COO – FORM 12

SUBJECT TITLE: OPERATIONS MANAGEMENT AND TQM

INSTRUCTOR: IVY JOY C. SERVIANO, CPA
SUBJECT CODE: MS1

FINALS MODULE

Topic 1: Supply Chain Planning

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Understand Supply Chain Management
2. Determine the activities of Supply chain management
3. Understand the relationship of supply chains in operations
4. Understand how supply chain can be improved

NOTES:

A. Definition of Supply Chain Management

Supply chain management is the management of the interconnection of

organizations that relate to each other through upstream and downstream linkages
between the processes that produce value to the ultimate consumer in the form of
products and services. It is a holistic approach to managing across company
boundaries. Supply Network refers to all the operations that were linked together
so as to provide goods and services through to the end-customers.

All supply chain management shares one common, and central, objective – to
satisfy the end customer. All stages in a chain must eventually include
consideration of the final customer, no matter how far an individual operation is
from the end-customer. When a customer decides to make a purchase, he or she
triggers action back along the whole chain. All the businesses in the supply chain
pass on portions of that end-customer’s money to each other, each retaining a
margin for the value it has added. Each operation in the chain should be satisfying
its own customer, but also making sure that eventually the end-customer is also
satisfied.

Meeting the requirements of end-customers requires the supply chain to achieve

appropriate levels of the five operations performance objectives: quality, speed,
dependability, flexibility and cost.

B. Activities of supply chain management

Some of the terms used in supply chain management are not universally applied.
Furthermore, some of the concepts behind the terminology overlap in the sense

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 that they refer to common parts of the total supply network. These are illustrated
in Figure 13.3.

Supply chain management coordinates all the operations on the supply side and
the demand side. Purchasing and supply management deals with the
operation’s interface with its supply markets. Physical distribution
management may mean supplying immediate customers, while logistics is an
extension that often refers to materials and information flow down through a
distribution channel, to the retail store or consumers (increasingly common
because of the growth of internet-based retailing). The term third-party
logistics (TPL) indicates outsourcing to a specialist logistics company. Materials
management is a more limited term and refers to the flow of materials and
information only through the immediate supply chain.

C. Types of relationships in supply chains

One of the key issues within a supply chain is how relationships with immediate
suppliers and customers should be managed. The behavior of the supply chain as
a whole is, after all, made up of the relationships which are formed between
individual pairs of operations in the chain. It is important, therefore, to have some
framework which helps us to understand the different ways in which supply chain
relationships can be developed.

Business or consumer relationships?

The growth in e-commerce has established broad categorization of supply chain

relationships. This happened because Internet companies have categorized market
sectors defined by who is supplying whom. Figure 13.5 illustrates this
categorization, and distinguishes between relationships that are the final link in
the supply chain, involving the ultimate consumer, and those involving two
commercial businesses. So, business-to-business (B2B) relationships are by far
the most common in a supply chain context and include some of the e-procurement
exchange networks. Business-to-consumer (B2C) relationships include both ‘bricks
and mortar’ retailers and online retailers. Consumer-to business (C2B)
relationships involve consumers posting their needs on the web (sometimes stating
the price they are willing to pay), companies then deciding whether to offer.
Customer-to-customer (C2C) or peer-to-peer (P2P) relationships include the online

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exchange and auction services and file sharing services. In this chapter we deal
almost exclusively with B2B relationships.

Types of business-to-business relationship

A convenient way of categorizing supply chain relationships is to examine the

extent and nature of what a company chooses to buy in from suppliers. Two
dimensions are particularly important – what the company chooses to outsource,
and who it chooses to supply it. In terms of what is outsourced, key questions are,
‘how many activities are outsourced (from doing everything in-house at one
extreme, to outsourcing everything at the other extreme), and ‘how important are
the activities outsourced (from outsourcing only trivial activities at one extreme,
to outsourcing even core activities at the other extreme)? In terms of who is chosen
to supply products and services, again two questions are important, ‘how many
suppliers will be used by the operation (from using many suppliers to perform the
same set of activities at one extreme, through to only one supplier for each activity
at the other extreme), and ‘how close are the relationships (from ‘arm’s length’
relationships at one extreme, through to close and intimate relationships at the
other extreme)? Figure 13.6 illustrates this way of characterizing relationships. It
also identifies some of the more common types of relationship and shows some of
the trends in how supply chain relationships have moved.

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D. Supply chain behavior

Distorted information or the lack of information, such as inaccurate demand

data or forecasts, from the customer end can ripple back upstream through
the supply chain and magnify demand variability at each stage. This can result
in high buffer inventories, poor customer service, missed production
schedules, wrong capacity plans, inefficient shipping, and high costs. This
phenomenon, which has been observed across different industries, is known
as the bullwhip effect. It occurs when slight to moderate demand variability
becomes magnified as demand information is transmitted back upstream in
the supply chain.

The bullwhip effect is created when supply chain members make ordering
decisions with an eye to their own self-interest and/or they do not have
accurate demand information from the adjacent supply chain members. If each
supply chain member is uncertain and not confident about what the actual
demand is for the succeeding member it supplies and is making its own
demand forecast, then it will stockpile extra inventory to compensate for the
uncertainty. In other words, they create a security blanket of inventory.

However, if slight changes in demand occur, and the distributor does not know
why this change occurred, then the distributor will tend to overreact and
increase its own demand, or conversely reduce its own demand too much if
demand from its customer unexpectedly drops. This creates an even greater
overreaction by the manufacturer who supplies the distributor and the
suppliers who supply the manufacturer. One way to cope with the bullwhip
effect is for supply chain members to share information, especially demand
forecasts. If the supply chain exhibits transparency, then members can have
access to each other’s information, which reduces or eliminates uncertainty.

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E. Supply chain improvement

The Supply Chain Operations Reference model (SCOR) is a highly structured

framework for supply chain improvement that has been developed by the Supply
Chain Council (SCC). The framework uses a methodology, diagnostic and
benchmarking tools that are increasingly widely accepted for evaluating and
comparing supply chain activities and their performance. Just as important, the
SCOR model allows its users to improve, and communicate supply chain
management practices within and between all interested parties in their supply
chain by using a standard language and a set of structured definitions. The SCC
also provides a benchmarking database by which companies can compare their
supply chain performance to others in their industries and training classes.

■ The model uses three well-known individual techniques turned into an integrated
approach.
These are:
– Business process modelling
– Benchmarking performance
– Best practice analysis.

The SCOR roadmap

The SCOR model can be implemented by using a five-phase project ‘roadmap’.
Within this roadmap lies a collection of tools and techniques that both help to
implement and support the SCOR framework. In fact many of these tools are
commonly used management decision tools such as Pareto charts, cause–effect
diagrams, maps of material flow and brainstorming.

