gives you an integrated treatment of
service quality issues across the various components of the delivery systems by reviewing the items
that make up service effectiveness questionnaire as suggested by the authors.
According to (Bowen 1986; Mills 1986) the framework for service effectiveness includes:
(1) Technology; the process technology; physical facility; and the extent of routinisation, reliability, and
consistency of the transformation process;

(2) Systems- primary production control systems; procedures for routing inputs to the transformation
process, particularly the customers themselves; and

(3) People – human resources management issue such as the selection and training of employees.
Also included is the management of customer attitudes and behaviours, consistent with a view of
customers as potential “partial employee” of the service organisation.

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18.2 COMPONENTS OF SERVICE QUALITY

Service firm strategy

Service delivery system

Technology

People System
Service quality

Figure 18.1 Service quality and the service delivery system


Source Stephen, W., et al. (1991)

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The service delivery system is operationalised by these three elements; the organisation’s strategy, that
is the composition of the goods/ service mix, the service levels and the pricing. The attributes of these
elements thus determine the quality of service the system will provide.

The following service quality framework needs to deliver integrated systems measurement tool to
assess the effectiveness of the services being delivered (Stephen, w., 1991; Fitzsimmons, J. A., and
Fitzsimmons M.J (2006). The approach adopted in this module is to consider issues that go into the
questionnaire. There are twenty eight service quality-related items that go into this questionnaire
framework. This provides an integrated, system diagnostic framework for identifying issues and
managing them effectively. The framework is also designed to be administered in such a way that
empirical evidence can be gathered to assess the effectiveness of the service delivery system in
managing these issues.

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Service System Effectiveness Questionnaire


You can assess the current functioning level of your organisation by circling the number that most
closely matches how you are doing in each particular characteristic.
Good Job Average Job Poor Job
1. Planning the service encounter 5 4 3 2 1
2. Back-office/front-office coordination 5 4 3 2 1
3. Reliability of service 5 4 3 2 1
4. Consistency of service 5 4 3 2 1
5. Effective use of technology 5 4 3 2 1
6. Right degree of standardisation 5 4 3 2 1
7. Facilities-location 5 4 3 2 1
8. Facilities-adequacy and atmosphere 5 4 3 2 1
9. Logical, consistent business hours 5 4 3 2 1
10. Handling of non-routine customer demands 5 4 3 2 1
11. Handling of emergency situations 5 4 3 2 1
12. Provisions for customer privacy during the
Service encounter 5 4 3 2 1
13. Provisions for customer privacy during the
queuing process 5 4 3 2 1
14. Rational approach for managing the
queuing process 5 4 3 2 1
15. Adhering to customer schedules 5 4 3 2 1
16. Shifting capacity when needed 5 4 3 2 1
17. Materials available when and where needed 5 4 3 2 1
18. Understandable (to customer) service process
and procedure 5 4 3 2 1
19. Customer orientation and training 5 4 3 2 1
20. Point-of-service marketing 5 4 3 2 1
21. Gathering customer feedback 5 4 3 2 1
22. Acting on customer feedback 5 4 3 2 1

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18.3 SERVICE QUALITY

The attribute theory is used to express service quality generally in literature by both the practitioners
and academics. This theory makes the assumption that service quality primarily reflects attributes of the
service delivery system. It thus applies the product framework to services. It further assumes, according
to Deming (1986), that management has full control over the inputs that define these attributes and that
these attributes are associated with service quality.

On the contrary, a customer satisfaction theory treats service quality as a perceptual phenomenon
which is identified through the eye of the customer. This is to say that the meaning, the definition and
the evaluation of quality exists in the mind of the customer. Ultimately therefore, quality is the difference
between service quality expectations and the perceptions of reality as argued by Berry (1986). This
theory shifts focus from production to the customer.

The interaction theory approach to service quality was presented by Klaus (1985). Klaus defined
service quality as a “shared experience of gain” by all participants in the service encounter. The
experiences of the customer are interrelated with the experiences of the contact employee so that
service quality emerges via mutual need; satisfaction of both the employee and the customers. The
diagnostic framework presented in this module is based on an attribute theory approach to service
quality. In specific terms, it details those attributes of service delivery that service literature indicates are
important determinants of service quality.

18.4 SERVICE FACILITY LOCATION


Whilst the focus in the manufacturing sector location analysis is to minimize costs, the focus in the
service sector is to maximize revenue. This is because the costs of manufacturing firms tend to vary
substantially between locations, whilst service firms find location has more impact on revenue than
cost. This means that the location for service firms should be based on determining the volume of
business and revenue.

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Heizer and Render (2014:374) submits that there are eight major components of volume and revenue
for service firms and these are:

 Purchasing power of the customer drawing area.


 Service and image compatibility with demographics of the customer drawing area.
 Competition in the area.
 Quality of competition.
 Uniqueness of the firm’s and competitors’ locations.
 Physical qualities of facilities and neighbouring businesses.
 Operating policies of the firm.
 Quality of management.

Location does not only lead to creating entry barriers and generating demand, but it affects the strategic
dimensions of flexibility, competitive positioning, demand management and focus Fitzsimmons, J.A.,
and Fitzsimmons, M.J (2006).

Fitzsimmons, J.A., and Fitzsimmons, M.J (2006) discuss the following:


Flexibility – Flexibility of a location measures the degree to which the service can react to changing
economic situations. Since location decisions are long-term commitments, with capital-intensive
aspects, it is essential to select locations that can be responsive to future economic, demographic,
cultural, and competitive changes. Locating sites in different provinces can help to reduce overall risks
associated with financial crises from regional economic downturns.

Competitive positioning- Competitive positioning makes reference to methods which the firm can
establish relative to its competitors. Multiple locations can serve as a barrier to competition through
building a firm’s competitive position and creating awareness. Obtaining prime locations before the
expansion of the market can keep competitors from gaining access to desirable locations and therefore,
create an artificial barrier to entry.

Demand management – demand management refers to the ability to control the quantity and quality,
and timing of demand. This is why hotels have difficulties in manipulating demand due to the fact that
they occupy fixed positions. Thus locating a place where there is a steady supply of demand is critical,
places like airports for example.

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Focus – can be developed by offering the same narrowly defined service at many locations. Many multi
service organisations create a standard facility that can be duplicated in various locations.

18.5 LOCATION CONSIDERATIONS


According to Fitzsimmons, J.A., and Fitzsimmons, M.J (2006) the following broad categories of location
considerations can be isolated:
(i) Geographic representation - this can be decomposed as Network and plane
(ii) Number of facilities - this can be decomposed as one and/or many
(iii) Optimisation criteria - Public sector and private sector

Geographic Representation
The classical classification of location is based on how the geography is modelled. Location options
and travel distance can be represented either on a plane or a network. Location on a plane, that is on a
flat surface, is characterised by a solution space that has infinite possibilities. Facilities may be located
anywhere on the plane and are identified by an XY Cartesian coordinate (or, in a global context, by
latitudes and longitudes). The distance between locations is measured at the extremes in one of two
ways. One method is the Euclidian metric or vector, travel distance, using the Pythagoras theorem.

