Shanti Business School

Operations Management Notes

Post Graduate Diploma in Management (PGDM)

Module I: Introduction to Operations Management

Goods / Products
1) Goods can be resold
2) Goods can be inventoried
3) Some aspects of quality are measurable
4) Selling is distinct from production of goods
5) Goods are transportable
6) Often easy to automate production of goods
7) Are tangible
8) Involve less customer interaction
9) Consistent product definition

Services
1) Reselling services is unusual
2) Services cannot be inventoried
3) Many aspects of quality are difficult to measure
4) Selling is often a part of production of service
5) Service provider, not the service, is transportable
6) Service is often difficult to automate
7) Are intangible
8) Involve higher customer interaction
9) Often unique
10) Inconsistent product definition
11) Often knowledge-based
12) Frequently dispersed
Manufacturing Operations & Service Operations

Characteristic Manufacturing Service

Output Tangible Intangible
Customer contact Low High
Uniformity of output High Low
Labor content per unit of Low High
goods or service
Uniformity of input High Low
Measurement of Easy Difficult
productivity
Opportunity to correct Easy Difficult
quality problems

Goods - Services Continuum

The goods and services continuum enables marketers to see the relative goods/services
composition of total products.

 A product's position on the continuum, in turn, enables marketers to spot

opportunities. At the pure goods end of the continuum, goods that have no related
services are positioned.
 At the pure goods end of the continuum, goods that have no related services are
positioned. At the pure services end are services that are not associated with physical
products.
 Products that are a combination of goods and services fall between the two ends.
Operations management
 Operation Management is the set of activities that relate to the creation of goods and
services through the transformation of inputs into outputs OR in other words it is the
management of all process and systems that produce goods and services for external
and internal customers.
 Operations Management is the business management function responsible for
planning, coordinating, and controlling the resources needed to produce products and
services for a company.
 It is a core function of every organization whether Service or Manufacturing, profit or
not for profit.
Operations management deals with the systematic design, direction, and control of processes.
a. “A process is an activity or group of activities that takes one or more inputs,
transforms them, and provides one or more outputs for its customers.”
b. An “Operation is a group of resources performing all or part of one or more
processes.”
c. “Supply chain management is the synchronization of a firm’s processes with those
of its suppliers and customers to match flow of materials, services, and information
with customer demand.”
Transformation Process
– Physical: as in manufacturing operations
– Locational: as in transportation or warehouse operations
– Exchange: as in retail operations
– Physiological: as in health care
– Psychological: as in entertainment
– Informational: as in communication
How is Operations Relevant to my major specialization?
How is Operations Relevant to my major specialization?
• Accounting - “As an auditor you must understand the fundamentals of operations
management.”

• Information Technology - “IT is a tool, and there’s no better place to apply it than in
operations.”

• Strategy Management or General Management - “We use so many things you learn in
an operations class—scheduling, lean production, theory of constraints, and tons of
quality tools.”

• Economics - “It’s all about processes. I live by flowcharts and Pareto analysis.”

• Marketing - “How can you do a good job marketing a product if you’re unsure of its
quality or delivery status?”

• Finance - “Most of our capital budgeting requests are from operations, and most of
our cost savings, too.”

Operations Strategy
Operations strategy
a. Specifies the means by which operations implements corporate strategy and helps to
build a customer-driven firm.
b. It links long-term and short-term operations decisions to corporate strategy and
develops the capabilities the firm needs to be competitive.

Competitive Priorities and Capabilities

1. Competitive priorities are the critical operational dimensions a process or supply chain
must possess to satisfy internal or external customer, both now and in the future.
2. Competitive capabilities are the cost, quality, time, and flexibility dimensions that a
process or supply chain actually processes and is able to deliver. An abbreviated list with
examples is provided here.

Dimension Definition Example

Low-cost Delivering a service or Costco achieves low costs by
operations product at the lowest cost designing all processes for efficiency.
possible.
Top Delivering an outstanding Rolex is known globally for top-
quality service or product. quality precision timepieces
Consistent Producing services or McDonald’s standardizes work
quality products that meet design methods, staff training processes, and
specifications on a consistent procurement to achieve consistency.
basis.
Delivery Quickly filling customer Dell engineered processes to deliver
speed orders reliable and inexpensive computers
with short lead times.
On-time Meeting delivery-time United Parcel Service (UPS) uses
delivery promises expertise in logistics and warehousing
processes to deliver on-time.
Development Quickly introducing new Zara is known by its ability to bring
speed services or products. fashions from the runway to market
quickly
Customizatio Satisfying unique needs of Ritz Carlton customizes services to
n customers individual customers.
Variety A wide assortment of Amazon.com uses information
services or products. technology along with order
fulfillment processes to deliver a vast
variety of items to customers.
Volume Accelerating or decelerating The United States Post Office
flexibility the rate of production (USPS) can have severe demand peak
fluctuations.
Key Performance Indicators
 A set of measures that help managers evaluate a company’s economic
performance and spot the need for change in operation.
 KPIs include financial measures such as days’ cash on hand and operating
income by unit or division, as well as non-financial metrics such as average time
to respond to service calls, lead time, or percentage of sales from new products.