Phase 1: Discover – Involves supply-chain definition and prioritization where a

‘Project Charter’ sets the scope for the project. This identifies logic groupings of
supply chains within the scope of the project. The priorities, based on a weighted
rating method, determine which supply chains should be dealt with first. This phase
also identifies the resources that are required, identified and secured through
business process owners or actors.

Phase 2: Analyze – Using data from benchmarking and competitive analysis, the
appropriate level of performance metrics are identified; that will define the
strategic requirements of each supply chain.

Phase 3: Material flow design – In this phase the project teams have their first go
at creating a common understanding of how processes can be developed. The
current state of processes is identified and an initial analysis attempts to see where
there are opportunities for improvement.

Phase 4: Work and information flow design – The project teams collect and analyze
the work involved in all relevant processes (plan, source, make, deliver and return)
and map the productivity and yield of all transactions.

Phase 5: Implementation planning – This is the final and preparation phase for
communicating the findings of the project. Its purpose is to transfer the knowledge
of the SCOR team(s) to individual implementation or deployment teams.

Benefits of the SCOR model

Claimed benefits from using the SCOR model include improved process
understanding and performance, improved supply chain performance, increased
customer satisfaction and retention, a decrease in required capital, better
profitability and return on investment, and increased productivity. And, although

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most of these results could arguably be expected when any company starts
focusing on business processes improvements, SCOR proponents argue that using
the model gives an above average and supply focused improvement.

EXERCISES:

1. What are supply chain management and its related activities?

2. What are the types of relationship between operations in supply
chains?
3. How does Bullwhip affects the supply chain?
4. How can supply chains be improved?

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Topic 2: Lean Synchronization

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Explain the concept of lean synchronization.
2. Determine how to eliminate waste by doing lean synchronization.
3. Understand the application of Lean synchronization applied throughout the
supply network.

NOTES:

A. Definition of lean synchronization

Synchronization means that the flow of products and services always delivers
exactly what customers want (perfect quality), in exact quantities (neither too
much nor too little), exactly when needed (not too early or too late), and exactly
where required (not to the wrong location). Lean synchronization is to do all this
at the lowest possible cost. It results in items flowing rapidly and smoothly through
processes, operations and supply networks.

Lean manufacturing evolved from the Toyota Production System (TPS), which is
based on the just-in-time (JIT) production model. This manufacturing approach is
in direct opposition to traditional manufacturing, which is characterized by high
inventory levels, large production lot sizes, process inefficiencies, and waste.

The goal of lean production is improved efficiency and effectiveness in every area,
including product design, supplier interaction, factory operations, employee
management, and customer relations. It involves getting the right products to the
right place, at the right time, in the right quantity while minimizing waste and
remaining flexible.

Characteristics of JIT

1. Pull processing. It involves pulling products from the consumer end

(demand), rather than pushing them from the production end (supply). Raw
materials inventory arrive in small quantities from vendors several times per
day, just in time to go into production.

2. Compressed operations. Production cells are arranged close together, so

there is less work-in-process inventory being moved between cells.

3. Perfect Quality. Supplier quality is certified in advance, so their deliveries

can be sent straight to the production area, rather than piling up in the
receiving area to await inspection.

4. Waste Minimization. All activities that do not add value must be

eliminated. There seven types of wastes which JIT seeks to minimize or
remove:

o Waste from overproduction.

o Waste of waiting time.
o Transportation waste.
o Processing waste.
o Inventory waste.

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 o Waste of motion.
o Waste from product defects.

5. Inventory Reduction. The hallmark of firms using JIT is their success in

inventory reduction. Such firms often experience annual inventory turnovers
of 100 times per year. Reduction in inventories can save the company a lot
of money.

Maintaining inventories means investment in materials, labor, and

overhead that cannot be realized until sold. They must be transported
throughout the factory. They must be handled, stored, and counted.
Moreover, inventories lose value through obsolescence

6. Production Flexibility. Long machine setup procedures cause delays in

production and encourage overproduction. Lean companies strive to reduce
setup time to a minimum, which allows them to produce a greater diversity
of products quickly, without sacrificing efficiency at lower volumes of
production.

7. Established Supplier Relations. A firm using JIT must have established

and cooperative relationships with vendors. When suppliers are located quite
close to a company's production facility, the shortened distances make it
much more likely that deliveries will be made on time, which reduces the
need for safety stock.

8. Total Employee Involvement / Team Attitude. JIT relies heavily on the

team attitude of all employees involved in the process, including those in
purchasing, receiving, manufacturing, shipping – everyone. Each employee
must be vigilant of problems that threaten the continuous flow operation of
the production.

B. Eliminate waste

Arguably the most significant part of the lean philosophy is its focus on the
elimination of all forms of waste. Waste can be defined as any activity that does
not add value. For example, studies often show that as little as 5 per cent of total
throughput time is actually spent directly adding value. This means that for 95 per
cent of its time, an operation is adding cost to the product or service, not adding
value. Such calculations can alert even relatively efficient operations to the
enormous waste which is dormant within all operations. This same phenomenon
applies as much to service processes as it does to manufacturing ones. Relatively
simple requests, such as applying for a driving license, may only take a few
minutes to actually process, yet take days (or weeks) to be returned.

Eliminate waste through streamlined flow

The smooth flow of materials, information and people in the operation is a central
idea of lean synchronization. Long process routes provide opportunities for delay
and inventory buildup, add no value, and slow down throughput time. So, the first
contribution any operation can make to streamlining flow is to reconsider the basic
layout of its processes.

Broadly speaking, this means moving from functional layouts towards cell-based
layouts, or from cell-based layouts towards product layouts. Either way, it is
necessary to move towards a layout that brings more systematization and control

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 to the process flow. At a more detailed level, typical layout techniques include:
placing workstations close together so that inventory physically just cannot build
up because there is no space for it to do so, and arranging workstations in such a
way that all those who contribute to a common activity are in sight of each other
and can provide mutual help, for example by facilitating movement between
workstations to balance capacity.

C. Lean synchronization applied throughout the supply network

Although most of the concepts and techniques discussed in this chapter are devoted
to the management of stages within processes and processes within an operation,
the same principles can apply to the whole supply chain. In this context, the stages
in a process are the whole businesses, operations or processes between which
products flow. And as any business start to approach lean synchronization it will
eventually come up against the constraints imposed by the lack of lean
synchronization of the other operations in its supply chain. So, achieving further gains
must involve trying to spread lean synchronization practice outward to its partners
in the chain. Ensuring lean synchronization throughout an entire supply network is
clearly a far more demanding task than doing the same within a single process. It is
a complex task. And it becomes more complex as more of the supply chain embraces
the lean philosophy. The nature of the interaction between whole operations is far
more complex than between individual stages within a process. A far more complex
mix of products and services is likely to be being provided and the whole network is
likely to be subject to a less predictable set of potentially disruptive events. To make
a supply chain lean means more than making each operation in the chain lean. A
collection of localized lean operations rarely leads to an overall lean chain. Rather
one needs to apply the lean synchronization philosophy to the supply chain as a
whole. Yet the advantages from truly lean chains can be significant.

