Operation management: Definition (1)

Operations management is the activity of managing the resources,

which are devoted to the production and delivery of products and
services.
Interfunctional relationships between operations and other functions

Interfunctional relationships between operations and

other functions

All operations are input-transformation-output processes

Inputs Transformation Process Outputs (customers)
Transformed resources: Materials, Information and Customers (I)
Transforming resources: Facilities and staff (I)

Outputs are products and services that add value for customers
Operations can be analysed at three levels

4vs: A typology of operations and processes *

Low
Volume
High
Low repetition
High repeatability
Each staff member performs more of each tasks
Specialization
Less systemization
Capital intensive
High Unit costs
Low unit costs
Volume: how many products we produce how many customers we
served
When the volume is high the cost is low. Price per unit cost
Low volume: local store
High

Variety

Low

Flexible
Well defined: how to do a
burger
Complex
Routine
Match customer needs
Regular
High unit costs
Low Unit costs
Variety: How many different products or services we provide.
Variety University: variety of courses of degrees
Low variety: Hult- business degrees
High

Variation in demand

Changing capacity
Anticipation
Flexibility
In touch with demand
High unit costs

Low
Stable
Routine
Predictable
High utilization
Low Unit costs

Example- Flexibility: Durante la semana hay das con mas gente y

mientras entresemana hay menos gente y tenemos que tener
flexibilidad para servir comida a toda la gente que viene entresemana
pero tambin a toda la gente que viene en el fin de semana.
Agriculture, temporal workers when we hire them we increase the
capacity.
Hult they didnt have capacity to accommodate students and they
rent classes from another University but now they increase the
capacity with the new building because of the variation in demand.
Variation in demand: how the demand changes by the seasonality
during the year
Hotel in London vs. Santorin during summer: higher demands
Santorin Low London. Part time employees,
Luxury restaurant dinner weekends / specials occasions.
High

Visibility

Low

Short waiting tolerance

Timer lag between production and
consumption
Satisfaction governed by customer perception Standardization
Customer contact skills needed
Low contact skills
Received variety is high
High staff utilization
High unit costs
Low unit costs
Waiting tolerance: Amazon the waiting time to deliver the product can
be between 1 day and 5 days. For the case of a bookstore the waiting
time for a book its 1 min.
Restaurant takes more time to order the food and the waiting
tolerance is higher while in McDonalds it takes around 1-3 min.
Satisfaction: How fast they deal with my request: restaurant or
bookstoreaffects the perception of the customer.

Visibility: How much of the operation of the process

Bookstore or amazon: who has more visibility
Online course: lower visibility if we compare it with a course at the
University
High visibility the cost is high. Need employees, place, and
materials.
Different strategies includes a different process depend on the sector
and the company.

Operations strategy (2)

Operations vs. strategy (is not about the activities)
Operations: how we use the resources to produce the services and
sell
Operational has strategic aspect as well.
Operations strategy at Flextronics and Ryanair

Study case: Flextronics and Ryanair

Flextronics
Quality means meeting the specification
Low cost
Good service to the customer
Location: advantage that they can sell to lot of countries in case that
they have an strategic location and the cost is low (Mexico, Shanghai,
Poland)
Another way of reducing costs: vertical integration if I produce chairs
and I need the wood I can buy the company of woodbuying the
entire chain or more than one-two suppliers that way they dont need
a communication between the factories. (Buying operations in
different markets)
They give incentives to reallocate the factories (suppliers)
Operations strategic decisions
Industrial parks with low cost but close locations and co-located
suppliers (Locating all together)
Market requirements
Low costs, Responsiveness and flexibility.
Ryanair
How they manage to stay less?
They use secondary airports and try to minimize the minims in the
airplane
They dont have to clean or serve food
They encourage not heavy luggage
Minimise the among of time that we spend at the airport
Why no allocated seats: to seat quickly
Why queues
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Standardized aircraft, staff,

Storage
Less staff: self check in, printing tickets
Operations strategic decisions
Stripped down service, one technology, cheap airport locations and
fast turnaround.
Market requirements
Low prices, reliability and basic service.
Strategic decisions: are those decisions which are widespread in their
effect on the organization to which the strategy refers, define the
position of the organization relative to its environment, and move the
organization closer to its long-term goals.

