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CHAPTER
Introduction to
Operations Management 1
Reid & Sanders, Operations Management

© Wiley 2002
OM Defined
Operations management:
The business function responsible for
planning, coordinating, and controlling
the resources needed to produce a
company’s products and services
Reid & Sanders, Operations Management Page 2

© Wiley 2002
Simplified Organizational Chart

© Wiley 2002
Information Flows

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Information Flows
To & From Operations

© Wiley 2002
The Role of OM in the Business

© Wiley 2002
Value Added Defined
Value Added by Process
Transformation
Inputs in $$ Outputs in $$$
Process

© Wiley 2002
Service - Manufacturing
Services: Manufacturing:
• Intangible product • Tangible product
• No inventories • Can be inventoried
• High customer • Low customer
contact contact
• Short response time • Capital intensive
• Labor intensive • Long response time

© Wiley 2002
Service-Manufacturing Continuum

© Wiley 2002
OM Decisions
• Strategic decisions:
– Decisions that set the direction for the
entire company.
– Broad in scope & long-term in nature
• Tactical decisions:
– Short-term & specific in nature
– Bound by the strategic decisions

© Wiley 2002
Example

© Wiley 2002
Major Historical Developments
Industrial Revolution Late 1700s
Scientific Management Early 1900s
Human Relations Movement 1930s to 1960s
Management Science Mid-1900s
Computer Age 1970s
Just-In-Time Systems 1980s
Total Quality Management (TQM) 1980s
Reengineering 1980s
Flexibility 1990s
Time-based Competition 1990s
Supply Chain Management 1990s
Global Competition 1990s
Environmental Issues 1990s
Electronic Commerce Late 1990s – Early 21st Century

© Wiley 2002
Industrial Revolution
Late 1700s
• Replaced traditional craft methods

• Substituted machine power for labor
• Major contributions:
– James Watt (1764): steam engine
– Adam Smith (1776): division of labor
– Eli Whitney (1790): interchangeable parts

© Wiley 2002
Scientific Management
Early 1900s
• Separated ‘planning’ from ‘doing’

• Management’s job was to discover
worker’s physical limits through
measurement, analysis & observation
• Major contributors:
– Fredrick Taylor: stopwatch time studies
– Henry Ford: moving assembly line

© Wiley 2002
Human Relations Movement
1930s to 1960s
• Recognition that factors other than

money contribute to worker productivity
• Major contributions:
– Understanding of the Hawthorn effect:
Study of Western Electric plant in Hawthorn, Illinois intended
to study impact of environmental factors (light & heat) on
productivity, but found workers responded to management’s
attention regardless of environmental changes
– Job enlargement
– Job enrichment
© Wiley 2002
Management Science
Mid-1900s
• Developed new quantitative techniques

for common OM problems:
– Major contributions include: inventory
modeling, linear programming, project
management, forecasting, statistical
sampling, & quality control techniques
– Played a large role in supporting American
military operations during World War II

© Wiley 2002
Computer Age
1970s
• Provided the tool necessary to support the

widespread use of Management Science’s
quantitative techniques – the ability to
process huge amounts of data quickly &
relatively cheaply
• Major contributions include the development
of Material Requirements Planning (MRP)
systems for production control

© Wiley 2002
Developments: 1980s
Japanese Influence
• Just-In-Time (JIT):
– Techniques designed to achieve high-volume
production using coordinated material flows,
continuous improvement, & elimination of waste
• Total Quality Management (TQM):
– Techniques designed to achieve high levels of
product quality through shared responsibility & by
eliminating the root causes of product defects
• Business Process Reengineering:
– ‘Clean sheet’ redesign of work processes to
increase efficiency, improve quality & reduce costs

© Wiley 2002
Developments: 1990s
• Flexibility:
– Offer a greater variety of product choices on a
mass scale (mass customization)
• Time-based competition:
– Developing new product designs & delivering
customer orders more quickly than competitors
• Supply Chain Management
– Cooperating with suppliers & customers to reduce
overall costs of the supply chain & increase
responsiveness to customers

© Wiley 2002
Developments: 1990s
• Global competition:
– International trade agreements open new markets for
expansion & lower barriers to the entry of foreign
competitors (e.g.: NAFTA & GATT)
– Creates the need for decision-making tools for facility
location, compliance with with local regulations, tailoring
product offerings to local tastes, managing distribution
networks, …
• Environmental issues:
– Pressure from consumers & regulators to reduce, reuse
& recycle solid wastes & discharges to air & water

© Wiley 2002
Electronic Commerce
• Internet & related technologies enable new

methods of business transactions:
– E-tailing creates a new outlet for retail goods &
services with global access and 24-7 availability
– Internet provides a cheap network for coordinating
supply chain management information
• Developing influence of broadband & wireless

© Wiley 2002
CHAPTER
Operations Strategy
& Competitiveness 2

© Wiley 2002
The Role of Business Strategy
• Business Strategy:
– The firm’s long-range plan based on an
understanding of the marketplace
– Defines how a company intends to
differentiate itself from competitors
– Individual employees & functional units use
the strategy to align their efforts with each
other to accomplish the overall game plan

© Wiley 2002
Operations Strategy
• OM Strategy:
– The long-range plan for the design & use of the
operations function to support the overall business
strategy:
• The location, size, & type of facilities
• The worker skills & talents required
• The technology & processes to be used
• How product & service quality will be controlled
– Operating efficiency ≠ an operating strategy

© Wiley 2002
Developing a
Business Strategy
• Mission:
– A statement defining what business the firm is in, who its
customers are, & how its core beliefs shape its decision-
making
• Environmental scanning:
– Monitoring the external environment for market opportunities
& competitive threats
• Core competencies:
– Internal strengths & weaknesses of the firm (e.g.: personnel
with special expertise, access to unique technology, & things
the firm does better than competitors)

© Wiley 2002
Putting it all Together
Environmental Mission: Core

Scanning: Statement that defines Competencies:
Monitoring the What our business is; Our unique strengths
business environment Who our clients are; that help us win in the
for market trends, and How our values marketplace
threats, and define our business
opportunities
Business Strategy:
Defined long-range plan
for the company
© Wiley 2002
Developing an
Operations Strategy
• Identify the competitive priorities required to support
the business strategy:
• Common priorities include:
– Cost: low production costs enables the company to price its
product below competitors
– Quality: higher performance or a more consistent product
can support a price premium
– Time: faster delivery or consistent on-time delivery can
support a price premium
– Flexibility: highly customized products or volume flexibility
can support a price premium

