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18
Operations
Management:
Managing Quality,
Efficiency, and
Responsiveness to
Customers
Technology
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Operations Management
 Refers to the management of the production system that
transforms inputs into finished goods and services.
 Production system: the way a firm acquires inputs then
converts and disposes outputs.
 Operations managers: responsible for the
transformation process from inputs to outputs.
 Operations management seeks to increase the quality,
efficiency, and responsiveness of the firm.
 Seeks to provide a competitive advantage.

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The Purpose of Operations Management

Figure 18.1

The Production System

Inputs Conversion Outputs
•raw materials • skills •goods
•component parts • machines •services
•labor • computers

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Operations Management Concepts

 Quality: goods and services that are reliable and perform
correctly.
 Quality allows customers to receive the performance that
they expect.
 Efficiency: the amount of input to produce a given output.
 Less input required lowers cost and waste.
 Responsiveness to customers: actions taken to respond to
customer needs.
 Firm can react quickly and correctly to customer needs as
they arise.

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Improving Responsiveness to Customers

 Without customers, organizations cease to exist.
 Non-profit and for-profit firms all have customers.
 Managers need to identify who the customer is and their needs.
 What do customers want? Usually customers prefer:
 A lower price to a higher price.
 High quality over low quality.
 Fast service over slow service.
 Also good after sale support.
 Many features over few features.
 Products tailored to their specific needs.

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Price/Attribute Relationship
Figure 18.2

Price
P2 P2/A2

At price P1, a firm

offer a product with
A1 attributes and
P1 cover costs. To offer
A2 attributes, firm
must charge P2 or
lose money.

A1 A2 Attributes
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Price v. Attributes
 Firms offering high quality, fast service and other
customer desires, often must raise price.
 Customers must tradeoff price for attributes.
 Operations management tries to push the price/attribute
curve to the right with better production.
 Provides more attributes at the same cost.
 By enhancing the price/attribute relationship, the firm can
increase its competitive position.

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Price/Attribute Relationship
Figure 18.3
Federal-Mogul was able
Price to offer products with
more attributes at a
Federal-Mogul lower price
1987

P2/A1 Federal-Mogul
P2 1993

P1 P1/A2

A1 A2 Attributes
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Customer Responsive Production Systems

 An output’s attributes is determined by the
production system.
 Firms must strike a balance between cost and
attributes
 Improving Quality: can apply to firms producing
goods and services.
 A firm that provides higher quality than others at
the same price is more responsive to customers.
 Higher quality can also lead to better efficiency.
 Lowers waste levels and operating costs.

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Impact of Increased Quality on
Figure 18.4
Organizational Performance

Increased
Increased Higher
Higher
Reliability
Reliability Prices
Prices

Increased
Increased Higher
Higher
Quality
Quality Profits
Profits

Increased
Increased Lower
Lower
Productivity
Productivity Costs
Costs

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Total Quality Management

 Seeks improvement in the quality of a firm’s goods or
services.
 Stress that all activities be directed to this goal.
 TQM is really a company-wide management philosophy
developed by Dr. Edwards Demming.
 Japanese firms were the first to use TQM.
 TQM results have been outstanding in many firms.
 Xerox has reduced defects and problems dramatically.
 TQM can fail when managers do not really support it.

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Successful TQM Implementation

 Successful firms have followed these steps:
1) Build organizational commitment to quality.
 All employees must embrace TQM concepts.
2) Focus on the customer as definition of quality.
3) Find ways to measure quality.
Easy in manufacturing areas but harder in service jobs.
4) Set goals and create incentives to be reached.
5) Solicit input from employees.
Quality circles: groups of employees meeting to discuss
how to increase quality.
Managers must respect employee opinion.
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Successful TQM Implementation

6) Identify defects and trace to source.
Managers must find out why the defect happened.
7) Introduce Just-in-Time (JIT) inventory systems.
Inventory is the stock of raw materials. JIT has parts arriving
in the plant just when needed and not stored in advance.
KANBAN: Japanese name for JIT that seeks to avoid
stockpiles of costly inventory.
8) Work with suppliers. You need good parts to make
great products.
9) Design products for easy manufacture.
10) Remove barriers between departments.

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Managers and TQM

 Managers are critical to a successful TQM system:
 Functional managers carry the responsibility for most of
the 10 steps to success.
 For TQM to work, functional managers must totally
embrace TQM.
 Top management must also show their strong support.
 They need to arrange training for all managers
(including themselves).
 Reward functional managers that move TQM forward.

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Improving Efficiency
 The fewer the inputs required to produce a given output,
the higher the production efficiency.
A common measure is called Total factor productivity.
Outputs
Total
Totalfactor
factorproductivity
productivity==All Inputs

It is a simple formula but each input is measured in

different units (labor in hours, steel in tons)
Therefore, most firms measure partial productivity.
Focus on one input at a time.

Outputs
Labor
Labor productivity
productivity == Direct Labor

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Improving Efficiency
 Labor productivity allows labor comparisons between
organizations.
 Improved efficiency leads to lower costs and better
performance.
 TQM and Efficiency: TQM can lead to much higher labor
productivity.
 When quality rises, less time is wasted on scrap.
 Flexible manufacturing and efficiency: reduces the set-up
costs for production systems.
Facilities layout: seeks to design the machine-worker interface
to increase production efficiency.

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Facilities Layouts
Figure 18.5

Final Product
Product layout

Final Process
Product layout

Fixed-
Final Product position
layout

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Facilities Layouts
 Product layout: work stations arranged in sequence.
 Mass production systems are a common example.
 Workers are stationary and a belt moves work to them.
 Process Layout: work stations are self contained and not
in a fixed sequence.
 Well suited to making a wide variety of products tailored
to customers.
 Provides flexibility to change products quickly
 Fixed-position layout: product stays in a fixed spot,
components produced at remote stations and brought to
final assembly.
 Good for jet aircraft assembly.
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Efficient Manufacturing
 Most firms face major expense when setting up to
produce a product.
 These costs must be paid before production begins.
 The more often products to be built change, the higher
setup costs become.
 FlexibleManufacturing reduces setup costs.
 Just-in-Time (JIT) inventory, while developed for
TQM, also adds to efficient production.
 Many costs are reduced including warehousing, holding
costs and inventory tracking.
 Firm does not have a supply of parts, but can be
vulnerable to strikes or supply problems.
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Efficient Manufacturing
 Self-managed teams boost efficiency by allowing for a flatter
organization structure.
 The team takes the role of the supervisor.
 Teams working together often become very skilled at
enhancing productivity.
 Kaizen: Japanese term for a management philosophy the
stresses the need for continuous improvement.
 Better operations can come from many, small, continuous
improvements.
 Focus on what adds value to the product and try to eliminate
steps that do not add value (such as inspection for defects).

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Reengineering
 Process Reengineering: the fundamental rethinking and
radical redesign of the business process.
 Can boost efficiency by directing efforts to activities
that add value to the good or service produced.
 While Kaizen focuses on continuous enhancements,
process reengineering considers wholesale change.
 Top managers must support operations enhancement
tools for them to be accepted by workers.
 Usually, a successful operations change means a
complete change in the organizational culture.
 Without a supporting culture, change will not succeed.

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