And essentially the principles of lean synchronization are the same for a supply chain
as they are for a process. Fast throughout the whole supply network is still valuable
and will save cost throughout the supply network. Lower levels of inventory will still
make it easier to achieve lean synchronization. Waste is just as evident (and even
larger) at the level of the supply network and reducing waste is still a worthwhile
task. Streamline flow, exact matching of supply and demand, enhanced flexibility,
and minimizing variability are all still tasks that will benefit the whole network. The
principles of pull control can work between whole operations in the same way as they
can between stages within a single process. In fact, the principles and the techniques
of lean synchronization are essentially the same no matter what level of analysis is
being used. And because lean synchronization is being implemented on a larger scale,
the benefits will also be proportionally greater.

One of the weaknesses of lean synchronization principles is that it is difficult to

achieve when conditions are subject to unexpected disturbance. This is especially a
problem with applying lean synchronization principles in the context of the whole
supply network. Whereas unexpected fluctuations and disturbances do occur within
operations, local management has a reasonable degree of control that it can exert in
order to reduce them. Outside the operation, within the supply network, it is far more
difficult. Nevertheless, it is generally held that, although the task is more difficult and
although it may take longer to achieve, the aim of lean synchronization is just as
valuable for the supply network as a whole as it is for an individual operation.

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Topic 3: Total Quality Management

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Understand the total quality management.
2. Identify the different perspective with regards quality and what influences
quality.
3. Identify the costs in quality management and tools to apply.

NOTES:

A. What is Quality?

It is a simple question, but with a not-so-simple answer. In fact, quality has

proved to be a difficult concept to pin down. But according to The Oxford American
Dictionary defines quality as “a degree or level of excellence.” The definition
of quality by the American National Standards Institute (ANSI) and the American
Society for Quality Control (ASQC) is “the totality of features and
characteristics of a product or service that bears on its ability to satisfy
given needs.”

B. Perspective of Quality

• Quality from Customer’s Perspective

A business organization produces goods and services to meet its customer’s

needs. Quality has become a major factor in a customer’s choice of products
and service. Customers know that certain companies produce better-quality
products than others, so they buy accordingly. That means a firm should
consider how the consumer defines quality. The consumer can be a
manufacturer purchasing raw materials or parts, a storeowner or retailer
purchasing products to sell, or someone who purchases retail products or
services over the Internet.

W. Edwards Deming, author and consultant on quality, said, “The consumer

is the most important part of the production line. Quality should be aimed at
the needs of the consumer, present and future.”

From this perspective, product and service quality is determined by what the
consumer wants and is willing to pay for. Since consumers have different
product needs, they will have different quality expectations. This results in a
commonly used definition of quality as a service or product’s fitness for use.
How well does it do what the consumer or user thinks it is supposed to do and
wants it to do?

Products and services are designed with intentional differences in quality to

meet the different wants and needs of individual consumers. A Mercedes and
a Ford truck are equally “fit for use,” in the sense that they both provide
automobile transportation for the consumer and each may meet the quality

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standards of its individual purchaser. However, the two products have
obviously been designed differently for different types of consumers. This is
commonly referred to as the quality of design-- the degree to which quality
characteristics are designed into the product. Although Mercedes and Ford are
designed for the same use yet they differ in their performance, features, size
and various other quality characteristics.

The dimensions of quality primarily for manufactured products which a

consumer looks for in a product include the following:

• Performance - The basic operating characteristic of a product is

performance. For example, how well a car handles or its gas mileage etc.
• Features - Features are the “extra” items added to the basic features,
such as stereo CD or a leather interior in a car.
• Reliability - Reliability is the probability that a product will operate
properly within an expected time frame, e.g., a TV without repair for about
7 years.
• Conformance - Conformance is the degree to which a product meets pre-
established standards.
• Durability - Durability tells how long a product lasts, i.e. its life span
before replacement.
• Serviceability - Serviceability is the ease of getting repairs, the speed of
repairs, and the courtesy and competence of the repairperson.
• Aesthetics - Aesthetics tells how a product looks, feels, sounds, smells or
tastes.
• Safety- Safety refers to assurance that the customer will not suffer injury
or harm from the product. It is an especially important consideration for
automobiles.
• Other Perceptions - Other perceptions include the subjective perceptions
based on brand name, advertising and the like.

A customer relative to the cost of the product weighs these quality

characteristics. In general, consumers will pay for the level of quality they can
afford. If they feel they are getting what they paid for, they tend to be satisfied
with the quality of the product.

The dimensions of quality for a service differ somewhat from those of a

manufactured product. Service quality is more directly related to time and the
interaction between employees and customer. Evans and Lindsay identify the
following dimensions of service quality:

• Time and Timeliness - tells how long a customer should wait for a
particular service and if it is completed in time. For example, is an
overnight package delivered on time?
• Completeness – answers to “Has everything a customer asked for been
provided?” For example, is a mail order from a catalog company complete
when delivered?
• Courtesy - tells how employees treat customers. For example, are catalog
phone operators nice and are their voices pleasant?
• Consistency – answers to “Is the same level of service provided to each
customer each time?” Another example could be “is your newspaper
delivered on time every morning?”

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 • Accessibility and Convenience – answers to “How easy it is to obtain
the service?” For example, when you call BPL Mobile, does the service
representative answer quickly?
• Accuracy – refers to the service performed right every time. For example,
is your bank or credit card statement correct every month?
• Responsiveness – it is how well the company reacts to unusual
situations, which can happen frequently in a service company. For
example, how well a telephone operator at a catalog company is able to
respond to a customer’s questions about a catalog item not fully described
in the catalog.

All the product and service characteristics mentioned previously should be

considered in the design process to meet the consumer’s expectations for
quality. This requires that a company accurately assess what the consumer
wants and needs.

Consumer research to determine what kinds of products are desired and the
level of quality expected is a big part of a company’s quality management
program. Once a consumer’s needs and wants have been determined by
marketing, they are incorporated into the design of the product. Now it is up to
operations to ensure that the design is properly implemented, resulting in
product and services that consumer wants and have the expected quality.

• Quality from Producer’s/Seller’s Perspective

Now we need to look at quality the way a producer or service provider sees it.
We already know that product development is a function of the quality
characteristics (i.e. the product’s fitness for use) the consumer’s wants, needs
and can afford.