© Wiley 2002
Translate Priorities into Design
Business Strategy
Operations Strategy:
Based on Competitive Priorities
Design of Operations:
Structure & Infrastructure

© Wiley 2002
Design of Operations
• Structure:
– Facilities
– Flow of work
– Technology
• Infrastructure:
– Planning & control systems
– Work design & compensation

© Wiley 2002
Competing on Low Cost
• Eliminate wasted labor, materials, and

facilities
• Emphasize efficient processes & high
productivity
• Often limit the product range & offer
little customization
• May invest in automation to increase
productivity

© Wiley 2002
Competing on Quality
• High performance design:

– Superior features, high durability, &
excellent customer service
• Product & service consistency:
– Error free delivery
– Close tolerances

© Wiley 2002
Competing on Time
• Rapid delivery:
– How quickly an order is received after the
order is placed
• On-time delivery:
– Sometimes items can arrive too quickly
• JIT firms try to avoid clutter of excess inventory
– Ability to deliver exactly when expected
• Not too early or too late

© Wiley 2002
Competing on Flexibility
• Product flexibility:
– Easily switch the production process from
one item to another (substitution)
– Easily customize output to meet the
specific requirements of a customer
• Volume flexibility:
– Rapidly increase or decrease the amount
of product being produced to match
demand

© Wiley 2002
Understand Tradeoffs
Example: Made-to-Order Pizza
QUALITY & DESIGN
QUALITY FLEXIBILITY
Fresh, Natural
Crust Choice
Ingredients
Toppings &
Slow to Cook
Low Volume
Ingredients
Expensive
Ovens
COST TIME VOLUME
FLEXIBILITY
© Wiley 2002
Distinguish Order Qualifiers
from Order Winners
• Order Qualifiers:
– Competitive priorities that a product must meet to
even be considered for purchase
– Generally, represented by features shared by all
competitors in a given market niche
• Order Winners:
– Competitive priorities that distinguish the firm’s
offerings from competitors & ultimately win the
customer’s order

© Wiley 2002
Productivity
Outputs
P=
Inputs

© Wiley 2002
Productivity Measures
• Partial Measures:
– A ratio of outputs to only one input (e.g.: labor
productivity, machine utilization, energy efficiency)
• Multifactor Measures:
– A ratio of outputs to several, but not all, inputs
• Total Productivity Measures:
– The ratio of outputs to all inputs

© Wiley 2002
Labor Productivity
Example:
– Assume two workers paint twenty-four tables in
eight hours:
– Inputs: 16 hours of labor (2 workers x 8 hours)
– Outputs: 24 painted tables
Outputs 24 tables
= = 1.5 tables / hour
Inputs 16 hours

© Wiley 2002
Multifactor Productivity
• Convert all inputs & outputs to $ value

• Example:
– 200 units produced sell for $12.00 each
– Materials cost $6.50 per unit
– 40 hours of labor were required at $10 an hour
200 units × $12 / unit $2400

= = 1.41
( 200 units × $6.50 / unit ) + ( 40 hours × $10 / hour ) $1700

© Wiley 2002
Interpreting Productivity Measures
• Is the productivity measure of 1.41 in

the previous example good or bad?
• Can’t tell without a reference point
• Compare to previous measures (e.g.:
last week) or to another benchmark

© Wiley 2002
Productivity Growth Rate
• Can be used to compare a process’

productivity at a given time (P2) to the
same process’ productivity at an earlier
time (P1)
P2 − P1
Growth Rate =
P1

© Wiley 2002
Productivity Growth Rate
Example:
– Last week a company produced 150 units using 200 hours of labor
– This week, the same company produced 180 units using 250 hours of labor
150 units
P1 = = 0.75 units / hour
200 hours
180 units
P2 = = 0.72 units / hour
250 hours
P − P 0.72 − 0.75
Growth Rate = 2 1 = = −0.04
P1 0.75
or a negative 4% growth rate
© Wiley 2002
CHAPTER
Product Design
& Process Selection 3

© Wiley 2002
Product & Service Design
• The process of deciding on the unique

characteristics of a company’s product
& service offerings
• Serves to define a company’s customer
base, image, competition and future
growth

© Wiley 2002
Products versus Services
• Products:
– Tangible offerings
– Dimensions, materials, tolerances &
performance standards
• Services:
– Intangible offerings
– Physical elements + sensory, esthetic, &
psychological benefits

© Wiley 2002
Strategic Importance
• Products & service offerings must

support the company’s business
strategy by satisfying the target
customers’ needs & preferences
• If not, the company will lose its
customer base and its market position
will erode

© Wiley 2002
Step–by-Step
• Idea Development:
– A need is identified & a product idea to satisfy it
is put together
• Product Screening:
– Initial ideas are evaluated for difficulty &
likelihood of success
• Preliminary Design & Testing
– Market testing & prototype development
• Final Design
– Product & service characteristics are set
© Wiley 2002
Idea Development
• Existing & target customers

– Customer surveys & focus groups
• Benchmarking
– Studying “best in class” companies from your
industry or others and comparing their practices &
performance to your own
• Reverse engineering
– Disassembling a competitor’s product & analyzing
its design characteristics & how it was made
• Suppliers, employees and technical advances
© Wiley 2002
Product Screening
• Operations:
– Are production requirements consistent with
existing capacity?
– Are the necessary labor skills & raw materials
available?
• Marketing:
– How large is the market niche?
– What is the long-term potential for the product?
• Finance:
– What is the expected return on investment?