Types of generic strategies: Porters

Broad (Industry wide)

Leadership: competitive advantage is our lower cost (Primark)
Opposite
Differentiation strategy: We are or we look different for our
competitors
(Burberry, NikeMercedes cars and Kia differentiation in qualitycharge a high price)
Narrow (Market segment: piece of the market not the entire market)
Focus strategy: Try to have the lower cost in the market
Opposite

Focus strategy- differentiation: Having the best quality in the market

(Tesla try to be the best in the electric cars but not in other cars)
Focus strategy: Jeep because of the limit of types of cars
Differentiation: Mercedes variety of cars and quality
Focus strategy differentiation: Go pro made action cameras (They are
the best only in that market segment)
Focus strategy: Canon variety of cameras

Strategy and Operations

Jewellery shops (Luxury ones): waiting for the people to expend

money or same with real state companies, the staff are waiting and
not busy because they dont want to lose one client that are going to
pay 2M pounds for a house.
Operations are the resources that create products and services
Operational is the opposite of strategic, meaning day-to- day and
detailed.

How is operations strategy different to operations

management?

The time scale is longer

OM: short-term for example,
capacity decisions.
OS: long-term, capacity decisions.

The level of analysis is higher

OM: Micro level of the process
OS: Macro-level of the total operation

The level of aggregation is higher

OM: Detailed. For example Can we give tax services to the small
business market in Antwerp?
OS: Aggregated. For example What it our overall business advice
capability compared with other capabilities?
The level of abstraction is higher
OM: Concrete. For example How do
we improve out purchasing
procedures?
OS: Philosophical. For example
Should we develop strategic
alliances with suppliers?

The 4 Stage model of

operations contribution

Hayes and wheelwright proposed a

capability and maturity model that
explains how an operation could
move from being a barrier to

strategic success, in stage one, to becoming an innovator and creator

of opportunity, in stage four.

Stage 1: Internal neutrality

The poorest level of operational contribution. The other areas of the
business view operations as a barrier to opportunity. Lacking in flair
and competitive drive. The operations function is inward looking and
at best reactive. Its vision is to be internally neutral, a position it
attempts to achieve not by anything positive but by avoiding the next
big mistake
Stage 2: External neutrality
The operations function must compare itself to other companies in
the outside marketplace. By implementing best practice strategies
already in use they seek to catch up to their peers.

Stage 3: Internally supportive

The operations strategy is now aligned to the overall business
strategy. It can internally support the objectives of the business and
considers itself to be one of the best in class. It aspires to be number
one in its field and the effort to be number one is likely to yield its
own rewards.

Stage 4: Externally supportive

An operation at stage four is unambiguously the best at what they do.
Their creativity and proactive attitude has put them ahead of the
others and are easily able to out compete their competition when
following the same rules. The operations is now interested in
changing these rules and redefining the expectations for the whole
industry.

The four perspectives on operations strategy

1. Top-down Perspective: What the business wants operations to

do
2. Market requirement Perspective: Market defines what we are
going to do.
3. Bottom-up Perspective: We do what we can do. Day to day
experience.
4. Operations resources perspective: What operations resources
can do
Example
Market requirement perspective vs. Operations resources
perspective. (Film the big night).
Operations Resources perspective: You do what your resources can
provide
We have a chain of restaurants and we see for our experience that its
better produce the meals in one place and then deliver it on the
restaurants better than producing the food on place.
Opera educate our customers to
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Operations resources perspective: When someone come an idea of an

iPhone and they made it because they can do it and then they change
the market.
Market requirement perspective: Applications of banks, because the
customers ask to do it.

The strategy hierarchy

Factors that affects the Competitive advantage

Order winning factors: Bring in orders; make customers to prefer our
company better than another one. University: teaching Family Cars:
safety, brand name.