Location on a network is characterised by a solution space that is restricted to the nodes of that
network. An example is that of a highway system that could be considered a network, with major
highway interchapters as nodes. The selection of geographic representation and distance metric often
is dictated by the economics of the data collection effort and the problem environment.

18.6 SUMMARY
Attention to service quality by a service firm has the potential to maximise the firm’s revenue. To truly
take advantage of these the company must be flexible, use competitive positioning more, manage
demand carefully and focus on niche markets. Location decisions also have to be appropriate, as they
in many instances contribute greater economies of scale.

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Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the
textbook chapters and journal articles listed in the “Essential Reading” list at the
beginning of this chapter. It is essential that you read all of the textbook chapters and journal articles
listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To
adequately address these questions you will need to have completed all the ‘essential
reading’ listed at the beginning of this chapter.)

Activity 2 to be discussed in groups

ACTIVITY 1
Examine three recent situations in which you were directly affected by poor product or service quality.

ACTIVITY 2
Suppose you were the manager at the companies described from someone’s experiences below,
recommend ways you would improve the service to ensure that this does not happen again.

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Solutions to reflection questions


Activity 1
(The experience of someone)
I purchased a bag of flour that I did not open right away. I placed in it the kitchen cabinet. Weeks
later, I found bugs in many food items in the cabinet. When I examined the bag of flour, I found
dead bugs in the glued seal and inside the bag. Because of the infestation, I had to throw out a
number of food items from the cabinet. I also had to treat the kitchen with a compound that would
get rid of the remaining bugs.

I did not notice that the bag of sliced beef was expired when I purchased it from a grocery store. A
few days later, I opened it and ate some beef. Within an hour, I became very sick. I then looked at
the package only to determine that it had expired 3 weeks earlier! I was very upset. I do accept
some responsibility in that I did not always check expiration dates on items I purchased. However,
that package should not have been available for sale. I now check expiration dates every time. In
addition, when I went to another facility of the same grocery store, I found that every package of
sliced beef for sale was expired by at least a week. So I took all of the packages of beef up to the
help desk to give them to a manager and to complain. He apologized saying that he would deal
with the problem.

My mother came to visit me to help me unpack from my move. Her luggage did not arrive with her
flight that arrived late on the evening of August 1. She was assigned a file reference number by the
airline baggage service after standing in line for at least 15 minutes. I started calling the baggage
call centre the next evening since we had not heard from the airline nor received the luggage. Our
frustration was further compounded by the fact that every time I called the 1-800 number, it was
busy. And believe me when I say that I tried many times. The following day (August 3rd), I decided
to try the flight reservation number in hopes of speaking with someone. I ended up speaking to
someone from that area many times. They would try calling the contracted baggage delivery
service after they found out that the luggage had been turned over to this service by the airline.

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They were not able to get an answer from them. They gave me their phone number as well. When I
was able to speak to someone there, I would get different answers, such as the need to find more
information or that the luggage had already been delivered. I kept calling both phone numbers on
the next day as well in hopes of getting more information. Finally, on August 5th, the luggage was
delivered after midnight. My mother did not have her luggage for four full days of a six-day trip. To
make matters worse, we had to deal with the frustration of not knowing what was going on and of
continuing need to spend time trying to gather information.

Activity 2
Learners to recommend solutions

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CHAPTER 19: THE SERVICE ENCOUNTER AND SERVICE


WAITING LINES
Learning Objectives

On completion of this chapter, you should be able to:

 Model waiting lines.

 Evaluate performance of waiting lines in order to for improvement service provision.

 Use the service triad to describe a service firm’s delivery process.

 Discuss the role of the customer as co-producer.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal
articles listed below.
Textbooks:
(International Textbooks – Relevant Chapter Pages)

 Heizer & Render (2014). Operations Management. Sustainability and Supply Chain
Management. Eleventh Edition. Pearson Education Limited, England.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition. John
Wiley & Sons Singapore Pte. Ltd.
 Fitzsimons and Fitzsimons (2006). Service Management. Operations, strategy, and
Information Technology. International Edition. Fifth Edition. McGraw Hill. USA.Lovelock, C.,
and Wirtz, J., (2007). Service Marketing. People, Technology, Strategy. 6th Edition. Pearson
Prentice Hall. USA. South African Textbooks – Relevant Chapter Pages) Grütter, A. (2010).
Introduction to Operations Management. A strategic Approach. First edition, Pearson
Education, South Africa, Cape Town.

Journal Articles & Reports


 Mostert, P.G., Meyer, C.F and Van Rensburg, L.R.J. (2009). The influence of service failure
and service recovery on airline passengers’ relationships with domestic airline: an
exploratory study. Southern African Business Review, Vol. 13, no. 2, pp. 118-140.
 Iashmi, P. and Kumar, S (2012). Economic Growth and Impact of Service’s Sector in India.
International Journal of Business Management and Economics, Vol. 3, No. 5, pp. 627-632.
 Mwaniki, P.W and Okwiri O.A. (2015). Aligning Waiting Management Decisions with Service
Demand Context to Improve Perceived Service Quality.

These articles are available on Google and at the Mancosa Library.

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19.1 INTRODUCTION
There is a variety of tools for designing services according to Russell and Taylor (2014:154); quality
function deployment, service blueprints, scripting, servicecapes, and waiting line analysis. If you go
shopping, you will most likely experience inconveniences due to waiting, they further argue. People
spend lots of time in lines waiting to be served. Machinery also waits in line to be serviced just like
trucks needing offloading and so forth. Waiting takes place in all productive processes.
Russel and Taylor (2014) point out that time spent in waiting lines is a valuable resource for customers.
Thus the reduction of waiting time in any business is important in operations management.
Organisations are thus able to reduce waiting time and provide faster service by increasing their
capacity, which usually adds time servers, for example more tellers, mechanics or checkout clerks. To
increase service capacity, a mandatory cost has to be incurred and that is why waiting line analysis
becomes very important. This involves a trade-off between the cost of improved service and the cost of
allowing the customer to wait.
Waiting line analysis is performed mathematically and formulas are used for this purpose. This field of
study is referred to as queuing theory. Different types of waiting line systems do utilise different types of
formulas. The mathematical derivations of these formulas as beyond the scope of this module guide.

19.2 ELEMENTS OF WAITING LINE ANALYSIS


Russel and Taylor (2014:158) argue that the emergence of waiting lines is due to the faster arrival of
people or things than can be served. This does not take anything away from the service capacity nor
does it imply that the service operation is understaffed. Waiting lines arise because customer arrival is
not constant. At one point there will be many customers and at another there will be very few. The
waiting line thus continually increases and decreases in length. Decisions regarding waiting lines and
their management are based on the averages of customer arrivals, waiting times and service times
observed over time. Queuing models use these to compute operating characteristics such as the
average number of customers waiting in line and the average time a customer must wait in line.
Different sets of formula are applied, depending on the type of waiting line system under investigation.
A bank drive-up teller window where a clerk serves a single line of cars is different from a single line of
passengers at an airliner ticket counter that is served by three or four agents.