© Wiley 2002
Preliminary Design & Testing
• General performance characteristics

are translated into technical
specifications
• Prototypes are built & tested (maybe
offered for sale on a small scale)
• Bugs are worked out & designs are
refined

© Wiley 2002
Final Design
• Specifications are set & then used to:

– Develop processing and service delivery
instructions
– Guide equipment selection
– Outline jobs to be performed
– Negotiate contracts with suppliers and
distributors

© Wiley 2002
Break-Even Analysis

© Wiley 2002
Break-Even Analysis
• Total cost = fixed costs + variable costs (quantity):

TC = F + (VC ) Q
• Revenue = selling price (quantity)
R = ( SP ) Q
• Break-even point is where total costs = revenue:
TC = R or F + (VC ) Q = ( SP ) Q
F
or Q=
SP − VC
© Wiley 2002
Example
• A firm estimates that the fixed cost of

producing a line of footwear is $52,000
with a $9 variable cost for each pair
produced. They want to know:
– If each pair sells for $25, how many pairs
must they sell to break-even?
– If they sell 4000 pairs at $25 each, how
much money will they make?

© Wiley 2002
Example Solved
• Break-even point:
F $52,000
Q= = = 3250 pairs
SP − VC $25 − $9
• Profit = total revenue – total costs
P = ( SP ) Q − ( F + (VC ) Q )
= ( $25) 4000 − ( $52,000 − ( $9 ) 4000 )
= $12,000

© Wiley 2002
Design for Manufacture (DFM)
• Guidelines:
– Minimize the number of parts
– Use common or standardized parts
– Use modular design
– Avoid the need for tools (e.g.: snap
together components)
– Simplify operations

© Wiley 2002
DFM Example

© Wiley 2002
DFM Benefits
• Lower costs:
– Lower inventories (fewer, standardized
components)
– Less labor required (simpler flows, easier
tasks)
• Higher quality:
– Simple, easy-to-make products means
fewer opportunities to make mistakes

© Wiley 2002
Product Life Cycle

© Wiley 2002
Concurrent Engineering
• A design approach that uses

multifunctional teams to simultaneously
design the product & process
• Replaces a traditional ‘over-the-wall’
approach where one group does their
part & then hands off the design to the
next group

© Wiley 2002
Sequential Design

© Wiley 2002
Concurrent Engineering

© Wiley 2002
Concurrent Engineering Benefits
• Representatives from the different groups can

better consider trade-offs in cost & design
choices as each decision is being made
• Development time is reduced due to less
rework (traditionally, groups would argue with
earlier decisions & try to get them changed)
• Emphasis is on problem-solving (not placing
blame on the ‘other group’ for mistakes)

© Wiley 2002
Process Selection
• Intermittent operations:
– Capable of producing a large variety of
product designs in relatively low volumes
• Continuous operations:
– Capable of producing one (or a few)
standardized designs in very high volumes

© Wiley 2002
Intermittent versus Continuous
Decision Intermittent Operation Continuous Operation

Product variety Great Small
Degree of standardization Low High
Organization of resources Grouped by Function Line flow
Path of products Varied, depends on product Line flow
Factor driving production Customer orders Forecast of demand
Critical resource Labor Capital
Type of equipment General purpose Specialized
Degree of automation Low High
Throughput time Longer Shorter
Work-in-process inventory More Less

© Wiley 2002
Intermittent Operations
• Pros:
– Very flexible
• Cons:
– Material handling & variable costs are high
– Work scheduling is difficult

© Wiley 2002
Continuous Operations
• Pros
– Highly efficient to produce large volumes
(low variable costs)
• Cons
– Inflexible to design changes
– Susceptible to component failure
– High fixed costs for capital equipment

© Wiley 2002
Continuum of Process Types
• Projects
– Used for one-at-a-time products made exactly to customer
specifications
• Batch processes:
– Used for small quantities (batches) with a high level of
customization
• Line processes:
– Used for relatively high volumes with little customization
• Continuous processes:
– Used for very high volume standardized products (often
commodities)

© Wiley 2002
Continuum of Process Types

© Wiley 2002
Vertical Integration
• How much of the supply chain is owned

by a company?
– A supply chain is the series of linked
activities from raw material extraction to
the final customer (Chapter 4)
• Consider the direction of integration:
– Forward (toward customers)
– Backward (toward suppliers)

© Wiley 2002
Make-or-Buy
• Outsourcing decisions should consider:

– Long-term strategic impact
– Existing capacity available
– Expertise required & available
– Quality issues
– Ramp up speed & delivery issues
– Total costs

© Wiley 2002
Process Flowcharting
• Graphically defines the operation, step-

by-step
• Used to help visualize the flow of work
& information:
– Can help identify potential problem areas
– Format can be as simple or detailed as
needed

© Wiley 2002
Example

© Wiley 2002
Process Technology
• Automation
• Automated Material Handling:
– Automated guided vehicles (AGV)
– Automated storage & retrieval systems (AS/RS)
• Computer-Aided Design (CAD) software
• Robotics & Numerically-Controlled (NC)
equipment
• Flexible Manufacturing Systems (FMS)
• Computer-Integrated Manufacturing (CIM)

© Wiley 2002
CHAPTER
Supply Chain Management 4

© Wiley 2002
What is a Supply Chain?
• A network of activities that deliver a

finished product or service to the
customer.
– The connected links of external suppliers,
internal processes, and external
distributors.

© Wiley 2002
Components of a
Typical Supply Chain
External Internal External

Suppliers Functions Distributors
INFORMATION

© Wiley 2002
A Basic Supply Chain

© Wiley 2002
Supply Chain Management
• Supply Chain Management entails:

– Coordinating the movement of goods and
delivery of services.
– Sharing information between members of
the supply chain.
• For example: sales, forecasts, promotional
campaigns, and inventory levels.

© Wiley 2002
Supply
Chain for
Milk
Products

© Wiley 2002
External Suppliers
• External suppliers provide the necessary raw

materials, services, and component parts.
• Purchased materials & services frequently
represent 50% (or more) of the costs of
goods sold.
• Suppliers are frequently members of several
supply chains – often in different roles.

© Wiley 2002
External Suppliers
• Tier one suppliers:

– Directly supplies materials or services to the firm that
does business with the final customer
• Tier two suppliers:
– Provides materials or services to tier one suppliers
• Tier three suppliers:
– Providers materials or services to tier two suppliers

© Wiley 2002
Internal Functions
• Vary by industry & firm, but might include:

– Processing
– Purchasing
– Production Planning & Control
– Quality Assurance
– Shipping

© Wiley 2002
Logistics & Distribution
• Logistics: getting the right material to the right

place at the right time in the right quantity:
– Traffic Management:
• The selection, scheduling & control of carriers (e.g.:
trucks & rail) for both incoming & outgoing materials &
products
– Distribution Management:
• The packaging, storing & handling of products in transit
to the end-user.