Product or service design results in design specifications that should achieve the
desired quality. However, once the product design has been determined, the
producer perceives quality to be how effectively the production process is able
to conform to the specifications required by the design referred to as the quality
of conformance. What this means is quality during production focuses on
making sure that the product meets the specifications required by the design.

Examples of the Quality of Conformance

If new tires do not conform to specifications, they wobble. If a hotel room is not
clean when a guest checks in, the hotel is not functioning according to the
specifications of its design. It is a faulty service. From this producer’s
perspective, good-quality products conform to specifications. They are well
made and on the other hand poor quality products are not made well. They do
not conform to specifications.

Achieving quality of conformance depends on a number of factors.

Some of them are as follows:

• Design of production process (distinct from product design)

• Performance level of machinery
• Equipment and technology

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 • Materials used
• Training and supervision of employees
• The degree to which statistical quality control techniques are used

Design specifications are generally not met in the following cases:

• When equipment fails or is malfunctioned

• When employees make mistakes
• When material and parts are defective
• When supervision is lax

The key personnel in achieving conformance to specifications include the

engineering staff, supervisors and managers and the most important,
employees.

An important consideration from the consumer’s perspective of product quality

is product or service price. From the producer’s perspective an important
consideration is achieving quality of conformance at an acceptable cost. Product
cost is also an important design specification. If products or services cannot be
produced at a cost that results in a competitive price, the final product will not
have acceptable value-the price is more than the consumer is willing to pay
given the product’s quality characteristics. Thus, the quality characteristics
included in the product design should be balanced against production costs.

We approach quality from two perspectives, the consumer’s and the producer’s.
These two perspectives are dependent on each other as shown in figure 1.1.
Although product design is customer-motivated yet it cannot be achieved
without the coordination and participation of production process. When a
product is designed without considering how it will be produced, it may be
impossible for the production process to meet design specifications or so costly
to do so that the product or service may be priced prohibitively high.
The Meaning of Quality

Producer’s Perspective Consumer’s Perspective

Quality of Conformance Quality of Design

Production

Marketing

• Conformance to • Quality
Specifications Characteristics
• Cost • Price

Fitness for
Consumer Use

Figure 1.1-- Meaning of quality from the producer and consumer’s

perspectives

Figure 1.1 depicts the meaning of quality from the producer and consumer’s
perspectives. The final determination of quality is fitness for use, which is the

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 consumer’s view of quality. It is the consumer who makes the final judgment
regarding quality and so it is the consumer’s view that should dominate.

• Factors affecting Quality

The quality of products and services are directly affected by many base factors. In
today’s, world these factors play a crucial role in an organization are listed below.

1. Markets
New products are hitting the market at an explosive rate. Many of these products
are manufactured by material and methods unheard till a few years back.
Customers demand and get better products today. As markets broaden in scope,
the scope of goods and services become more and more specialized. Burners today
should be very flexible and be able to a respond rapidly and appropriately in
different markets worldwide.

2. Money
As competition has increased, profit margins have decreased. Automation forced
companies to spend heavily on new equipment’s and processes. To absorb these
costs, productivity has to be increased, which means loss production, reworks and
scrap has to be kept to the minimum. Quality costs have to be kept low which
mean cost saving due to quality improvement has to be kept in prime focus.

3. Man
The rapid growth of technology and opening of new fields have created a great
demand for workers with specialized knowledge. This specialization of people has
created a need for persons who can bring together this knowledge to plan and
create operating systems that will bring the desired results.

4. Materials
Due to high material costs, engineers have to constantly keep coming up with
ways to bring down the cost of material used. They also need to come up with
new alternate materials that can replace costlier older material.

5. Machines
The demand to cut costs is forcing companies to use newer machines, which will
deliver better quality and product using lesser cycle times. Further the machines
need to deliver higher quantities also to keep production costs low. This means
maintaining of these machines also becomes critical as any and only down time
of these machines leads to increased costs.

6. Management
Today responsibility for product quality has to be distributed among, various
functions. For example, design of design for quality of product design.
Manufacturing for process quality, service for after sales quality and marketing
for establishing the quantity of the new product required. This means that top
management should ensure proper allocation of responsibilities to all to achieve
the organization goals.

7. Motivation
The increased complexity of the product means that every employee has to give
his best if quality is to be maintained. This requires that quality consciousness
among employees are high. This can be achieved only through continuous

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 education and motivation of the work force. Motivation, therefore, needs to be on
the top of the agenda for any management team of an organization.

8. Modern Methods of Information

With the spread of computers, data collection, storage retrieval retrieved and
transmission of information has become easy. This also means that the right
information can be given to the right person at his workplaces be it on the
machines or in the office.

From the above we see that there are many factors affecting quality and
organization should continually change to keep pace with these requirements. As
responsible citizens it is our duty to demand quality from our suppliers and deliver
quality to our customers. Quality is an endless journey. It is like walking toward
the horizon. No matter how much far you walk, it does not change where the
horizon is.

C. Total Quality Management

Total Quality Management (TQM) is an enhancement to the traditional way of

doing business. It is a proven technique guaranteeing survival in world-class
competition. The culture and actions of an organization can be transformed by
changing only the actions of management. Total Quality Management (TQM) is a
comprehensive and structured approach to organizational management that seeks
to improve the quality of products and services through ongoing refinements in
response to continuous feedback. Analyzing the three words, we have:

• Total—Make-up of the whole

• Quality-- Degree of excellence a product or service provides
• Management-- Act, art, or manner of handling, controlling, directing etc.

Therefore, TQM is an art of managing the whole to achieve excellence. TQM is also
defined as both a philosophy and a set of benchmarks that represent the foundation
of a continuously improving organization. It is an application of quantitative
methods and human resources to improve all the processes within an organization
and exceed customer needs at present and in the future. TQM integrates
fundamental management techniques, existing improvement efforts and technical
tools under a disciplined approach.

TQM is based on the following principles:

1. Primary responsibility for product quality rests with top management

2. Quality should be customer focused and evaluated using customer-based
standards
3. The production process and work methods should be designed consciously to
achieve quality conformance
4. Every employee is responsible for achieving good product quality
5. Quality cannot be inspected in a product, so make it right the first time
6. Quality should be monitored to identify problems quickly and correct quality
problems immediately
7. The organization should strive for continuous improvements
8. Companies should work with their suppliers and extend TQM programs to
them to ensure quality inputs

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 The purpose of TQM is to provide a quality product and/or service to customers
which will, in turn, increase productivity and decrease cost. With a higher quality
product and lower price, competitive position in marketplace will be enhanced.
This series of events will allow an organization to achieve its objectives of profit
and growth with greater ease. In addition, the workforce will have job security
which will create a satisfying place to work.