The following elements that make up waiting lines are discussed by Russel and Taylor (2014:158:
The Waiting Line
Basic components of the waiting line are the calling population, arrivals servers, and the waiting line or
queue.
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The Calling Population


Russel and Taylor (2014:158) say a customer in a waiting line context is a person or thing that wants
service from an operation. The calling population then is the source of the customers to the waiting line
system and this can either be finite or infinite. An infinite population makes the assumption of a large
number of potential customers that is always possible for one or more customers to arrive to be served.
A finite calling population has a very specific, quantifiable number of potential customers. Examples
include a repair person in a shop who is responsible for a constant number of machines to work on, a
trucking terminal that services a fleet of say 20 trucks or even a nurse assigned to attend to only 6
people.

The Arrival Rate


This refers to the rate at which customers arrive at the service facility during a specified period. This
rate can be estimated from empirical data obtained from studying the system or a similar system or it
can even be an average of these data. For instance if the 100 customers arrive at a store checkout
counter during a 10-hour day, it could be said that the arrival rate averages 10 customers per hour. But
it could be that no customers would arrive during another hour. Arrivals are assumed to be independent
of each other and to vary randomly over time.
The variability of arrivals at a service facility often conforms to a probability distribution (PD). Arrival
may be described by many distributions and based on research for many years in queuing theory. It
has been established that the number of arrivals per unit of time at a service facility can frequently be
described as a Poisson distribution. Thus in queuing, the average arrival rate, or the number of
customers arriving during a period of time, is signified by the Greek Letter λ. The assumption made in
these models is that balking (refusing to join the queue) does not exist.

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Service Times
In analysing waiting lines, Russel and Taylor (2014:159) postulate that arrivals are described in terms of
a rate and service in terms of time. Service times in queuing processes may also be any one of a large
number of different probability distributions. The distribution that is mostly assumed for service times is
the negative exponential distribution. Though this distribution is for service times, it is a service that
must be expressed as a rate to be compatible with the arrival rate. The average service rate or the
number of customers that can be served in a period of time is expressed as µ.

Since empirical evidence has shown that the assumption of the Poisson distribution and negative
exponential distribution do not hold in practice regarding arrivals, actual applications of queuing
analysis need to verify these assumptions. It is interesting to note that if service times are exponentially
distributed, then the service rate is Poisson distributed. For instance, if the average time to serve a
customer is three minutes (and exponentially distributed), then the average service rate is 20
customers per hour (and Poisson distributed). The opposite is true for Poisson arrivals.

Queue Discipline and Length


Russel and Taylor (2014:160) say queue discipline is the order in which waiting customers are served.
The most common form of queue discipline is first come, first served. This implies that the first person
or item waiting in line is served first. Other disciplines include first in last out, as in when a worker
stacks parts in such a way that the last one will be removed first. The other discipline is that of picking
this at random or alternatively customers can be processed alphabetically. This is another form of
queue discipline. This happens a lot at school registrations and or interviews etc.

In manufacturing operations jobs with the shortest time may be processed first. At hospitals, the most
critical case is always attended to first. All these are various forms of queue discipline. Queues can be
finite of infinite. An infinite queue can be of any size, with no upper limit, and is the most common
queue structure. For instance, at the movie theatre, an assumption is made that a queue could stretch
through the lobby and out of the door if necessary. A finite queue is limited in size. For instance the
driveway at the bank teller window can accommodate only a limited number of cars before it backs up
to the street.

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Basic Waiting Line Structure


According to Russel and Taylor (2014:160), four types of waiting line structures can be identified based
on the type of service facility. These are: single-channel, single-phase; single-channel, multiple-phase;
multiple-channel, single-phase; and multiple-channel, multiple-phase. The number of channels in a
queuing process is the number of parallel servers available. The number of phases indicates the
number of sequential servers each customer must go through to complete service. An example of a
single-channel, single-phase queuing operation is a post office with only one postal clerk waiting on a
single line of customers. Sometimes it’s simply called the single-server waiting line. A post office with
various postal clerks waiting on a single line of customers is an example of a multiple-channel, single-
phase process or simply called a multiple-server waiting line.

The other two types have multiple phases. They have a sequence of servers, one following another.
For instance, when patients go to clinic for treatment, or are admitted into a hospital, they first wait in a
reception room, and then they may go to an office to fill out some paperwork. When they go to the
treatment room, the patients receive an initial check-up or treatment from a nurse, followed by
treatment from a doctor. This arrangement is called multiple-channel, multiple phase process. A
manufacturing assembly is another example of this type of waiting line-one where a product is worked
on at various sequential machines or by several sequential operators at workstations. These are more
complicated and are beyond the scope of this module.

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Table: 19.1 Queuing System Operating Characteristics


Notation Operating Characteristic
L Average number of customers in the system
(waiting and being served)
Lq Average number of customers in the waiting line
W Average time a customer spends in the system
(waiting and being served)
Wq Average time a customer spends waiting in line
Po Probability of no (i.e., zero) customers in the
system
Pn Probability of n customers in the system
P Utilisation rate: the proportion of the time the
system is in use.
Source: Russel and Taylor (2014: 161)

Waiting Line Models


The simplest, very basic waiting line structure is the single server model. Every day we run into this
type of waiting line. Examples are the use of a copier at the office, visiting a professor in their office,
buying a ticket to see a movie - you wait in line to be served by one person.

The Basic Single-Server Model


Although a variety of single server waiting lines exist, the basic assumptions of a single-server model
are:
 Poisson arrival rate.
 Exponential service times.
 First-come, first served queue discipline.
 Infinite queue length.
 Infinite calling population.

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The basic operating characteristics of this single server model are computed using the following
formulas, where λ = mean arrival rate, µ = mean service rate, and n= the number of customers in the
waiting line system including the customer being served (if any). The probability that no customers are
in the queuing system (either in the queue or being served) is
λ
Po = (1 - )
µ

The probability of exactly n customers in the queuing system is


λ λ λ
Pn = ( )𝑛 . Po = ( µ )𝑛 (1 - )
µ µ

The average number of customers in the queuing system (i.e. the customers being serviced and in the
waiting line) is
λ
L = µ−λ

The average number of customers in the waiting line is


λ2
Lq = µ( µ − λ)

The average time a customer spends in the queuing system (i.e. waiting and being served) is
1 𝐿
W = µ−λ = λ

The average time a customer spends in line waiting to be served


λ
Wq =
µ( µ − λ)

The probability that the server is busy and a customer has to wait, known as the utilisation factor, is
λ
P= µ

The probability that the server is idle and the customer can be served is
λ
I=1–p=1- = Po
µ

Recall that these operating characteristics are averages that result over a period of time; they are not
absolutes. This means that customers who arrive at a bookstore checkout counter will not find 3.2
customers in line. There may be 1, 2, 3 or 4 customers. Notice that there are four customers in the
system (L =4) and 3.2, customers in line (Lq =3.2). The difference is 0nly 0.8 customer being served
because 20% of the time, there is no customer being served (I = .20). Note also, that the total time in
the system of 10 minutes (W = 10) is exactly equal to the waiting time of 8 minutes (Wq = 8) plus the
service time of 2 minutes (i.e., 60/30). Refer to exhibit 5.1 0n page 166 of Russel and Taylor (2014) for
details on this example.