© Wiley 2002
Information Sharing
• Supply chain partners can benefit by

sharing information on sales, demand
forecasts, inventory levels & marketing
campaigns
• Inaccurate or distorted information
leads to the Bullwhip Effect

© Wiley 2002
Typical Information Flow

© Wiley 2002
The Bullwhip Effect
• If information isn’t shared, everyone has to

guess what is going on downstream.
• Guessing wrong leads to too much or too little
inventory:
– If too much, firms hold off buying more until
inventories fall (leading suppliers to think demand
has fallen).
– If too little, firms demand a rush order & order more
than usual to avoid being caught short in the future
(leading suppliers to think demand has risen).

© Wiley 2002
The Bullwhip Effect
• Farther away from the customer, the quality

of information gets worse & worse as supply
chain members base their guesses on the
bad guesses of their partners.
• The result is increasingly inefficient inventory
management, manufacturing, & logistics

© Wiley 2002
Short-Circuit the Bullwhip
• Make information transparent:

– Use Electronic Data Interchange (EDI) to support
Just-In-Time supplier replenishment
– Use bar codes & electronic scanning to capture &
share point-of-sale data
• Eliminate wholesale price promotions &
quantity discounts
• Allocate scarce items in proportion to past
sales to avoid attempts to ‘game’ the system

© Wiley 2002
Electronic Data Interchange
• The most common method of using

computer-to-computer links to exchange data
between supply chain partners in a
standardized format.
• Benefits include:
– Quick transfer of information
– Reduced paperwork & administration
– Improved data accuracy & tracking capability

© Wiley 2002
Vertical Integration
• A measure of how much of the supply

chain is controlled by the manufacturer.
– Backward integration:
• Acquiring control of raw material suppliers.
– Forward integration:
• Acquiring control of distribution channels.

© Wiley 2002
Outsourcing
• Entails paying third-party suppliers to provide

raw materials and services, rather than
making them in-house.
• Outsourcing is increasing as many firms try to
focus their internal operations on what they
do best.

© Wiley 2002
Whether to Outsource?
• What volume is required?

• Are items of similar quality available in the
marketplace?
• Is long-term demand for the item stable?
• Is the item critical to success of the firm?
• Does the item represent a core competency
of the firm?

© Wiley 2002
Breakeven Analysis
Total Cost of Outsourcing :

TC Buy = FC Buy + (VC Buy × Q )
Total Cost of Insourcing :
TC Make = FCMake + (VCMake × Q )
Indifference Point :
FC Buy + (VC Buy × Q ) = FCMake + (VCMake × Q )

© Wiley 2002
Example: The Bagel Shop
• Bill & Nancy plan to open a small bagel shop.

– The local baker has offered to sell them bagels at
40 cents each. However, they will need to invest
$1,000 in bread racks to transport the bagels back
& forth from the bakery to their store.
– Alternatively, they can bake the bagels at their
store for 15 cents each if they invest $15,00 in
kitchen equipment.
– They expect to sell 60,000 bagels each year.
• What should they do?

© Wiley 2002
Example Solved
Indifference Point Calculation :

FC Buy + (VC Buy × Q ) = FCMake + (VCMake × Q )
$1,000 + ( $0.40 × Q ) = $15,000 + ( $0.15 × Q )
Solve for Q : Q = 56,000
Interpretation:
– They anticipate selling 60,000 bagels (greater
than the indifference point of 56,000).
– Therefore, make the bagels in-house.

© Wiley 2002
Developing a Supply Base
• How to chose between suppliers?

• One supplier or many per item?
• Whether to partner with suppliers?

© Wiley 2002
Criteria for Choosing Suppliers
• Cost:
– Cost per unit & transaction costs
• Quality:
– Conformance to specifications
• On-time delivery:
– Speed & predictability

© Wiley 2002
Arguments for
One Supplier per Item
• May only be one practical source for the item
– Patent issues, geography, or quality considerations)
• The supply chain is integrated to support JIT or EDI
– Making multiple suppliers impractical
• Availability of quantity discounts
• Supplier may be more responsive if it’s guaranteed
all your business for the item
• Contract might bind you to using only one supplier
• Deliveries may be scheduled more easily

© Wiley 2002
Arguments for
Multiple Suppliers per Item
• No single supplier may have sufficient capacity
• Competition may result in better pricing or service
• Multiple suppliers spreads the risk of supply chain
interruption
• Eliminates purchaser’s dependence on a single
source of supply
• Provides greater volume flexibility
• Government regulation may require multiple suppliers
– Antitrust issues
• Allows testing new suppliers without risking a
complete disruption of material flow
© Wiley 2002
Partnering with Suppliers
• Involves developing a long-term,

mutually-beneficial relationship:
– Requires trust to share information, risk,
opportunities, & investing in compatible
technology
– Work together to reduce waste and
inefficiency & develop new products
– Agree to share the gains

© Wiley 2002
The Role of Warehouses
• General Warehouses:
– Used for long-term storage of goods
• Distribution Warehouses:
– Transportation consolidation:
• Consolidate LTL into TL deliveries
– Product mixing & blending:
• Group multiple items from various suppliers
– Improve service:
• Reduced response time
• Allow for last-minute customization

© Wiley 2002
Future Challenges
• Household Replenishment:
– Fulfilling consumer demand at the point of
use (the home).
– Often called ‘the last mile’ problem.
• Freeze Point Delay (Postponement):
– Last minute customization to provide
exactly what the consumer wants while
maintaining very small inventories

© Wiley 2002
CHAPTER
Total Quality Management 5

© Wiley 2002
What is TQM?
• Total Quality Management

– An integrated effort designed to improve
quality performance at every level of the
organization.
• Customer-defined quality
– The meaning of quality as defined by the
customer.

© Wiley 2002
Defining Quality
• Conformance to Specifications
– How well the product or service meets the targets
and tolerances determined by its designers
• Fitness for Use
– Definition of quality that evaluates how well the
product performs for its intended use.
• Value for Price Paid
– Quality defined in terms of product or service
usefulness for the price paid.