Quality Management Costs

The reason quality has gained such prominence is that organizations have gained an
understanding of the high cost of poor quality. Quality affects all aspects of the
organization and has dramatic cost implications. The most obvious consequence
occurs when poor quality creates dissatisfied customers and eventually leads to loss
of business. However, quality has many other costs, which can be divided into two
categories. The first category consists of costs necessary for achieving high quality,
which are called quality control costs. These are of two types: prevention costs and
appraisal costs. The second category consists of the cost consequences of poor
quality, which are called quality failure costs. These include external failure costs and
internal failure costs. These costs of quality are shown in Figure 5-1. The first two
costs are incurred in the hope of preventing the second two.

Prevention costs. Costs of preparing and

implementing a quality plan.

Appraisal costs. Costs of testing, evaluating,

and inspecting quality.

Internal failure costs. Costs of scrap, rework,

and material losses.

External failure costs. Costs of failure at customer site,

including returns, repairs, and recalls.

1. Prevention costs are all costs incurred in the process of preventing poor
quality from occurring. They include quality planning costs, such as the costs
of developing and implementing a quality plan. Also included are the costs of
product and process design, from collecting customer information to designing
processes that achieve conformance to specifications. Employee training in
quality measurement is included as part of this cost, as well as the costs of
maintaining records of information and data related to quality.

2. Appraisal costs are incurred in the process of uncovering defects. They

include the cost of quality inspections, product testing, and performing audits
to make sure that quality standards are being met. Also included in this
category are the costs of worker time spent measuring quality and the cost of
equipment used for quality appraisal.

3. Internal failure costs are associated with discovering poor product quality
before the product reaches the customer site. One type of internal failure cost
is rework, which is the cost of correcting the defective item. Sometimes the
item is so defective that it cannot be corrected and must be thrown away. This
is called scrap, and its costs include all the material, labor, and machine cost
spent in producing the defective product. Other types of internal failure costs

P a g e 16 | 33
 include the cost of machine downtime due to failures in the process and the
costs of discounting defective items for salvage value.

4. External failure costs are associated with quality problems that occur at the
customer site. These costs can be particularly damaging because customer
faith and loyalty can be difficult to regain. They include everything from
customer complaints, product returns, and repairs, to warranty claims, recalls,
and even litigation costs resulting from product liability issues. A final
component of this cost is lost sales and lost customers. For example,
manufacturers of lunch meats and hot dogs whose products have been recalled
due to bacterial contamination have had to struggle to regain consumer
confidence. Other examples include auto manufacturers whose products have
been recalled due to major malfunctions such as problematic braking systems
and airlines that have experienced a crash with many fatalities. External failure
can sometimes put a company out of business almost overnight.

External failure costs tend to be particularly high for service organizations. The
reason is that with a service the customer spends much time in the service
delivery system, and there are fewer opportunities to correct defects than
there are in manufacturing. Examples of external failure in services include an
airline that has overbooked flights, long delays in airline service, and lost
luggage.

Companies that consider quality important invest heavily in prevention and

appraisal costs in order to prevent internal and external failure costs. The earlier
defects are found, the less costly they are to correct. For example, detecting
and correcting defects during product design and product production is
considerably less expensive than when the defects are found at the customer
site.
Cost of Defect

Product Product Customer

Design Production Site
Location of Defect

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Exercises:
1. Discuss the Total Quality Management and it’s principles.
2. Differentiate quality from customer’s and producer’s perspective.
3. What are the factors that influences the quality of products and
services?
4. Enumerate the different quality management costs and identify the
most significant one?
5. Give at least 3 quality management tools and discuss how they work.

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Topic 4: Operations Improvement and Organizing

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Understand the significance of operations improvement in Operations
management.
2. Identify the different improvement approaches.
3. Understand the organizing of improvement and its importance.
4. Understand the performance measurement and different types of
performance measurement.

NOTES:

A. Operations Improvement and Approaches

Operational improvement is often a fundamental requirement and continuous

effort for any organization that wishes to succeed in today’s environment of
change and challenge. Along with operational efficiency, it can play an
enormous role driving growth and profitability.

Improvement is now seen as the prime responsibility of operations

management. Of the four areas of operations management activity (operations
strategy, design, planning and control, and improvement) the focus of most
operations managers has shifted from planning and control to improvement.
Furthermore all operations management activities are really concerned with
improvement in the long term.

B. Elements of Improvement

1. Radical breakthrough improvement (or ‘innovation’-based improvement as

it is sometimes called) is a philosophy that assumes that the main vehicle of
improvement is major and dramatic change in the way the operation works.
The impact of these improvements is relatively sudden and represents a step
change in practice (and hopefully performance). Such improvements are rarely
inexpensive, usually calling for high investment of capital, often disrupting the
ongoing workings of the operation, and frequently involving changes in the
product/service or process technology.

Breakthrough improvement places a high value on creative solutions. It

encourages free thinking and individualism. It is a radical philosophy insomuch
as it fosters an approach to improvement which does not accept many
constraints on what is possible. ‘Starting with a clean sheet of paper’, ‘going
back to first principles’ and ‘completely rethinking the system’ are all typical
breakthrough improvement principles.

2. Continuous improvement, as the name implies, adopts an approach to

improving performance which assumes many small incremental improvement
steps. Continuous improvement is also known as kaizen. Kaizen is a Japanese
word, the definition of which is given by Masaaki Imai (who has been one of
the main proponents of continuous improvement) as follows.

‘Kaizen means improvement. Moreover, it means improvement in

personal life, home life, social life and work life. When applied to the

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 workplace, kaizen means continuing improvement involving everyone –
managers and workers alike.’

3. Improvement cycle is the use of a literally never ending process of

repeatedly questioning and re-questioning the detailed working of a process
or activity, of which there are many, but two are widely used models – the
PDCA cycle (sometimes called the Deming cycle, named after the famous
quality ‘guru’, W.E. Deming) and the DMAIC (pronounced de-make) cycle,
made popular by the Six Sigma approach.

The PDCA cycle model is shown in Figure 18.3(a). It starts with the P (for
plan) stage, which involves an examination of the current method or the
problem area being studied. This involves collecting and analyzing data so as
to formulate a plan of action which is intended to improve performance. Once
a plan for improvement has been agreed, the next step is the D (for do)
stage. This is the implementation stage during which the plan is tried out in
the operation. This stage may itself involve a mini-PDCA cycle as the problems
of implementation are resolved. Next comes the C (for check) stage where
the new implemented solution is evaluated to see whether it has resulted in
the expected performance improvement. Finally, at least for this cycle, comes
the A (for act) stage. During this stage the change is consolidated or
standardized if it has been successful. Alternatively, if the change has not been
successful, the lessons learned from the ‘trial’ are formalized before the cycle
starts again.