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 ACTIVITY
The new-accounts officer at the Citizens Northern Savings Bank enrols all new customers in checking
accounts. During the three week period in August encompassing the beginning of the new school
year at State University, the bank opens a lot of new accounts for students. The bank estimates that
the arrival rate during this period will be Poisson distributed with an average of four customers per
hour. The service time is exponentially distributed with an average of 12 minutes per customer to set
up a new account. The bank wants to determine the operating characteristics for this system to
determine if the current person is sufficient to handle the increased traffic.

Solution
Determine operating characteristics for the single-server system:
λ = 4 customers per hour arrive
µ = 5 customers per hour are served
λ 4
Po = (1 - ) = Po = (1 - ) = 0.2 probability of no customers in the system
µ 5

λ 4
L = µ−λ = 5−4 = 4 customers on average in the queuing system

λ2 42
Lq = = = 3.2 customers on average waiting.
µ( µ − λ) 5(5 − 4)

1 1
W = µ−λ = = 1 hour average time in the system
5−4

λ 4
Wq = = 5( 5 = 0.8 Hour (48 minutes) average time waiting
µ( µ − λ) − 4)

The probability that the server is busy and a customer has to wait, known as the utilisation factor,
is
λ 4
P = µ = 5 = 0.8 probability that the new accounts officer will be busy and that a customer

must wait.

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19.3 THE SERVICE ENCOUNTER TRIAD


Slack a et al. (2008) make a well-founded argument that customers for service actively participate in the
delivery process. All moments of truth involve interaction with the customer and the service provider. All
parties have a role to play. The three parties in the service triad delivery process are the organisation;
contact person (employee) and the customer. The manager’s interest is in delivering the service as
efficiently as possible to protect the organisation’s profit margins. To control service delivery mangers
tend to impose rules and procedures on the contact personnel to limit their autonomy and discretion
when serving the customer. These same rules and procedures are also intended to limit the extent of
service provided for the customer. This may result in a customer not receiving the required service. The
interaction between the customer and the contact person has the element of control by both parties.
The employee wants to control the behaviour of the customer to make their work manageable and less
stressful and the customer at the same time attempts to control the service encounter to drive the most
benefit out of it. Suffice to say that the encounter can be dominated by the organisation, the service
personnel or the customer.

19.4 THE CUSTOMER AS CO-PRODUCER


According to Slack et al. (2008), in the service encounter the customer and the provider of the service
have roles to play in transacting the service. Society has defined tasks for service customers to perform
like the procedure required for cashing a cheque at the bank. Also, diners in restaurants may assume a
variety of productive roles, such as assembling their meals and carrying them to the table in the
cafeteria, or serving themselves at the salad bar. Customers have learnt behaviours that are
appropriate for the situation. The customer participates in the service delivery as a partial employee
with a role to play and is following a script that is defined by societal norms or implied by the particular
design of the service offered. Customers process a variety of scripts that are learned for use in different
service encounters. Following the appropriate scripts allow both the customer and the service provider
to predict the behaviour of each other as they play out their respective roles. Thus, each participant
expects some element of perceived control in the service encounter. Customer resistance to new types
of service transactions such as the introduction of Universal Product Codes in supermarkets, which
removed the necessity for item pricing, and automated teller machines (ATMs) in banking, which
eliminated the need for human interaction- may be explained by the need to learn a radically new script.
What originally were “mindless” encounters now need the customer to apply effort to learn a new role.
The introduction of ATMs allowed banks to place the machines in the banks for the customer to learn a
new role. Teaching customers a new role can be facilitated if the transaction becomes logical
modification of past behaviour.
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19.5 SUMMARY
The understanding that a service is co-produced and that the customer can dominate the service
encounter is an important part of the service delivery process. The analysis of waiting lines is equally
crucial because the amount of the spent in a queue, if too long, will lead to customers’ frustrations with
the service provision.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)

ACTIVITY 1
Explain why a bank teller, nurse, or flight attendant must have service management skills. How do the
required skills differ from someone working in a factory? What are the implications for hiring criteria and
training?

ACTIVITY 2
Critically use examples to discuss the concept of the service encounter and co-produced value.

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Solutions to reflection questions

Activity 1
Service-providers need technical/operations skills plus human interaction and marketing skills (i.e.
service management skills). A bank teller, for example, must be able to complete many types of
financial transactions and operate the computer and associated software. The teller must also interact
with the customer in a pleasant way and market other financial services (cross-sell, up sell etc.). A
factory worker can focus on technical/operations/production skills since they have no or little interaction
with customers. The training for front-room service-providers is more interdisciplinary compared to
backroom factory employees.

Activity 2
A look at service production and delivery systems reveals a number of sources of service productivity
and quality. Not only is the distinction between goods and services blurred but service production is
different from goods manufacturing. The most crucial operational characteristic of service management
and marketing - which differentiates it from goods - is the service encounter. It holds that in service
production and delivery, the customer enters the stage during the production process, starts the
consumption of the service during the production, and continues to benefit from the service in the future
(Gummesson, 1997). In goods manufacturing, the customer enters the stage only when the
manufacturing of the goods is finished. This leads to a different buying and consumption behaviour
pattern for services from that of goods. The customers’ contributions to the production of the service
have a significant impact on productivity and quality. The customer is a co-producer of value.

Two basic types of relationships and interactions of the service encounter will be analysed here: those
between the service provider’s contact personnel (the front line) and the customer; and customer-to-
customer interaction, that is, interactions between customers.

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Interaction between the service provider’s contact personnel and the customer

A passenger interacts with a flight attendant, a patient with nurses and doctors at a hospital, a product
manager with the account manager, the art director, and the copywriter of an advertising agency. The
customer becomes a co-producer; productivity and quality of the service are dependent on the
contributions from both the customer and the service provider. The interaction is sometimes extremely
intense and intimate and includes enormous stakes for the customer, such as in surgery or counsel in a
divorce case. The shared experience can cement or prevent long-lasting relationships. Other service
encounters can be trivial but regular, such as taxi and postal services, but because of the repeated
need for the services, they are important to the customer.

In this context, service productivity and quality emerge from three sources:

 Part of the provider’s work being done independently of the customer;


 Part of the customer’s work being done independently of the provider; and
 Work the two parties do in interaction.

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CHAPTER 20: MANAGING SERVICE SUPPLY


RELATIONSHIPS
Learning Objectives

On completion of this chapter, you should be able to:

 Contrast the supply chain for physical goods with the customer-suppliers duality of service.

 Discuss the challenges of managing service supply relationships.

 Discuss managerial considerations to be addressed in outsourcing services.

 Discuss the challenges of delivering the services in the field.

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ESSENTIAL READING
Students are required to read ALL of the textbook Chapters and journal articles
listed below.
Textbooks:
(International Textbooks – Relevant Chapter Pages)

 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply


Chain Management. Eleventh Edition. Pearson Education Limited, England.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte. Ltd.