© Wiley 2002
Defining Quality
• Support Services
– Quality defined in terms of the support provided
after the product or service is purchased
• Psychological Criteria
– A way of defining quality that focuses on
judgmental evaluations of what constitutes product
or service excellence.

© Wiley 2002
Manufacturing vs. Service
• Manufacturing produces a tangible product

– Quality is often defined by tangible characteristics
– Conformance, Performance, Reliability, Features
• Service produces an intangible product
– Quality is often defined by perceptual factors
– Courtesy, Friendliness, Promptness, Atmosphere,
Consistency

© Wiley 2002
Changing Focus
of Quality Management

© Wiley 2002
Overview of TQM Philosophy
• Focus on identifying root causes of

reoccurring problems & correcting them
– A proactive, not reactive approach
• Allow customers to determine what’s
important (customer-driven quality)
• Involve everyone in the organization

© Wiley 2002
TQM Philosophy
• Maintain a Customer Focus:

– Identify and meet current customer needs
– Continually gather data (look for changing
preferences)
• Continuous Improvement:
– Continually strive to improve
– Good enough, isn’t good enough
• Quality at the Source:
– Find the source of quality problems & correct them

© Wiley 2002
TQM Philosophy
• Employee Empowerment:
– Empower all employees to find quality problems
and correct them
• Focus on internal & external customer needs:
– External customers:
• People who purchase the company’s goods and services
– Internal customers:
• Other downstream employees who rely on preceding
employees to do their job

© Wiley 2002
TQM Philosophy
• Understanding Quality Tools:

– All employees should be trained to properly utilize
quality control tools
• Team Approach:
– Quality is an organization-wide effort
– Quality circles: work groups acting as problem-
solving teams
• Benchmarking
– Studying the business practices of other
companies for purposes of comparison.

© Wiley 2002
TQM Philosophy
• Manage Supplier Quality:

– Ensuring that suppliers engage in the same high
quality practices
– Strategic partnering with key suppliers
• Quality of Design:
– Determining which features will be included in the
final design of a product to meet customers’ needs
& preferences
• Ease of Use:
– Ergonomics, easy to understand directions, etc.

© Wiley 2002
TQM Philosophy
• Quality of Conformance to Design:

– Degree to which the product conforms to it’s
design specifications (a measure of consistency &
lack of variation)
• Post-Sale Service:
– Assisting with issues that arise after the purchase
– Warranty & repair issues, follow through on any
promises to build a continuing relationship with the
customer

© Wiley 2002
Costs of Quality

© Wiley 2002
Ways to Improve Quality
• PDSA Cycle
• Quality Function Deployment
• Problem-solving tools

© Wiley 2002
Plan-Do-Study-Act Cycle (PDSA)

© Wiley 2002
Plan-Do-Study-Act Cycle (PDSA)
• Plan: Plan experiments to uncover the

root cause of problems
• Do: Conduct the experiments
• Study: Study the data generated
• Act: Implement improvements or start
over
• Repeat: Continuously improve

© Wiley 2002
Quality Function Deployment
• Compares customer requirements &

product’s characteristics
• Understand how the product delivers
quality to the customer

© Wiley 2002
Comparing “Voices”
Voice of the
Engineer
Voice of the Customer-based

Customer Benchmarks

© Wiley 2002
QFD
• In addition, QFD:
• Provides for competitive evaluation
(benchmarks)
• Considers design trade-offs & synergies
• Facilitates target setting & developing
product specifications

© Wiley 2002
Setting Specifications
Trade-offs
Technical
Targets Benchmarks
© Wiley 2002
Problem Solving Tools
• Cause-and-Effect Diagrams
• Flow Charts
• Check Lists
• Control Charts
• Scatter Diagrams
• Pareto Charts
• Histograms
© Wiley 2002
Cause-and-Effect Diagrams
• Also called Fishbone Diagrams

• Help identify potential causes of specific
‘effects’ (quality problems)

© Wiley 2002
Flow Charts
• Diagrams of the steps involved in an

operation or process

© Wiley 2002
Checklists
• Simple forms used to record the

appearance of common defects and the
number of occurrences

© Wiley 2002
Control Charts
• Track whether a process is operating as

expected

© Wiley 2002
Scatter Diagrams
• Illustrate how two variables are related

to each other

© Wiley 2002
Pareto Analysis
• Helps identify the degree of importance

of different quality problems

© Wiley 2002
Histograms
• Illustrate a frequency distribution

© Wiley 2002
Quality Awards
• Malcolm Baldrige National Quality

Award is given annually to companies
demonstrating excellence
– Manufacturing
– Service
– Small Business
– Education
– Healthcare

© Wiley 2002
MBNQA Criteria

© Wiley 2002
Quality Standards
• ISO 9000 Standards:

– Set of internationally recognized quality standards
– Companies are periodically audited & certified
• ISO 14000:
– Focuses on a company’s environmental
responsibility
• QS 9000:
– Auto industry’s version of ISO 9000

© Wiley 2002
Quality Gurus
• W. Edwards Deming
• Joseph Juran
• Phillip Crosby

© Wiley 2002
W. Edwards Deming
• Focus on optimizing the system - not

individual components
• Management is responsible for the
system (source of 85% of problems)
• Continuous improvement (focus on
prevention, not after-the-fact inspection)
• Understand variation (special versus
common causes)

© Wiley 2002
Joseph Juran
• Quality = fitness for use

• Developed the quality trilogy:
– Quality planning (future orientation/design quality)
– Quality control (statistical control of variation)
– Quality improvement (continuous improvement)
• Emphasized the costs of quality:
– Understand the trade-offs between prevention &
appraisal costs with failure costs

© Wiley 2002
Phillip Crosby
• Quality requires leadership:

– Do it right the first time
– The goal is zero defects
• Argued that ‘quality is free’:
– The benefits far outweigh the cost of
achieving zero defects

© Wiley 2002
CHAPTER
Statistical Quality Control 6

© Wiley 2002
Quality Control Methods
• Descriptive statistics:
– Used to describe distributions of data
• Statistical process control (SPC):
– Used to determine whether a process is
performing as expected
• Acceptance sampling:
– Used to accept or reject entire batches by
only inspecting a few items