The DMAIC cycle is in some ways more intuitively obvious than the PDCA cycle
insomuch as it follows a more ‘experimental’ approach. The DMAIC cycle
starts with defining the problem or problems, partly to understand the scope
of what needs to be done and partly to define exactly the requirements of the
process improvement. Often at this stage a formal goal or target for the
improvement is set. After definition comes the measurement stage. This stage
involves validating the problem to make sure that it really is a problem worth
solving, using data to refine the problem and measuring exactly what is
happening. Once these measurements have been established, they can be
analyzed. The analysis stage is sometimes seen as an opportunity to develop
hypotheses as to what the root causes of the problem really are. Such
hypotheses are validated (or not) by the analysis and the main root causes of
the problem identified. Once the causes of the problem are identified, work
can begin on improving the process. Ideas are developed to remove the root
causes of problems, solutions are tested and those solutions that seem to work
are implemented and formalized and results measured. The improved process
needs then to be continually monitored and controlled to check that the
improved level of performance is sustaining. After this point the cycle starts
again and defines the problems which are preventing further improvement.
Remember though, it is the last point about both cycles that is the most
important – the cycle starts again. It is only by accepting that in a continuous
improvement philosophy these cycles quite literally never stop that
improvement becomes part of every person’s job.

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4. Customer- centricity - It involves the whole organization in understanding
the central importance of customers to its success and even to its survival.
Customers are seen not as being external to the organization but as the most
important part of it. However, the idea of being customer centric does not
mean that customers must be provided with everything that they want.
Although ‘What’s good for customers’ may frequently be the same as ‘What’s
good for the business’, it is not always. Operations managers are always
having to strike a balance between what customers would like and what the
operation can afford (or wants) to do.

5. Emphasis on Education and training – the idea that structured training and
organization of improvement should be central to improvement. Not only
should the techniques of improvement be fully understood by everyone
engaged in the improvement process, the business and organizational context
of improvement should also be understood. Education and training have an
important part to play in motivating all staff towards seeing improvement as a
worthwhile activity. Some improvement approaches in particular place great
emphasis on formal education.

6. Involving everybody- the skills and enthusiasm of every person and all parts
of the organization seems an obvious principle of improvement. The phrase
‘quality at source’ is sometimes used, stressing the impact that each
individual has on improvement. The contribution of all individuals in the
organization may go beyond understanding their contribution to ‘not make
mistakes’. Individuals are expected to bring something positive to improving
the way they perform their jobs. The principles of ‘empowerment’ are
frequently cited as supporting this aspect of improvement.

7. Plan for Zero Defects - Define all the individual action steps that build-up to
Zero Defects day. These steps, placed on a schedule and assigned to members
of the Zero defects team for execution, will provide a clean energy flow into
an organization-wide Zero Defects commitment.

8. Develop internal customer – supplier relationship - One of the best ways

to ensure that external customers are satisfied is to establish the idea that
every part of the organization contributes to external customer satisfaction by
satisfying its own internal customers. It means stressing that each process in
an operation has a responsibility to manage these internal customer–supplier
relationships. They do this primarily by defining as clearly as possible what
their own and their customers’ requirements are. In effect this means defining

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 what constitutes ‘error-free’ service – the quality, speed, dependability and
flexibility required by internal customers.

C. Improvement Techniques

You can see that Operations places a great deal of responsibility on all workers.
If employees are to identify and correct problems, they need proper training.
They need to understand how to operations by using a variety of techniques or
tools, how to interpret findings, and how to correct problems. In this section we
look at different improvement tools. Sometimes workers use only one tool at a
time, but often a combination of tools is most helpful.

1. Cause-and-effect diagrams are charts that identify potential causes for

particular quality problems. They are often called fishbone diagrams because
they look like the bones of a fish. The “head” of the fish is the root problem,
such as damaged zippers on a garment or broken valves on a tire. The
diagram is drawn so that the “spine” of the fish connects the “head” to the
possible cause of the problem. These causes could be related to the
machines, workers, measurement, suppliers, materials, and many other
aspects of the production process. Each of these possible causes can then
have smaller “bones” that address specific issues that relate to each cause.
Refer to the sample diagram below.

Cause-and-effect diagrams are problem-solving tools commonly used by

quality control teams. Specific causes of problems can be explored through
brainstorming. The development of a cause-and-effect diagram requires
the team to think through all the possible causes of poor quality.

2. A flowchart is a schematic diagram of the sequence of steps involved in an

operation or process. It provides a visual tool that is easy to use and
understand. By seeing the steps involved in an operation or process, everyone
develops a clear picture of how the operation works and where problems could
arise.

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3. A checklist is a list of common defects and the number of observed
occurrences of these defects. It is a simple yet effective fact-finding tool that
allows the worker to collect specific information regarding the defects
observed.

4. A histogram is a kind of bar chart showing a distribution of variables or causes

of problems. It represents cause of a problem as a column and the frequency
of each cause of problem as the height of the column. Histogram helps in
prioritizing factors and identify which are the areas that needs utmost attention
immediately.

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5. Control charts. These charts are used to evaluate whether a process is
operating within expectations relative to some measured value such as
weight, width, or volume. For example, we could measure the weight of a
sack of flour, the width of a tire, or the volume of a bottle of soft drink.
When the production process is operating within expectations, we say that
it is “in control.”

To evaluate whether or not a process is in control, we regularly measure the

variable of interest and plot it on a control chart. The chart has a line down the
center representing the average value of the variable we are measuring. Above
and below the center line are two lines, called the upper control limit (UCL)
and the lower control limit (LCL). As long as the observed values fall within the
upper and lower control limits, the process is in control and there is no problem
with quality. When a measured observation falls outside of these limits, there
is a problem.

D. Improvement Organizing

Improvement does not just happen by itself. It needs organizing, information

must be gathered so that improvement is treating the most appropriate issues,
responsibility for looking after the improvement effort must be allocated, and

P a g e 24 | 33
resources must be allocated. It must also be linked to the organization’s overall
strategy. Without these decisions, it is unlikely that real improvement will take
place.

How should the improvement effort be linked to strategy?

At a strategic level, the whole purpose of operations improvement is to make

operations performance better serve its markets. Therefore there should be
approximate alignment or ‘fit’ between an operations’ performance and the
requirements of its markets. In fact, improvement should do three things to
achieve this:

1. It should achieve an approximate balance between ‘required market

performance’ and ‘actual operations performance’
2. It should make this alignment ‘sustainable’ over time.
3. It should ‘move up’ the line of fit, the assumption being that high levels of
market performance, achieved as a result of high levels of operations
performance are difficult for competitors to match.