What is Productivity?
Productivity is a measure of the effective use of resources, usually expressed as the ratio of
output to input
Productivity = Output / Input
Output
– Sales made, Products produced, Customers served, Meals delivered, or Calls
answered
Input
– Labor hours, Investment in equipment, Material usage, or square footage

Productivity is a common measure of how well a country, industry or business unit is using
its resources.

Partial measures of productivity = Output/labor, Output/Capital, Output/ Material etc.

Multifactor measures of productivity = Output / (Labor + Capital + Energy)

Productivity and Competitiveness

• A global marketplace means more customer and more intense competition.
• The most common measure of competitiveness is productivity.
• In broader context we speak of Competitiveness in reference to other countries rather
than to other Companies, because how effectively a nation competes in global
marketplace affects the economic success of the nation and the quality of life for its
citizens.
 • Increase in productivity allow wages to grow without producing inflation, thus raising
the standard of living. (How quickly a economy can expand its capacity to supply
good and services?)
• Competitiveness is the degree to which a nation can produce goods and services that
meet the test of international markets simultaneously expanding the real income of its
citizens.
Productivity Statistics Can be misleading
• Decreasing Input
• It assumes that if more input are available, output would increase at the same rate.
This may or may not be true.
• Productivity over emphasize on Output produced, not output sold. (Increasing
Inventory Issues)
• Productivity is a relative measure.

Corporate Strategy and Operations

• Strategy is how the mission of a company is accomplished.
• Provides direction for achieving a mission
• Unites the organization
• Provides consistency in decisions
• Keeps organization moving in the right direction
• Operations Management play an important role in corporate strategy.

Strategy Formulation
1. Defining a primary task
– What the firm is in the business of doing?
2. Assessing core competencies
– What does the firm do better than anyone else?
3. Determining order winners and order qualifiers
– What qualifies an item to be considered for purchase?
– What wins the order?
4. Positioning the firm
– How will the firm compete?
5. Deploying the strategy
Order Qualifiers & Order Winners
• Terry Hill has divided the criteria required in the marketplace into two groups: Order
qualifiers and Order winners.
• An order qualifier is a characteristic of a product or service that is required in order
for the product/service to even be considered by a customer.
• An order winner is a characteristic that will win the bid or customer's purchase.
• Therefore, firms must provide the qualifiers in order to get into or stay in a market.
• To provide qualifiers, they need only to be as good as their competitors. Failure to do
so may result in lost sales.
• However, to provide order winners, firms must be better than their competitors.
• Winners:
• Differentiators — performance not yet duplicated by competitors
• Competitive advantage — performance better than all or most of the
competitors
• Qualifiers
• Minimum acceptable level of performance
With time, Order Winners become Order Qualifiers

Core competencies
  Core competencies are the defining products, services, skills and capabilities
that give a business advantages over its competitors. In other words, business
core competencies are advantages that no competitor can reasonably offer or
replicate.
 “A strength that sets a business apart from its competition”
McDonald’s - Quality
Disney World - Innovation
Intel Corporation - Product Leadership
Dell - Low Cost
Honda – Engine Design

A distinctive or core competence has three characteristics:

1. It provides potential access to a wide variety of markets.
2. It increases perceived customer benefits.
3. It is hard for competitors to imitate.

Traditional and New Age Operations Competitive Dimensions

• Cost
• Quality (including Service)
• Delivery (Speed)
• Flexibility
• Service
• Delivery Reliability
• Innovation
• Coping with Changes in Demand
• New Product Introduction Speed
Examples for Operations Competitive Dimensions
• Cost or Price: “Make the product or deliver the service at low cost” E.g. Maruti
• Quality: “Make a great product or deliver great service” E.g. Amway
• Delivery Speed: “Make the product or deliver the service quickly” E.g. Dominos
• Delivery Reliability: “Deliver it when it is promised” E.g. Federal Express
• Coping with changes in demand: “Change its volume with the demand fluctuation”
E.g. Coke
 • Flexibility and New Product introduction speed: “Change it” E.g. Samsung

Policy Deployment - Balanced Scorecard

• Balanced scorecard
o measuring more than financial performance
• finances
• customers
• processes
• learning and growing
 Module II: Product & Service Design

Product Design
 Product design – the process of defining the product characteristics appearance,
materials, dimensions, tolerances, and performance standards
 Product design must support product manufacturability (the ease with which a
product can be made)
 Product design – the process of defining all of the company’s product
characteristics
 defines appearance of product
 sets standards for performance
 specifies which materials are to be used
 determines dimensions and tolerances
 Product design must support product manufacturability (the ease with which a
product can be made)