 Fitzsimons, J.A and Fitzsimons M.J. (2006). Service Management. Operations,


strategy, and Information Technology. International Edition. Fifth Edition. McGraw Hill.
USA.

 Lovelock, C., and Wirtz, J., (2007). Service Marketing. People, Technology, Strategy.
6th Edition. Pearson Prentice Hall. USA.
(South African Textbooks – Relevant Chapter / Pages)
 Grütter, A. (2010). Introduction to Operations Management. A strategic Approach.
First edition, Pearson Education, South Africa, Cape Town.

Journal Articles & Reports


 Mostert, P.G., Meyer, C.F and Van Rensburg, L.R.J. (2009). The influence of service failure
and service recovery on airline passengers’ relationships with domestic airline: an exploratory
study. Southern African Business Review, Vol. 13, no. 2, pp. 118-140.
 Iashmi, P. and Kumar, S (2012). Economic Growth and Impact of Service’s Sector in India.
International Journal of Business Management and Economics, Vol. 3, No. 5, pp. 627-632.
 Mwaniki, P.W and Okwiri O.A. (2015). Aligning Waiting Management Decisions with Service
Demand Context to Improve Perceived Service Quality.
 Cernea, S.O., Jaradat, M., and Jaradat, M. (2010). Characteristics of Waiting Line Models –
The Indicators of the Customer Flow Management System Efficiency. Annales University or
Apulensis Series Oeconomica, Vol. 12, No. 2, pp. 616-622.
These articles are available on Google and at the Mancosa Library.

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20.1 INTRODUCTION
Fitzsimons, J.A and Fitzsimons M.J., (2006:478); Lovelock, C., and Wirtz, J., (2007) argue that supply
chain management is a total systems approach to delivering manufactured products to the customer.
Using information technology to coordinate all elements of the supply chain from parts suppliers to
retailers achieves a level of integration that creates competitive advantage, that is, not available in
traditional logistic systems. Service supply relationship management is a systems approach which
recognises the customer-supplier duality found in the delivery of services. For services, customers are
suppliers of significant inputs, for example, minds, bodies, belongings, and information to the process.

20.2 SUPPLY CHAIN MANAGEMENT


Fitzsimons et al., (2006:) argue that due to shorter product life cycles and globalisation, a system view
of whole supply chain is important. Shorter product life cycles make many products obsolete quickly. It
is therefore, a challenge to make manufacturing capacity plans, agreeing on production schedules, and
setting inventory stock levels because there is no historical data available. Poor planning can lead to
lost sales or expensive end of-life inventory write-offs. Competitive pressure thus requires organisations
to think globally when looking for suppliers as well as locating manufacturing operations.
The real challenge of supply chain management is to balance requirements of reliable and prominent
customer delivery with manufacturing and stock costs. A supply chain is usually modelled to evaluate
the chances of the greatest improvements in customers’ relationship between asset costs such as
inventory and the domain characteristics of customer service such as responsiveness and reliability in
customer delivery. A comprehensive system view facilitates interactions between participants and
assists in a collaborative search for effective measures to meet customer demands.

Unreliable deliveries increase inventory investments in safety stocks or result in unsatisfied customers
and loss of sales. The physical goods supply chain is viewed as a network of value-adding materials-
processing stages each defined with supply input, material transformations, and demand output.

Managing Uncertainty
Slack et al. (2008:479) contend that managing supply would be straightforward if there were no
uncertainties which arise from three sources: supplier delivery performance, manufacturing reliability,
and customer demand. Inventory is used as insurance during times of uncertainties. To meet customer
service levels, extra units of stock items are held so that the customer delivery requirements can be
met. Uncertainty can be caused by many factors. Some of these are storms that delay shipment, quality
problems, machine failure, or even late arrivals of raw material supply.
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Suppliers manufacturing ability is affected by a number of problems such as internal scheduling delays
caused by several problems facing suppliers. The overall uncertainty is captured by a probability
distribution of on-time performance. It is very difficult to determine customer demand variability
especially with short product life cycles. Consequently, historical demand distributions become difficult.
Market research and past experience with similar products can assist in predicting distributions.

Supply Chain Strategic Planning


Strategic initiatives do lessen the impact of uncertainty and thus improve customer service. The
implementation of TQM statistical process control can help improve manufacturing reliability. More
dependable transport modes can also be investigated. Changes in the manufacturing design can allow
the manufacturing operations to stock uncompleted products and postpone the final customisation
thereby increasing responsiveness to customer orders. Sometimes products are stocked in an
incomplete state only to be completed when customer orders are made.

20.3 SERVICE SUPPLY RELATIONSHIPS


Customer supplier duality- The nature of services creates customer-suppliers duality that results in
service supply relationships which is different to the supply chain found in manufacturing. Services
seemingly act on people’s minds, for example education, entertainment, religion and so forth. Bodies
such as transportation, lodging, health care and belongings such as auto repairs, cleaning, and banking
all act on peoples’ minds. In a service exchange the customer also acts as a supplier. This is called a
bidirectional relationship.

20.4 MANAGERIAL IMPLICATIONS OF BIDIRECTIONAL RELATIONSHIPS


Service relationships are hubs, not chains as in manufacturing. For services production and
consumption are simultaneous. The relationship is more like a hub than a chain because the service
provider acts as the agent for the customer when dealing with outsiders.
According to Fitzsimons, et al., (2006) services are produced simultaneously by the service provider for
the customer. Hubs are therefore, more desirable therefore, than chains because there are few
opportunities for delays and information can be more easily shared. Thus partnering between the
service provider and their supplier is a good and common practice. Both stand to gain from financial
and process efficiency. The implication of this is that customer supplied inputs, according to Fitzsimons
et al., (2006), do vary. For example some students are more prepared for class than others and
expectations may differ. A client may have prepared tax documents inadequately and so on.

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This inconsistency in the quality of the customer-supplier inputs represents a challenge for the provider
of the service to deliver on promise when inputs are questionable. Therefore explicitly commanding
value-adding expectations with customers prior to service can avoid misunderstandings.

20.5 SUMMARY
A system view of supply chain is essential to account for the significant interactions between and
among all participants from suppliers, to manufacturing, to retail customers. The supply chain modelled
as a network of material processing stages buffered by inventory stocks is a sound approach. However,
services are managed as a hub rather than a chain. This ensures that the opportunity of doing this,
right the first times, is taken advantage of, and both the service provider and the customers enjoy
financial and process efficiency.

Have You Completed the ‘Essential Reading’ for this Chapter?


Now that you have been introduced to this chapter source and work through the textbook
chapters and journal articles listed in the “Essential Reading” list at the beginning of this
chapter. It is essential that you read all of the textbook chapters and journal articles listed.

QUESTIONS FOR REFLECTION


After completing your study of this chapter reflect on the following questions. (To adequately
address these questions you will need to have completed all the ‘essential reading’ listed at
the beginning of this chapter.)
To be discussed in groups

ACTIVITY 1
Come up with examples of multilevel bidirectional service relationships (i.e. service supplier
relationships with three or more levels). Argue why such service relationships are so rare.