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Qualifying factors: need to reach a level to qualify that level but after
that you have to expend money in other factors. University: Clean
toilet, high speed Internet. Family cars: sound system
Hotel you expected a minimum of cleanness but once you see that a
room is clean you focus in other factors.
Less important factors: Family cars: sunglasses pocket under the seat

The effects of the product/ service life cycle

Introduction: the price is more or less important than in the

maturity period. They care more about the trend,
characteristics, and features
Growth: Price doesnt matter as in the Introduction of the
product/ service, the technical characteristics are more
important
Maturity: Low price and dependable supply,
Decline: Low price

Dominate performance objectives: What the operations should target.

11

Different competitive factors imply different

performance objectives
Fast delivery: McDonalds
Reliable delivery: when you order something and you have a due
date. E.g. national blood service
Innovative products and services what Customers are looking for and
we have to be flexible to give them what they want.
Wide range of products and services:
The ability to change the timing or quantity of products and services:
Customer might want to increase the deliver among by the supplier.

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Social, environmental and economic

performance (2.2)
Some ways in which operations can impact each element of the triple
bottom line:

13

1. People
Customer safety from products and services
Employment impact of an operations location
Employment implications of outsourcing
Repetitive or alienating work
Staff safety and workplace stress
Non-exploitation of developing country suppliers
2. Planet
Recyclability of materials, energy, consumption and waste
material generation.
Reducing transport-related energy
Noise pollution, fume and emission pollution
Obsolescence and wastage
Environmental impact of process failures
Recovery to minimize impact of failures
3. Profit
Cost of producing products and services
Revenue from the effects of quality, speed, dependability, and
flexibility.
Effectiveness of investment in operations resources
Risk and resilience of supply
Building capabilities for the future

Operations and process management contribution to

strategy
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The five competitive objectives

Quality Being right

Speed Being fast
Dependability Being on time
Flexibility Being able to change
Cost Being productive

How may operations affect the environment? Pollution, Transportation

(how much we transfer)
Obsolesce (how long is the lifetime of our product)
People impact: Lay out, Staff, Working conditions
Profitability: reduction of costs by having good operations, increasing
the speed, dependability, quality, flexibility

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The benefits of excelling at the five objectives

What does Quality mean

A Hospital?
Patients receive the most appropriate treatment
Treatment is carried out in the correct manner
Patients are consulted and kept informed
Staffs is courteous, friendly and helpful

Two common meanings of Quality

Quality as the specification of a product or service
Quality as the conformance with which the product or service is
produced

External and internal benefits of conformance

quality
Irrespective of a product or services specification quality, producing it
so it conforms to its specification consistently brings benefits to any
operation
Externally: it enhances the product or service in the market, or at
least avoids customer complaints
Internally: it brings other benefits to the operation
It prevents errors slowing down throughput speed

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It prevents errors causing internal unreliability an low

dependability
It prevents errors causing wasted time and effort, therefore
saving cost

Example: 3 Workstation and the product has to pass 3, staff have to

work correctly.

External and internal benefits of speed

Speed again has different interpretations externally and internally
Externally: it means the elapsed time between a customer asking for
a product or service and getting it (in a satisfactory condition)
Internally: It brings other benefits to the operation
It helps to overcome internal problems by maintaining
dependability
It reduces the need to manage transformed resources as they
pass through the operation, therefore saving cost

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External and internal benefits of Dependability

Externally: it enhances the product or service in the market, or at
least avoids customer complaints
Internally: it brings other benefits to the operation
It prevents late delivery slowing down throughput speed
It prevents lateness causing disruption and wasted time and
effort, therefore saving cost

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External and internal benefits of flexibility

Flexibility has several distinct meanings but is always associated with

an operations ability it change:
Product/ Service flexibility: The products and services it brings
to the market
Mix flexibility: the mix of products and services it produces at
any one time
Volume flexibility: the volume of products and services it
produces
Delivery flexibility: the delivery time of its products and services

Cost
The cost of producing products and services is obviously influenced
by many factors such as input costs, but two important sets are

The 4 Vs

The internal performance of the operation at

Quality
Speed
Dependability
Flexibility

Variety
Variation
Visibility
Volume

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Aldi: competitive advantage how do they achieve the low cost? Item
they are not out of their boxes, no one have to check if there is
everything place in the right corridor, so they saved money on
replacing food and place it.
Basic lay out, no fancy staff or people-promoting product, No
department to cut the meet or fish
What does cost mean in a Hospital?