Design of Services
 Service design is unique in that the service and entire service concept are being
designed must define both the service and concept
 Physical elements, aesthetic & psychological benefits e.g. promptness,
friendliness, ambiance
 Product and service design must match the needs and preferences of the targeted
customer group
What is a Product or Service?
• Need-satisfying offering of an organization for customers
– Example
• P&G does not sell laundry detergent
• P&G sells the benefit of clean clothes
• Customers buy satisfaction, not goods or services
Reasons for Product or Service Design
• Economic
• Low demand, excessive warranty claims
• Social and demographic
• Changing tastes, aging population
 • Political, liability, or legal
• Safety issues, new regulations, government changes
• Competitive Market
• New products and services in the market, promotions
• Cost or availability of Inputs
• Raw materials, components, labor
• Technological
• Components, production processes
Effective Design
• Effective design can provide a competitive edge
– matches product or service characteristics with customer requirements
– ensures that customer requirements are met in the simplest and least
costly manner
– reduces time required to design a new product or service
– minimizes revisions necessary to make a design workable

Product Development Process

Idea Generation
• Company’s own R&D department
• Customer complaints or suggestions
• Marketing research
• Suppliers
• Salespersons in the field
• Factory workers
• New technological developments
Idea Generation from Competitors
• Perceptual Maps
o visual method of comparing customer perceptions of different products or
services

o
• Benchmarking
o comparing product or process against best-in-class and making
recommendations for improvements based on results.
o The benchmarking company can be in an entirely different line of business.
You can benchmark McDonald’s for Consistency, American Express for quick
payments, Xerox for its benchmarking techniques.
• Reverse engineering
o carefully dismantling a competitor’s product to improve your own product
o Ford used reverse engineering for design of Taurus automobile assessing 400
features of competitor’s products and enhancing their product including the
competitors features like Audi’s accelerator pedal, Toyota’s Fuel gauge
accuracy and BMW’s tire and jacket storage.

Feasibility Study
• Market analysis (Survey, Interviews, Focus group studies or market tests)
o How large is the market niche?
o What is the long-term potential for the product?
• Economic analysis (Estimate production cost & development cost)
o What is the expected return on investment?
• Technical/strategic analyses
o Are production requirements consistent with existing capacity?
 o Are the necessary labor skills & raw materials available?
Performance specifications
• Performance specifications are written for product concepts that pass the feasibility
study and are approved for the development.
• They describe the function of the product-that is, what the product should do to satisfy
customer needs.
• The next step is prototyping
Rapid Prototyping and Concurrent Design
• Testing and revising a preliminary design model
• Build a prototype
o form design-refers to the physical appearance of a product.
o Aesthetics, image, market appeal and personal identification are also part
of form design.
o functional design-how the product performs. Reliability, Maintainability
(Serviceability) and Usability.
o production design- how product will be made
• Test prototype
• Revise design
• Retest

Concurrent engineering
Concurrent engineering can be defined as the simultaneous development of project design
functions, with open and interactive communication existing among all team members for
the purposes of reducing time to market, decreasing cost, and improving quality and
reliability.
 Old “over-the –wall” sequential design process should not be used

 Each function did its work and passed it to the next function
  Replace with a Concurrent Engineering process

 All functions form a design team working together to develop specifications,

involve customers early, solve potential problems, reduce costs, & shorten time to
market.
 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)

Quality Function Deployment

 It is an approach to getting the voice of the customer into the design specification
of a product. Product design process using cross-functional teams Marketing,
engineering, manufacturing
 Translates customer preferences into specific product characteristics Involves
creating 4 tabular ‘Matrices’ or ‘Houses’
 Breakdown product design into increasing levels of detail
 Identify customer wants
 Identify how the good/service will satisfy customer wants
  Relate customer wants to product how’s.
 Identify relationships between the firm’s how’s.
 Develop importance ratings
 Evaluate competing products

Designing for Manufacturing

• Beyond the overall objective to achieve customer satisfaction while making a
reasonable profit is:
• Design for Manufacturing(DFM)
• The designers’ consideration of the organization’s manufacturing capabilities when
designing a product.
• The more general term design for operations encompasses services as well as
manufacturing
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
Standardization
• Standardization
– Extent to which there is an absence of variety in a product, service or process
• Standardized products are immediately available to customers
Advantages of Standardization
• Fewer parts to deal with in inventory & manufacturing
• Design costs are generally lower
• Reduced training costs and time
• More routine purchasing, handling, and inspection procedures
• Opportunities for long production runs and automation
 Mass Customization
• Mass customization:
– A strategy of producing standardized goods or services, but incorporating
some degree degree of customization
– Delayed differentiation
– Modular design
• Delayed differentiation is a postponement tactic
– Producing but not quite completing a product or service until customer
preferences or specifications are known
Modular design is a form of standardization in which component parts are
subdivided into modules that are easily replaced or interchanged. It allows:
– Easier to customise in mass
– easier diagnosis and remedy of failures
– easier repair and replacement
– simplification of manufacturing and assembly