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BIBLIOGRAPHY
 Heizer, J & Render, B (2014). Operations Management. Sustainability and Supply
Chain Management. Eleventh Edition. Pearson Education Limited, England.
 Russel and Taylor (2014). Operations and Supply Chain Management. Eighth edition.
John Wiley & Sons Singapore Pte.Ltd.
 Slack et al. (2008; 2006). Operations and Process Management: Principles and
Practice for Strategic Impact. Prentice Hall
 Fitzsimons, J.A and Fitzsimons M.J. (2006). Service Management. Operations,
strategy, and Information Technology. International Edition. Fifth Edition. McGraw Hill.
USA.
 Lovelock, C., and Wirtz, J., (2007). Service Marketing. People, Technology, Strategy.
6th Edition. Pearson Prentice Hall. USA.

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APPENDIX A : CASE STUDY 1: DESIGN HOUSE


PARTNERSHIPS AT CONCEPT DESIGN SERVICES
I can’t believe how much we have changed in a relatively short time. From an inward-looking
manufacturer, we became a customer-focused “design and make” operation. Now we are an integrated
service provider. Most of our new business comes from the partnerships we have formed with design
houses. In effect, we design products jointly with specialist design houses that have a well-known
brand, and offer them a complete service of manufacturing and distribution. In many ways we are now
a “business-to-business” company rather than a “business-to-customer” company’ (Jim Thompson,
CEO, Concept Design Services (CDS).

CDS had become one of Europe’s most profitable home-ware businesses. Originally founded in the
1960s, the company had moved from making industrial mouldings, mainly in the aerospace sector, and
some cheap ‘houseware’ items such as buckets and dustpans, sold under the ‘Focus’ brand name, to
making very high-quality (expensive) stylish homewares with high ‘design value.’

The move into ‘Concept’ products


The move into higher-margin homeware had been master-minded by Linda Fleet, CDS’s Marketing
Director, who had previously worked for a large retail chain of paint and wallpaper retailers. ‘Experience
in the decorative products industry had taught me the importance of fashion and product development,
even in mundane products such as paint, Premium-priced colours and new textures would become
popular for one or two years, supported by appropriate promotion and features in lifestyle magazines.
The manufacturers and retailers who created and supported these products were dramatically more
profitable than those who simply provided standard ranges. Instinctively, I felt that this must also apply
to homeware. We decided to develop a whole coordinated range of such items, and to open up a new
distribution network for them to serve upmarket stores, kitchen equipment and speciality retailers.
Within a year of launching our first new range of kitchen homeware under the “Concept” brand name,
we had over 3000 retail outlets signed up, provided with point-of-sale display facilities. Press coverage
generated an enormous interest which was reinforced by the product placement on several TV cookery
and “lifestyle” programmes. We soon developed an entirely new market and within two years “Concept”
products were providing over per cent of our revenue and 90 per cent of our profits.
The price realisation of Concept products is many times higher than for Focus range. To keep ahead
we launched new ranges at regular intervals.’

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The move to the design house partnerships


‘Over the last four years, we have been designing, manufacturing and distributing products for some of
the more prestigious design houses. This sort of business is likely to grow, especially in Europe where
the design houses appreciate our ability to offer a full service. We can design products in conjunction
with their own design staff and offer them a level of manufacturing expertise they can’t get elsewhere,
more significantly, we can offer a distribution service which is tailored to their needs. From the
customer’s point of view the distribution arrangements appear to belong to the design house itself. In
fact they are based exclusively on our own centre, warehouse and distribution resources.’

The most successful collaboration was with Villessi, the Italian designers. Generally it was CDS’s
design expertise which was attractive to ‘design house’ partners. Not only did CDS employ
professionally respected designers, they had also acquired a reputation for being able to translate
difficult technical designs into manufacturable and saleable products.

Design house partnerships usually involved relatively long lead times but produced unique products
with very high margins, nearly always carrying the design house’s brand. ‘This type of relationship plays
to our strengths. Our design expertise gains us entry to the partnership but we are soon valued equally
for our marketing, distribution and manufacturing competence.’ (Linda Fleet< Marketing Director)

Manufacturing operations
All manufacturing was carried out in a facility located 20 km from head office. Its moulding area housed
large injection-moulding machines, most with robotic material handling capabilities. Products and
components passed to the packing hall, where they were assembled and inspected. The newer more
complex products often had to move from moulding to assembly and then back again for further
moulding. All products followed the same broad process route but with more products needing several
progressive moulding and assembly stages, there was an increase in ‘process flow recycling which was
adding complexity. One idea was to devote a separate cell to the newer and more complex products
until they had ‘bedded in’. This cell could also be used for testing new moulds. However, it would need
investment in extra capacity that would not always be fully utilised. After manufacture, products were
packed and sorted in the adjacent distribution centre.

“When we moved into making the higher-margin Concept products, we disposed of most of our older,
small injection-moulding machines. Having all larger machines allowed us to use large multi-cavity
moulds.
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This increased productivity by allowing us to produce several products, or components, each machine
cycle. It also allowed us to use high-quality and complex mould which, although cumbersome and more
difficult to change over, gave a very high-quality product.
For example, with the same labour we could make three items per minute on the old machines, and 18
items per minute on the modern ones using multi-moulds. That’s a 600 per cent increase in
productivity. We also achieved high-dimensional accuracy, excellent surface finish, and extreme
consistency of colour. We could do this because of our expertise derived from years making aerospace
products. Also, by standardising on single large machines, any mould could fit any machines. This was
an ideal situation from a planning perspective, as we were often asked to make small runs of Concept
products at short notice.’ (Grant Williams, CDS Operations Manager).

Increasing volume and desire to reduce cost had resulted in CDS subcontracting much of its Focus
products to other (usually smaller) moulding companies. ‘We would never do it with any complex or
design house partner products =, but it should allow us to reduce the cost of making basic products
while releasing capacity for high-margin one. However, there have been quite a few ‘testing problems’.
Coordinating the production schedules is currently a problem, as is agreeing quality standards. To
some extent, it’s our own fault. We didn’t realise that subcontracting was a kill in its own right. And
although we have got over some of the problems, we still do not have satisfactory relationship with all
of our contractors.’ (Grant Williams, CDS Operations Manager).

Planning and distribution services


The distribution services department of the company was regarded as being at the heart of the
company’s customer service drive. Its purpose was to integrate the efforts of design, manufacturing and
sales by planning the flow of products from production, through the distribution centre, to the customer.
Sandra White, the Planning Manager, reported to Linda Fleet and was responsible for the scheduling of
all manufacturing and distribution, and for maintaining inventory levels for all the warehoused items.
‘We try to stick to a preferred production sequence of each machine and mould so as to minimise set-
up times by starting on a light colour, and progressing through a sequence to the darkest. We can
change colours in 15 minutes, but because our moulds are large and technically complex, mould
changes can take up to three hours. Good scheduling is important to maintain high plant utilisation.

With a higher variety of complex products, batch sizes have reduced and it has brought down average
utilisation. Often we can’t stick to schedules.