© Wiley 2002
Descriptive Statistics
• Mean (x-bar):
– The average or central tendency of a data set
• Standard deviation (sigma):
– Describes the amount of spread or observed
variation in the data set
• Range:
– Another measure of spread
– The range measures the difference between the
largest & smallest observed values in the data set

© Wiley 2002
The Normal Distribution

© Wiley 2002
Equations
• Mean: n
∑x i
x= i =1
n
• Standard deviation:
∑(x − X )
n
2
i
σ= i =1
n −1
© Wiley 2002
Impact of Standard Deviation

© Wiley 2002
Skewed Distributions
(One Form of Non-Normal Distribution)

© Wiley 2002
SPC Methods
• Control charts
– Use statistical limits to identify when a
sample of data falls within a normal range
of variation

© Wiley 2002
Setting Limits Requires
Balancing Risks
• Control limits are based on a willingness to think something’s
wrong, when it’s actually not (Type I or alpha error), balanced
against the sensitivity of the tool - the ability to quickly reveal a
problem (failure is Type II or beta error)

© Wiley 2002
Types of Data
• Variable level data:

– Can be measured using a continuous scale
– Examples: length, weight, time, &
temperature
• Attribute level data:
– Can only be described by discrete
characteristics
– Example: defective & not defective

© Wiley 2002
Control Charts for Variable Data
• Mean (x-bar) charts

– Tracks the central tendency (the average
value observed) over time
• Range (R) charts:
– Tracks the spread of the distribution over
time (estimates the observed variation)

© Wiley 2002
x-Bar Computations
x1 + x 2 + ... x n σ
x= σx =
n n
UCLx = x + zσ x
LCLx = x − zσ x

© Wiley 2002
Example
• Assume the standard deviation of the process is given as 1.13 ounces
• Management wants a 3-sigma chart (only 0.26% chance of alpha error)
• Observed values shown in the table are in ounces
Time 1 Time 2 Time 3

Observation 1 15.8 16.1 16.0
Observation 2 16.0 16.0 15.9
Observation 3 15.8 15.8 15.9
Observation 4 15.9 15.9 15.8
Sample means 15.875 15.975 15.9
© Wiley 2002
Computations
• Center line (x-double bar):

15.875 + 15.975 + 15.9
x= = 15.92
3
• Control limits:
Object 3

© Wiley 2002
2 Method Using R-bar
nd
R1 + R2 + ... Rn
R=
n
UCLx = x + A2 R
LCLx = x − A2 R

© Wiley 2002
Control Chart Factors
F a cto r fo r x -Ch a rt F a cto rs fo r R-Ch a rt
S a m p le S iz e (n )
A2 D3 D4
2 1.88 0.00 3.27
3 1.02 0.00 2.57
4 0.73 0.00 2.28
5 0.58 0.00 2.11
6 0.48 0.00 2.00
7 0.42 0.08 1.92
8 0.37 0.14 1.86
9 0.34 0.18 1.82
10 0.31 0.22 1.78
11 0.29 0.26 1.74
12 0.27 0.28 1.72
13 0.25 0.31 1.69
14 0.24 0.33 1.67
15 0.22 0.35 1.65

© Wiley 2002
Example
Time 1 Time 2 Time 3

Observation 1 15.8 16.1 16.0
Observation 2 16.0 16.0 15.9
Observation 3 15.8 15.8 15.9
Observation 4 15.9 15.9 15.8
Sample means 15.875 15.975 15.9
Sample ranges 0.2 0.3 0.2

© Wiley 2002
Computations
0.2 + 0.3 + 0.2

R= = 2.33
3
UCLx = x + A2 R = 15.92 + ( 0.73) 2.33 = 17.62
LCLx = x − A2 R = 15.92 − ( 0.73) 2.33 = 14.22

© Wiley 2002
Example x-bar Chart
X-bar Chart
18
UCL
17
16 CL
Ounces
15
LCL
14
13
12
1 2 3 4 5 6 7 8 9 10
Time

© Wiley 2002
R-chart Computations
(Use D3 & D4 Factors: Table 6-1)
0.2 + 0.3 + 0.2

R= = 2.33
3
UCLR = RD4 = ( 2.33)( 2.28) = 6.71

LCLR = RD3 = ( 2.33)( 0 ) = 0

© Wiley 2002
Example R-chart
R Chart
7
UCL
5
Ounces
CL
2
0 LCL
1 2 3 4 5 6 7 8 9 10 11
Time

© Wiley 2002
Using x-bar & R-charts
• Use together
• Reveal different
problems

© Wiley 2002
Control Charts for Attribute Data
• p-Charts:
– Track the proportion defective in a sample
• c-Charts:
– Track the average number of defects per
unit of output

© Wiley 2002
Process Capability
• A measure of the ability of a process to meet

preset design specifications:
– Determines whether the process can do what we
are asking it to do
• Design specifications (a/k/a tolerance limits):
– Preset by design engineers to define the
acceptable range of individual product
characteristics (e.g.: physical dimensions, elapsed
time, etc.)
– Based upon customer expectations & how the
product works (not statistics!)
© Wiley 2002
Measuring Process Capability
Compare the
width of design
specifications &
observed process
output

© Wiley 2002
Capability Indexes
• Centered Process (Cp):

specification width USL − LSL
Cp = =
process width 6σ
• Any Process (Cpk):
 USL − µ µ − LSL 
C pk = min ; 
 3σ 3σ 

© Wiley 2002
Example
• Design specifications call for a target value of 16.0 +/-0.2

microns (USL = 16.2 & LSL = 15.8)
• Observed process output has a mean of 15.9 and a standard
deviation of 0.1 microns

© Wiley 2002
Computations
• Cp: USL − LSL 16.2 − 15.8 0.4

Cp = = = = 0.66
6σ 6( 0.1) 0.6
• Cpk:  USL − µ µ − LSL 

C pk = min or 
 3σ 3σ 
 16.2 − 15.9 15.9 − 15.8 
= min or 
 3( 0.1) 3( 0.1) 
 0.3 0.1 
= min or  = min (1 or 0.33) = 0.33
 0.3 0.3 
© Wiley 2002
Three Sigma Capability
• Until now, we assumed process output should

be modeled as +/- 3 standard deviations
• By doing so, we ignore the 0.26% of output
that falls outside +/- 3 sigma range
• The result: a 3-sigma capable process
produces 2600 defects for every million units
produced