Performance Measurement

It is unlikely that for any operation a single measure of performance will

adequately reflect the whole of a performance objective. Usually operations have
to collect a whole bundle of partial measures of performance.

Performance measurement is the process of quantifying action, where

measurement means the process of quantification and the performance of the
operation is assumed to derive from actions taken by its management.
Performance here is defined as the degree to which an operation fulfils the five
performance objectives at any point in time, in order to satisfy its customers.
Some kind of performance measurement is a prerequisite for judging whether an
operation is good, bad or indifferent. Without performance measurement, it would
be impossible to exert any control over an operation on an ongoing basis.

The Balanced Scorecard Approach

Generally operations performance measures have been broadening in their scope.

It is now generally accepted that the scope of measurement should, at some level,
include external as well as internal, long-term as well as short-term, and ‘soft’ as
well as ‘hard’ measures. The best-known manifestation of this trend is the
‘balanced scorecard’ approach taken by Kaplan and Norton.

The balanced scorecard retains traditional financial measures. But financial

measures tell the story of past events, an adequate story for industrial age
companies for which investments in long-term capabilities are customer
relationships were not critical for success. These financial measures are
inadequate, however, for guiding and evaluating the journey that information age
companies must make to create future value through investment in customers,
suppliers, employees, processes, technology, and innovation.

As well as including financial measures of performance, in the same way as

traditional performance measurement systems, the balanced scorecard approach,
also attempts to provide the important information that is required to allow the

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overall strategy of an organization to be reflected adequately in specific
performance measures. In addition to financial measures of performance, it also
includes more operational measures of customer satisfaction, internal processes,
innovation and other improvement activities. In doing so it measures the factors
behind financial performance which are seen as the key drivers of future financial
success. In particular, it is argued that a balanced range of measures enables
managers to address the following questions:

• How do we look to our shareholders (financial perspective)?

• What must we excel at (internal process perspective)?
• How do our customers see us (the customer perspective)?
• How can we continue to improve and build capabilities (the learning and
growth perspective)?

The balanced scorecard attempts to bring together the elements that reflect a
business’s strategic position, including product or service quality measures,
product and service development times, customer complaints, labor productivity,
and so on. At the same time it attempts to avoid performance reporting becoming
unwieldy by restricting the number of measures and focusing especially on those
seen to be essential. The advantages of the approach are that it presents an
overall picture of the organization’s performance in a single report, and by being
comprehensive in the measures of performance it uses, encourages companies to
take decisions in the interests of the whole organization rather than sub-
optimizing around narrow measures.

Benchmarking, is ‘the process of learning from others’ and involves comparing

one’s own performance or methods against other comparable operations. It is a
broader issue than setting performance targets, and includes investigating other
organizations’ operations practice in order to derive ideas that could contribute to
performance improvement.

Its rationale is based on the idea that:

(a) problems in managing processes are almost certainly shared by

processes elsewhere, and
(b) that there is probably another operation somewhere that has developed
a better way of doing things.

Benchmarking is essentially about stimulating creativity in improvement

practice. There are many different types of benchmarking (which are not
necessarily mutually exclusive), some of which are listed below:

1. Internal benchmarking is a comparison between operations or parts of

operations which are within the same total organization.
2. External benchmarking is a comparison between an operation and other
operations which are part of a different organization.
3. Non-competitive benchmarking is benchmarking against external
organizations which do not compete directly in the same markets.
4. Competitive benchmarking is a comparison directly between competitors in
the same, or similar, markets.
5. Performance benchmarking is a comparison between the levels of achieved
performance in different operations. For example, an operation might
compare its own performance in terms of some or all of our performance

P a g e 26 | 33
 objectives – quality, speed, dependability, flexibility and cost – against
other organizations’ performance in the same dimensions.
6. Practice benchmarking is a comparison between an organization’s
operations practices, or way of doing things, and those adopted by another
operation. For example, a large retail store might compare its systems and
procedures for controlling stock levels with those used by another
department store.

Exercises:
1. Discuss the Operations improvement and its significance in
Operations of firms.
2. Discuss the difference of breakthrough and continuous improvement.
3. What is the importance of performance measurement?
4. What is/are the benefit of using the benchmarking?
5. What is the role of organization culture in operations improvement of
firms?

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Topic 5: Enterprise Resource Planning

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Understand the ERP, its purpose and usage to the enterprises.
2. Weigh the advantages and disadvantages of ERP.

NOTES:

A. Enterprise Resource Planning

Enterprise resource planning (ERP) is a process used by companies to manage

and integrate the important parts of their businesses. It utilizes ERP software
applications to improve the performance of organizations’ resource planning,
management control and operational control.

'ERP' refers to both ERP software and business strategies that implement ERP
systems that addresses the enterprise needs taking the process view of an
organization to meet the organizational goals tightly integrating all functions
of an enterprise.

B. Purpose of ERP

Enterprise Resource Planning (ERP) software is considered as one of the

complete business software in today’s competitive environment. An ERP
solution allows organization to have an integrated view of all Business
Processes and other sub-processes it has which further allows efficiency and
effectiveness in achieving your business goals.

ERP applications also allow the different departments to communicate and

share information more easily with the rest of the company. It collects
information about the activity and state of different divisions, making this
information available to other parts, where it can be used productively.

ERP applications can help a corporation become more self-aware by linking

information about the production, finance, distribution, and human resources
together. Because it connects different technologies used by each part of a
business, an ERP application can eliminate costly duplicate and incompatible
technology.

C. Uses of ERP
Enterprise resource planning software is used to manage a number of business
functions, but how is it any better than other solutions? Even though ERP may
have similar goals to other solutions, its unique features make it a distinctive
competitor in the software market. Here are the eight reasons why the
important usage of enterprise resource planning (ERP):

1. Unifying functions and systems

ERP unifies many of the systems that may currently be fragmented in an

organization. From product development to accounts payable, staff will be
able to access all the necessary tools for their job from one centralized
system.

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 By unifying systems, it helps staffs utilize their time more efficiently. With
ERP, users don’t have to hunt down a piece of information across multiple
systems. With the central database, information is much easier to retrieve.

2. Improve Collaboration

The features of ERP applications can vary slightly depending on the program
using, but generally, all systems improve collaboration in some way. The
centralized database is an integral part of what makes an ERP unique. With
this database, it provides a company with a single source of truth to work from.
This reduces any errors brought on by working with the incorrect data, further
reducing costs.

Moreover, a central database reduces any hesitation or stalling during projects,

since all team members have access to the company-wide data they need.
Additionally, there’s no need to merge information across various systems or
sources. Because all of the data is compiled, stored, shared and accessed
through a single system, there is no concern about how accurate, complete or
secure the data files are.