The external and internal benefits of performance

objectives

Polar diagrams
Are used to indicate the relative importance of each performance
objective to an operation or process. They can also be used to
indicate the difference between different products and services

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produced

by

an

operation

or

process

Polar diagrams for a taxi service versus a bus service

Speed
Quality
Flexibility: you can stop, ore be late
Cost: taxi more expensive than the bus
Dependability: timetable for the bus, taxi may find one or may not
Polar diagrams for a proposed police performance method

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Trade- offs
Do you want it good, or do you want it Tuesday?
No such things as a free lunch.
McDonalds they scarify the quality in order to achieve the speed
Cost in order to achieve the quality

The design of services and products and

processes (3)

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Why is design so important?

UK Design Council Survey
Design helps businesses connect strongly with their customers
90% of businesses growing rapidly say design is significant to
them, only 26% of static companies say the same
Design reduces costs by making processes more efficient. It can
also reduce the time to market for new products and services.
Almost 70% of companies seeing design as integral have
developed new products and services in the last three years,
compared to only a third of businesses overall.
Companies who were effective users of design had financial
performances 200% better than average

Stages of product/service design

1.
2.
3.
4.
5.

Concept generation
Concept screening
Preliminary design
Evaluation and improvement
Prototyping and final design

Concept generation

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Ideas from customers formally through marketing activities

Listening to customers: on a day-to-day basis
Ideas from competitor activity: reverse engineer (start from the
end)
Ideas from staff: especially those who meet customers every
day
Ideas from research and development

Concept screening

Feasibility How difficult is to produce the product and what

investment
Acceptability: How worthwhile the product (how the market is going to
accept the product)
Vulnerability: What if we do it wrong?
Using a different brand name: Toyota. Decide to go luxury marketLexus they change the name because of the market perspectives
about the concept of Toyota cars.
Depend on the company if they want to risk or not they choose a
different criteria for screening.

Design involves progressively reducing the number

of possibilities until the final design is reached

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At the beginning the company has different ideas about the concept
and they choose a criteria until they reach the final design
specification. As I move on time I reduce the uncertainly regarding the
final design.

A delays in the Time to market disproportionally

delays the financial BEP

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Process design (5)

Manufacturing process types

Project type processes

Very common in a field of project management; characterised by low
volume, high variety, intermittent flow and I a Diverse and complex
tasks. Production line when the activity doesnt stop.
One off complex, large scale, high work content products. Specially
made, every one customized. Defined start and finish: time, quality
and cost objectives. Many different skills have to be coordinated.
Build a ship
Jobbing Processes
Very small quantities: one-offs or only a few required. Specially
made. High variety, low repetition. Strangers every one customized.
Skill requirements are usually very broad. Skilled jobber or team
complete whole product.
Is like a small project: construction company that build houses have to
co
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Create a Rolex watch: required a lot of skills to produce it.