© Wiley 2002
Six Sigma Capability
• Six sigma capability assumes the

process is capable of producing output
where +/- 6 standard deviations fall
within the design specifications (even
when the mean output drifts up to 1.5
standard deviations off target)
• The result: only 3.4 defects for every
million produced
© Wiley 2002
3-Sigma versus 6-Sigma

© Wiley 2002
CHAPTER
Just-In-Time Systems 7

© Wiley 2002
Just-In-Time
• Getting the right quantity of goods to

the right place – exactly when needed!
• Just-In-Time= not late & not early

© Wiley 2002
Philosophy of JIT
• Elimination of waste
• Broad view of operations
• Simplicity
• Continuous improvement
• Visibility
• Flexibility

© Wiley 2002
Eliminate Waste
• Waste is anything that doesn’t add

value:
– Unsynchronized production
– Inefficient & unstreamlined layouts
– Unnecessary material handling
– Scrap & rework

© Wiley 2002
Broad View of Operations
• Understanding that operations is part of

a larger system
• Goal is to optimize the system – not
each part:
– Avoid narrow view: “That’s not in my job
description!”
– Avoid sub-optimization

© Wiley 2002
Simplicity
• It’s often easy to develop complex

solutions to problems by adding extra
steps
• Goal is to find a simpler way to do
things right:
– Less chance to forget extra step
– Fewer opportunities to make mistakes
– More efficient

© Wiley 2002
Continuous Improvement
• Traditional viewpoint: “It’s good enough”

• JIT viewpoint: “If it’s not perfect, make it
better”

© Wiley 2002
Visibility
• Waste can only be eliminated after it’s

discovered
• Clutter hides waste
• JIT requires good housekeeping

© Wiley 2002
Visibility

© Wiley 2002
Flexibility
• Easy to make volume changes:

– Ramp up & down to meet demand
• Easy to switch from one product to
another:
– Build a mix of products without wasting
time with long changeovers

© Wiley 2002
Three Elements of JIT

© Wiley 2002
JIT Manufacturing
• Kanbans & pull production systems

• Quick setups & small lots
• Uniform plant loading
• Flexible resources
• Efficient facility layouts

© Wiley 2002
Pull Production & Kanbans

© Wiley 2002
Number of Kanbans Required
DT
N=
C
N = number of containers
D = demand rate at the withdraw station
T = lead time from supply station
C = container size

© Wiley 2002
Quick Setups & Small Lots
• Setup times = time required to get

ready
– E.g.: clean & calibrate equipment,
changing tools, etc.
• Internal versus external setups
– Stop production or setup will still running
• Internal setups = lost production time
– Inefficient setups = waste
© Wiley 2002
Uniform Plant Loading
Weekly Production Required
A 10 units
B 20 units
C 5 units
D 5 units
E 10 units
Traditional Production Plan
Monday Tuesday Wednesday Thursday Friday
AAAAA BBBBB BBBBB DDDDD EEEEE
AAAAA BBBBB BBBBB CCCCC EEEEE
JIT Plan with Level Scheduling
Monday Tuesday Wednesday Thursday Friday
AABBBB AABBBB AABBBB AABBBB AABBBB
CDEE CDEE CDEE CDEE CDEE

© Wiley 2002
Flexible Resources
• General purpose equipment:

– E.g.: drills, lathes, printer-fax-copiers, etc.
– Capable of being setup to do many
different things
• Multifunctional workers:
– Cross-trained to perform several different
duties

© Wiley 2002
Efficient Facility Layouts
• Workstations in close physical proximity to

reduce transport & movement
• Streamlined flow of material
• Often use:
– Cellular Manufacturing (instead of job shops)
– U-shaped lines: (allows material handler to quickly
drop off materials & pick up finished work)

© Wiley 2002
Job Shop Layout

© Wiley 2002
Cellular Manufacturing

© Wiley 2002
TQM & JIT
• Quality at the Source

• Jidoka (authority to stop line)
• Poka-yoke (foolproof the process)
• Preventive maintenance

© Wiley 2002
Respect for People:
The Role of Workers
• Cross-trained workers
• Actively engaged in problem-solving
• Workers are empowered
• Everyone responsible for quality
• Workers gather performance data
• Team approaches used for problem-solving
• Decision made bottom-up
• Workers responsible for preventive
maintenance
© Wiley 2002
Respect for People:
The Role of Management
• Responsible for culture of mutual trust

• Serve as coaches & facilitators
• Support culture with appropriate
incentive system
• Responsible for developing workers
• Provide multi-functional training
• Facilitate teamwork
© Wiley 2002
Supplier Relations & JIT
• Use single-source suppliers

• Build long-term relationships
• Co-locate facilities to reduce transport
• Stable delivery schedules
• Share cost & other information

© Wiley 2002
Benefits of JIT
• Smaller inventories
• Improved quality
• Reduced space requirements
• Shorter lead times
• Lower production costs
• Increased productivity
• Increased machine utilization
• Greater flexibility
© Wiley 2002
Implementing JIT Manufacturing
• Identify & fix problems

• Reorganize workplace
– Remove clutter & designate storage
• Reduce setup times
• Reduce lot sizes & lead times
• Implement layout changes
– Cellular manufacturing & close proximity
• Switch to pull production
• Extend methods to suppliers
© Wiley 2002
JIT in Services
• Multifunctional workers
• Reduce cycle times
• Minimize setups
• Parallel processing
• Good housekeeping
• Simple, highly-visible flow of work

© Wiley 2002
CHAPTER
Forecasting 8

© Wiley 2002
Principles of Forecasting
• Forecasts are rarely perfect

• Grouped forecasts are more accurate
than individual items
• Forecast accuracy is higher for shorter
time horizons

© Wiley 2002
Step-by-Step
• Decide what to forecast:

– Level of detail, units of analysis & time horizon
required
• Evaluate & analyze appropriate data
– Identify needed data & whether it’s available
• Select & test the forecasting model
– Cost, ease of use & accuracy
• Generate the forecast
• Monitor forecast accuracy over time

© Wiley 2002
Types of Forecasting Methods
• Qualitative methods:
– Forecasts generated subjectively by the
forecaster
• Quantitative methods:
– Forecasts generated through mathematical
modeling

© Wiley 2002
Qualitative Methods
• Strengths:
– Incorporates inside information
– Particularly useful when the future is
expected to be very different than the past
• Weaknesses:
– Forecaster bias can reduce the accuracy of
the forecast

© Wiley 2002
Types of Qualitative Models
Type Characteristics Strengths Weaknesses
Executive A group of managers Good for strategic or One person's opinion
opinion meet & come up with new-product can dominate the
a forecast forecasting forecast
Market Uses surveys & Good determinant of It can be difficult to

research interviews to identify customer preferences develop a good
customer preferences questionnaire
Delphi Seeks to develop a Excellent for Time consuming to

method consensus among a forecasting long-term develop
group of experts product demand,
technological
changes, and
© Wiley 2002
Quantitative Methods
• Strengths:
– Consistent and objective
– Can consider a lot of data at once
• Weaknesses:
– Necessary data isn’t always available
– Forecast quality is dependent upon data
quality

© Wiley 2002
Types of Quantitative Methods
• Time Series Models:

– Assumes the future will follow same
patterns as the past
• Causal Models:
– Explores cause-and-effect relationships
– Uses leading indicators to predict the
future

© Wiley 2002
Patterns in Time Series Data

© Wiley 2002
Logic of Time Series Models
• Data = historic pattern + random variation

• Historic pattern may include:
– Level (long-term average)
– Trend
– Seasonality
– Cycle

© Wiley 2002
Time Series Models
• Naive:
– The forecast is equal to the actual value observed
during the last period
• Simple Mean:
– The average of all available data
• Moving Average:
– The average value over a set time period (e.g.: the
last four weeks)
– Each new forecast drops the oldest data point &
adds a new observation

© Wiley 2002
Weighted Moving Average
Ft +1 = ∑ Ct At
• All weights must add to 100% or 1.00
• Allows the forecaster to emphasize one
period over others
• Differs from the simple moving average
that weights all periods equally

© Wiley 2002
Exponential Smoothing
Ft +1 = αAt + (1 − α ) Ft
• Forecast quality is highly dependent on
selection of alpha:
– Low alpha values generate more stable forecasts
– High alpha values generate forecasts that respond
quickly to recent data
• Issue is whether recent changes reflect
random variation or real change in long-term
demand
© Wiley 2002
Forecasting Trends
• Trend-adjusted exponential smoothing

• Three step process:
– Smooth the level of the series:
St = αAt + (1 − α )( S t −1 + Tt −1 )
– Smooth the trend:
Tt = β ( St − St −1 ) + (1 + β )Tt −1
– Calculate the forecast including trend:
FITt +1 = S t + Tt
© Wiley 2002
Adjusting for Seasonality
• Calculate the average demand per season

– E.g.: average quarterly demand
• Calculate a seasonal index for each season
of each year:
– Divide the actual demand of each season by the
average demand per season for that year
• Average the indexes by season
– E.g.: take the average of all Spring indexes, then
of all Summer indexes, ...

© Wiley 2002
Adjusting for Seasonality
• Forecast demand for the next year & divide

by the number of seasons
– Use regular forecasting method & divide by four
for average quarterly demand
• Multiply next year’s average seasonal
demand by each average seasonal index
– Result is a forecast of demand for each season of
next year

© Wiley 2002
Casual Models
• Often, leading indicators hint can help

predict changes in demand
• Causal models build on these cause-
and-effect relationships
• A common tool of causal modeling is
linear regression:
Y = a + bx
© Wiley 2002
Linear Regression

© Wiley 2002
Forecast Accuracy
• Forecasts are rarely perfect

• Need to know how much we should rely on
our chosen forecasting method
• Measuring forecast error:
Et = At − Ft
• Note that over-forecasts = negative errors
and under-forecasts = positive errors

© Wiley 2002
Tracking Forecast Error
Over Time
• Mean Absolute Deviation (MAD):
– A good measure of the actual error MAD =
∑ actual − forecast
in a forecast n
• Mean Square Error (MSE):

– Penalizes extreme errors ∑ ( actual - forecast ) 2
MSE =
n −1
• Tracking Signal
– Exposes bias (positive or negative) ∑ ( actual - forecast )
TS =
MAD

© Wiley 2002
Factors for Selecting a
Forecasting Model
• The amount & type of available data

• Degree of accuracy required
• Length of forecast horizon
• Presence of data patterns

© Wiley 2002

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CHAPTER

Reid & Sanders, Operations Management

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Value Added by Process

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Reid & Sanders, Operations Management Page 9

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• Replaced traditional craft methods

Reid & Sanders, Operations Management Page 13

• Separated ‘planning’ from ‘doing’

Reid & Sanders, Operations Management Page 14

• Recognition that factors other than

• Developed new quantitative techniques

Reid & Sanders, Operations Management Page 16

• Provided the tool necessary to support the

Reid & Sanders, Operations Management Page 17

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• Internet & related technologies enable new

Reid & Sanders, Operations Management Page 21

Reid & Sanders, Operations Management

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Environmental Mission: Core

Reid & Sanders, Operations Management Page 27

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• Eliminate wasted labor, materials, and

Reid & Sanders, Operations Management Page 30

• High performance design:

Reid & Sanders, Operations Management Page 31

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• Convert all inputs & outputs to $ value

200 units × $12 / unit $2400

Reid & Sanders, Operations Management Page 39

• Is the productivity measure of 1.41 in

Reid & Sanders, Operations Management Page 40

• Can be used to compare a process’

Reid & Sanders, Operations Management Page 41

Reid & Sanders, Operations Management

• The process of deciding on the unique

Reid & Sanders, Operations Management Page 44

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• Products & service offerings must

Reid & Sanders, Operations Management Page 46

• Existing & target customers

Reid & Sanders, Operations Management Page 49

• General performance characteristics

Reid & Sanders, Operations Management Page 50