3. Better Analytics

A central database of information also aids in improving your analytics and

reporting. Since an ERP records and stores all the data users input, it makes
for an excellent business intelligence tool. As long as the vendor provides
strong functionality, ERP software makes it easier and faster for organization’s
team to generate various reports. Reports that could take days of research
and compilation without an ERP takes just minutes.

Most ERP solutions provide a customizable dashboard so executives can see

reports when they first log into the system. These reports may include
everything from income and expense statements to custom KPIs that offer
insight into certain functions. The ability to have access to these reports quickly
enables you and your team to make better decisions more quickly. It is no
longer need to rely on IT staff to generate the reports that is needed. Lastly,
reports typically come with access levels, ensuring only relevant staff see
valuable company data.

4. Improved Productivity

With traditional methods, tedious tasks are completely unavoidable. Tasks like
generating reports, monitoring inventory levels, timesheet tracking and
processing orders have historically taken employees hours to accomplish. In
addition to taking up time, these processes lower employee morale and open
yourself up to human error. After the many hours of entering the same line of
data into different forms, even the best staff members are bound to make a
mistake.

If you choose the right solution, an ERP can automate your most tedious tasks.
The database within ERP software eliminates redundant tasks such as data
entry and allows the system to perform advanced calculations within minutes.
This frees up your team members’ time to do more thoughtful work, increasing
your ROI when it comes to labor. From this, ERP increases your organization’s
productivity, efficiency and profitability.

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5. Happier Customers
Managing your customers has never been so important. In our digital age,
more and more people are turning to the internet to receive advice on what
clothes to wear, what food to eat and how to live their lives.

The best way to improve customer satisfaction is to provide client-centered

goods and services. ERP provides this in a few different ways. First, most ERP
are equipped with a customer relationship management (CRM) tool or can be
easily integrated with one. With an ERP, CRM has access to data across
business functions.

Along with contact information, an integrated CRM can show details such as
order history and billing information. This enables organization’s team to see
clients more holistically to gain a better understanding of their wants and
needs. The increased customer visibility helps to formulate sales strategy for
improved lead generation.

6. Simplified Compliance and Risk Management

As companies grow and do business in different countries, it can be difficult to

keep track of all the different regulations imposed on your business. Even local
companies need to worry about various environmental, information security
and human resources regulations.

Luckily, many ERP offerings are built with these regulations in mind to help in
maintaining compliance at every stage. Moreover, ERP software provides built-
in auditing tools to assist with documenting things like tax provisions. This
makes it incredibly easy to formulate reports and send them over to the
relevant governing body.

Additionally, ERP often provides tools to manage risk. This solution’s enhanced
reliability and accuracy improve overall financial management since there’s
less chance for errors during accounting. Forecasting tools also allow users to
predict events when it comes to demand, labor and budget. With this
information in hand, you can create more secure budgets, schedules and
product development plans.

7. Improved Inventory Monitoring

A major challenge for growing companies is tracking and monitoring their

expanding inventory levels. ERP utilizes barcoding, RFID tags and serial
numbers to keep tabs on your inventory at every stage during the supply
chain. These tools help you keep track of inventory levels at different
warehouses, which items are in transportation and which items are on the
shelves ready for consumers. The increased warehouse visibility optimizes the
pick, pack and ship process greatly, removing all the guesswork.

Inventory monitoring also bolsters reporting, as tracking technologies provide

more accurate numbers. Users can configure custom KPIs to see which
products move the fastest — showing greater demand — and which increase
carrying costs. With the greater precision provided by ERP, warehouse
managers can get real-time data on their inventory to make more accurate
business decisions.

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 8. Improved Production Planning and Resource Management

Along with managing your inventory, ERP also manages manufacturing. ERP
provides insight into all manufacturing operations including the shop floor. This
enables users to optimize production schedules, equipment and labor to
maximize capacity.

Additionally, ERP manages your Bill of Materials (BOM) and fixed assets. With
this software, users can easily create and edit BOMs along with keep track of
all previous changes. Fixed asset management allows users to schedule
equipment maintenance to reduce unexpected downtime, improving your
profitability and supply chain relationships.

D. Advantage and Disadvantage of ERP

Key business Advantages of ERP software are:

1. Enhanced Business Reporting:

• Better reporting tools with real-time information

• A single source of truth – one integrated database for all business processes

2. Communications with the use of information within the organization

is made fast and effective

3. Better customer service:

• Better access to customer information

• Faster response times
• Improved on-time delivery
• Improved order accuracy
• Enhances the image of the organization

4. Improved Inventory Costs:

• Only carry as much inventory as needed, avoid these common issues

Too much inventory, and higher overhead costs
Too little inventory, and longer customer fulfillment times

5. Boosted Cash Flow:

• Better invoicing and better collections tools to bring cash in faster

• Faster cash means more cash on-hand for the business

6. Cost Savings:

• Improved inventory planning

• Better procurement management
• Better customer service
• Improved vendor relationship management

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 7. Better Data & Cloud Security:

• Dedicated security resources

• Avoid installing malicious software
• Data distributed across multiple servers

8. Superior Supply Chain Management:

• Effective demand forecasting and lean inventory
• Reduce production bottlenecks
• Transparency through the business

9. Easy access to update information helps in proper planning, decision

making utilizing relevant analysis

Disadvantages of ERP

1. Costs of an ERP Software

• Third-party software add-ins

• Implementation costs
• Maintenance
• Initial and continuous training

2. Complex Data Conversion

• Developing a solid data conversion strategy can be difficult

• You have to define, examine and analyze data sources
• Bad data conversion will cause delays and increased costs

3. Requires thorough training

• Training needs to cover all of the ERP system’s features.

• ERP training sessions need to be in line with business processes
• IT users need to be trained for the technical aspects of the ERP System

Exercises:
1. What is the significance of ERP?
2. Which Benefit of ERP you think will give a greater return to company in
employing it businesses?
3. Give at least 2 advantages and disadvantages of having ERP that you think is
helpful as basis in buying or rejecting ERP?
4. Does ERP really improve business processes? Why or why not?

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REFERENCES:
1. Slack, N., Chambers, S., and Johnston, R., 2010. Operations Management
Sixth Edition. Pearson Education Limited.
2. Russell, R., and Taylor III, B., 2011. Operations Management: Creating Value
along the Supply Chain Seventh Edition. John Wiley & Sons, Inc.
3. Wallstreetmojo.com
4. Prachi, Juneja, 2015. Production and Operations Management. Management
Study Guide.Com
5. Aparna. J. Employee Impowerment.Economicsdiscussion.net

END OF FINAL MODULE

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