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Short-term changes are inevitable in a fashion market. Certainly better forecasts would help…but even
our own promotions are sometimes organised at such short notice that we often get caught with stock
outs. New products in particular are difficult to forecast, especially when they are “fashion” items and/or
seasonal. Also, I have to schedule production time for new product mould trials; we normally allow 24
hours for the testing of each new mould received,
and this has to be done on production machines. Even if we have urgent orders, the needs of the
designers always have priority.’ (Sandra White).

Customer orders for Concept and design house partnership products were taken by the company’s
sales call centre located next to the warehouse. The individual orders would then be dispatched using
the company’s own fleet of medium and small distribution vehicles for UK orders, but using carriers for
the Continental European Market. A standard delivery timetable was used and an ‘express delivery’
service was offered for those customers prepared to pay a small delivery premium. However, a recent
study had shown that almost 40 per cent of express deliveries were initiated by the company rather
than customers. Typically this would be to fulfil deliveries of order containing products out of stock at
the time of ordering. The express delivery service was not required for Focus products because almost
all deliveries were to five large customers. The size of each order was usually very large, with deliveries
to customers; own distribution depots. However, although the organisation of Focus delivery was
relatively straightforward, the consequences of failure were large. Missing a delivery meant upsetting a
large customer.

Challenges for CDS


Although the company was financially successful and very well regarded in the homeware industry,
there were a number of issues and challenges that it knew it would have to address. The first was the
role of the design department and its influence over new product development.

New product development had become particularly important to CDS, especially since they had formed
alliances with design houses. This had led to substantial growth in both the size and the influence of the
design department, which reported to Linda Fleet. ‘Building up and retaining design expertise will be the
key to our future. Most of our growth is going to come from the business which will be bought in through
the creativity with an understanding of our partners’ business and design needs can now bring in
substantial contracts. The existing business is important of course, but growth will come directly from
these people’s capabilities.’ (Linda Fleet)

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But not everyone was so sanguine about the rise of the design department. ‘It is undeniable that
relationships between the designers and other parts of the company have been under strain recently. I
suppose it is, to some extent, inevitable. After all, they really do need the freedom to design as they
wish. I can understand it when they get frustrated at some of the constraints which we have to work
under in the manufacturing or distribution parts of the business.

They also should be able to expect a professional level of service from us. Yet the truth is that they
make most of the problems themselves. They sometimes don’t seem to understand the consequences
or implications of their design decisions or the promises they make to the design houses. More
seriously they don’t really understand that we could actually help them do their job better if they co-
operated a bit more. In fact, I now see some of our design house partners’ designers more than I do our
own designers. The Villessi designers are always in my factory and we have developed some really
good relationships (Grant Williams).
The second major issue concerned sales forecasting and again there were two different views. Grant
Williams was convinced that forecasts should be improved. ‘Every Friday morning we devise a
schedule of production and distribution for the following week. Yet, usually before Tuesday morning, it
has had to be significantly changed because of unexpected orders coming in from our customers’
weekend sales. This causes tremendous disruptions to both manufacturing and distribution operations.
If sales could be forecast more accurately we would achieve fa higher utilisation, better customer
service, and I believe significant cost savings.
However, Linda Fleet saw things differently. ‘Look, I do understand Grants frustration, but after all, this
is a fashion business. In terms of month-by month sales volumes we are in fact pretty accurate, but
trying to make a forecast foe every week and every product is almost impossible to do accurately.
Sorry, that’s just the nature of the business we are in. In fact, although Grant complain about our lack of
forecast accuracy, he always does a great job in responding to unexpected customer demand.’

Jim Thompson, the Managing Director, summed up his view of the current situation. ‘Particularly
significant has been our alliances with the Italian and German design houses. In effect we are
positioning ourselves as a complete service partners to the designers. We have a world-class design
capability together with manufacturing, order processing, order-taking and distribution services. These
abilities allow us to develop genuinely equal partnerships which integrate us into the whole industry’s
activities.’

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Linda Fleet also saw an increasing role for collaborative arrangements. ‘It may be that we are seeing a
fundamental change in how we do business within our industry. We have always seen ourselves as
primarily a company that satisfies consumer desires through the medium of providing good service to
retailers. The new partnership arrangement put us more into the “business-to-business” sector.
I don’t have any problem with this in principle, but I’m a little anxious as to how much it gets us into area
of business beyond our core expertise.’

The final issue which was being debated within the company was longer-term, and particularly
important. ‘The two big changes we made in this company have both happened because we exploited
a strength we already had within the company. Moving into Concept products was only possible
because we brought our high-tech precision expertise that we had developed in the aerospace sector
into the home sector where none of our competitors could match our manufacturing excellence. Then
when we moved into design house partnerships we did so because we had a set of designers who
could command respect from the world-class design houses with whom we formed partnerships.

So what is the next move for us? Do we expand globally? We are strong in Europe but nowhere else in
the world. Do we extend our design scope into other markets, such as furniture? If so, that could take
us into areas where we have no manufacturing expertise. We are great at plastic injection moulding,
but if we tried any other manufacturing process, we would be no better than, and probably worse than,
other firms with more experience. So what’s the future for us?’ (Jim Thompson, CEO CDS).
Source: Slack et al. (2008).

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APPENDIX A CASE STUDY 1:


DESIGN HOUSE PARTNERSHIPS AT CONCEPT DESIGN
SERVICES
Instructions to Learners
This case study is to be analysed and prepared in your Study Groups. Your Study Group is required to
present the analysis of this case study at Workshop 2. Your presentation should not be longer than 15
minutes.

The questions that you are required to address in analysing the case study are:

1. Discuss why operations is important at CDS (15 Marks)

2. Discuss what you would recommend to the company if they asked for your advice to improve
their operatiions. (25 marks)

3. Discuss all operations management topics mentioned in this case study.

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APPENDIX B: CASE STUDY 2:


IKEAS’s INVENTORY MANAGEMENT STRATEGY:
HOW DOES IKEA DO IT?

By Clara Lu 23 April, 2014

What are IKEA’s best-kept secrets behind its smooth backend operations and efficient supply chain
processes? The world’s largest home furnishing retailer has 298 stores in 37 countries. It ranks number
41 on Forbes’ esteemed World’s Most Valuable Brands list, and took in 35.5 billion in sales in 2013.
IKEA has certainly come a long way in its 60 years of business since its 1943 founding in Sweden.

This organisation impresses not just its consumers with affordable, high quality furniture, but also
competitors and companies around the world – especially with its unique supply chain and inventory
management techniques.

Each IKEA store is huge and holds more than 9,500 products! How in the world does IKEA offer so
much at such a low price while always being able to keep items in stock?

IKEA's Vision

To start off, IKEA has a clear vision – to provide well designed, functional home furnishings at prices so
low that as many people as possible will be able to afford them. Its various functions (supply chain
operations and inventory management included) work together to support its distinctive value
proposition.

IKEA is distinctive by committing to a catalog of products that will be stocked for a year at a guaranteed
price.

Cost Savings In Furniture Design

IKEA designs unique products that incur low manufacturing costs while meeting strict requirements for
function, efficient distribution, quality, and impact on the environment.

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According to a case study produced by The Times of London, more than 50% of the products are made
from sustainable or recycled products. IKEA seeks to use as few materials as possible to make the
furniture, without compromising on quality or durability. By using fewer materials, the company cuts
down on transportation costs because it uses less fuel and manpower to receive materials and ship
products.

Sustainable Relationships With Suppliers

A key part of IKEA’s success is credited to its communications and relationship management with
materials suppliers and manufacturers to get good prices on what it procures.

IKEA is a very high volume retailer – it buys products from more than 1,800 suppliers in 50 countries,
and uses 42 trading service offices around the world to manage supplier relationships. They negotiate
prices with suppliers, check the quality of materials, and keep an eye on social and working conditions.

Although Ikea fosters competition among suppliers to ensure they attain the best prices and materials,
it believes in making long-term business relationships with them by signing long-term contracts, thus
lowering prices of products further.

For example, IKEA has a code of conduct called the IKEA Way of Purchasing Home Furnishing
Products (IWAY), containing minimum rules and guidelines that help manufacturers reduce the impact
of their activities on the environment. The requirements within IWAY raise standards by developing
sustainable business activities and leaving positive impacts on the business environment in which the
suppliers operate.

This also underlines IKEA's commitment to the 'low price but not at any price' vision. Although IKEA
wants its customers to enjoy low prices, this should not happen at the expense of its business
principles.

Do-It-Yourself Assembly Lowers Packaging Costs

Most IKEA furniture is designed and sold in pieces for the customer to assemble. The pieces are
placed into convenient and efficient, flat packages for low-cost transport because they take up less
room in trucks, maximizing the number of products that can be shipped.

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The unique packaging also take up less space in warehouse bins and reserve racks, allowing for more
room to stock additional items for order fulfilment. What the company saves in fuel and stocking costs is
passed on to customers.

Combining Retail And Warehouse Processes

Every IKEA store has a warehouse on the premises. On the main showroom floor, customers can
browse for items. They then obtain the products themselves from the floor pallet location with racking
as high as the typical person could reach, where furniture can be purchased and taken home.
Additional products are stored in reserve racks above these locations.

Inventory is let down to the lower slots at night (forklifts and pallet jacks are not used during store hours
for safety reasons). About one third of the lower level is comprised of a warehouse off limits to
customers. This space contains items too bulky for customers to load without help from the staff. Since
IKEA wants as much self-service as possible, it works to minimize the number of items in this bulk
storage area.

Cost-Per-Touch Inventory Tactic

Having customers select the furniture and retrieve the packages themselves is an inventory
management tactic called ‘cost-per-touch’. As a rule of thumb, companies find that the more hands
touch the product, the more costs are associated with it.

For example, imagine when someone selects a piece of furniture to buy. The item is then ordered,
shipped from the manufacturer, moved from the delivery truck into storage in the warehouse, moved
from the warehouse to the customer’s vehicle or delivered by the furniture retailer to the customer’s
home. Every time the product is shipped, moved, and loaded, it costs money. The fewer times
someone moves or touches the item, the fewer costs are associated with it. IKEA saves costs with this
guiding principle to minimise touches because it doesn’t have to pay the customer to retrieve the
furniture and take it home.

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In-Store Logistics IKEA also relies on something rare and unique concerning its logistical management
of reordering products – it employs in-store logistics personnel to handle inventory management at its
stores. According to the ARC Advisory Group (professionals and consultants on logistical and supply
chain operations), there is an in-store logistics manager responsible for the ordering process and a
store goods manager responsible for material handling logistics at all IKEA stores.

The duties of the logistics personnel are to monitor and record deliveries, carefully check delivery
notices, sort and separate the goods, and get them off to the correct sales area or designated
overstock locations. Overall, they ensure an efficient flow of goods within IKEA stores, which is
essential to maintaining high sales and enhancing customer loyalty.

Maximum/Minimum Settings As Proprietary System

The in-store logistics managers use an inventory replenishment management process developed by
IKEA called ‘minimum/maximum settings’ to respond to store-level inventory reorder points and reorder
products. Minimum settings: The minimum amount of products available before reordering.
Maximum settings: The maximum amount of a particular product to order at one time.

Due to the fact that all IKEA inventory is only stocked at night after opening hours, the logic of its
min/max settings is based on the number of products that will be sold from the reserve stack of bin in a
single day or two-day period. The process meets customer demand while minimising ordering too few
or too many products.

This strategy also ensures that IKEA has ready inventory to meet customers’ demands, lowering the
cost of lost sales.

Using IKEA’s proprietary inventory system, logistics managers know what is sold through point-of-sale
(POS) data and how much inventory comes into the store through direct shipping and from distribution
centres through warehouse management system data. From these data, they can forecast sales for the
next couple of days and order in the suitable amount of products to meet that demand.

If the sales data doesn’t match the projected number of items that should have been sold that day, the
logistics manager goes directly to the pallet and bin to manually count the product stock.

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IKEA believes its process and system allows for the right goods to be in the store with greater certainty,
and at a lower cost, than the traditional retail forecasting and replenishment process.

Usage Of High-Flow and Low-Flow Warehouse Facilities

IKEA’s store operations are supported by high-flow facilities (focused on the 20% of SKUs that account
for 80% of the volume) and low-flow warehouses that are more manual. In its high-flow warehouses,
IKEA employs automatic storage and retrieval systems to drive down its costs-per-touch. Products
stocked in a low-flow facility are not in high demand, and operations rely on manual processes since
workers will not be shifting and moving inventory around too much.

These strategies have made IKEA the world’s most successful furniture retailer with low operating costs
and high product demand. This allows the company to stay competitive in the industry as it continually
seeks more advanced methods to streamline supply chain management.

IKEA has a clear vision supported by complementary cross-functional logic. This not only differentiates
IKEA from its peers, but also provides it with a competitive advantage that is difficult to duplicate at
other organisations.

While it may be hard for other organisations to copy IKEA’s successful formula with stock management
and order fulfilment, IKEA’s supply chain strategies pushes against boundaries. This will hopefully
inspire you to develop your company’s inventory strategies suited for your company’s particular
operations. For instance, the TradeGecko inventory management system may be the perfect answer
for small to medium retailers or wholesalers. Software is integrated with other software solutions such
as the Shopify ecommerce platform and Xero accounting system to make backend operations even
better for your business.

To end off, IKEA sets an optimistic trend where more companies will move away from traditional and
outdated supply chain management strategies used for generations, to seek creative and better-suited
solutions to handle inventory

Source: https://www.tradegecko.com/blog/ikeas-inventory-management-strategy-ikea

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APPENDIX B CASE STUDY 2:


IKEAS’s INVENTORY MANAGEMENT STRATEGY: HOW
DOES IKEA DO IT?

Instructions to Learners
This case study is to be analysed and prepared in your Study Groups. Your Study Group is required to
present the analysis of this case study at Workshop 3. Your presentation should not be longer than
15 minutes.

The questions that you are required to address in analysing the case study are:

1. Comprehensively evaluate IKEA’s Inventory management approach. (20 Marks)


2. Critically examine and comment on IKES’s competitive strategy. (20 Marks)

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