Batch processes
Group of similar products.
Higher volumes and lower variety than for jobbing.
Standard products, repeating demand. But can male specials.
Specialized, narrower skills.
If I have to do an ice cream and I have to create 2 different flavours: I
start
Tuna sandwiches first then we clean and we do chicken sandwiches
they produce batches.
Mass (line) processes
Higher volumes than batch.
Standard, repeat products (runners).
Low and/or narrow skills.
No set ups, or almost instantaneous ones.
Continuous processes
Extremely high volumes and low variety: often-single product.
Standard, repeat
Highly capital-intensive and automated
Few changeovers required
Difficult and expensive to start and stop the process
Service process types

Professional services:
High levels of customers (client) contact.
Clients spend a considerable time in the service process

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High levels of customization with service processes being highly

adaptable
Contact staff are given high levels of discretion in servicing
customers
People based rather than equipment based
Therapist, lawyers, dentists
Service shops
Medium levels of volumes of customers
Medium or mixed levels of customer contact
Medium or mixed levels of customization
Medium or mixed levels of staff discretion
Examples:
Mass service: Gym in aerobic course in a group of 15 people same
product or service
Professional service: Personal trainer the practice is a - personal
service
Bank
Professional service: someone has to assist you
Mass service
High levels of volumes of customers
Low to medium levels of customer contact
Low or mixed levels of customization
Low or mixed levels of staff discretion
Deviating from the natural diagonal on the product-process matrix
has consequences for cost and flexibility

Example: Restaurant based on the knowledge we have the idea of

being specialized in fish and chips: decrease variety.
Use same equipment but less variety. You change your products
transforming it in new products like chips.
Ryanair decide to use personalized service they have to change the
process with new staff
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Definitions
Work content: the total amount of work required to produce a unit of
output.
Work in process (WIP): Amount of customers/products in the process
Throughput time (TH): The time for WIP to move through the process
Cycle time (CT): The average times between unit of output emerging
form the process.

Example 1
Need to mark 500 exams scripts in 5 days (working 7 hours a day).
Takes 1 hour to mark a script. How many markers
are needed?
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Work content = 1h
Work in process = 500
Throughput time =35 (5x7)
Cycle time = X
35=(500) CT
CT= 35/500 CT = 0,07
N= WC/CT
N= 1/0,07 = 14,98 = 15
Example 2
Work in process (total work done) =500 Works
Throughput time = 40hours
Work content = 2h/each
40= 500 (CT)
CT= 40/ 500 CT = 0.08
N=2/0.08 = 25
Throughput efficiency is the work content of whatever is being
processed as a percentage of its throughput time.
TE= WC/Throughput time X 100
There will be 530 workstation to renovation will take on average 1,5
hours. How many technicians will be needed to complete the
renovation process within one working week (40 hours)?
WIP= 530
WC= 1,5
TH= 40
40= 530 (CT)
CT=40/530 CT = 0.075
N=1.5/0.075 = 20
TE= (1,5/ 40) 100 = 3,75%

Process utilization, waiting time and variability

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Location, layout and flow (6)

Location
The aim of the location decisions is to achieve an appropriate balance
between three related objectives.
1. The spatially variable costs of the operations
(spatially
variable= something changes with geographical location)
2. The service the operation is able to provide to its customer
3. The revenue potential of the operations

Supply- side and demand- side factor in location

decisions

What makes a good layout?

Inherent safety
Length of flow
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Clarity of flow
Staff conditions
Management coordination
Accessibility
Use of space
Long-term flexibility

An innovative layout in a surgery improves its

efficiency

Basic layout types have different fixed and variable costs that seem to
determine which one to use
High fix cost: line layout you product
Fix cost: cost independent of the production
Variable cost: correlated with the production
The basic layout types are
Fixed position layout
Functional layout
Cell layout
Line layout

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Fixed layout
The transformed resources do not move between the transforming
resources. Instead of materials, information or customers flowing
through an operation, the recipient of the processing is stationary and
the transforming resources move as necessary.

Advantages and disadvantages

Functional layout
It conforms to the needs and convenience of the functions performed
by the transforming resources within the process. Similar resources or
process are located together. The combinatorial complexity of
functional layouts makes optimal solutions difficult to achieve in
practice.
Functional layout in a library the path of one customer

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Advantages and disadvantages

Cell layout
Transformed resources entering the operation are pre-selected (or
pre-selected themselves) to move to one part of the operation (cell) in
which they meet their immediate processing needs.
After being processed in the cell, transformed resources may go on to
another cell. An attempt to bring some order to the complexity of flow
which characterizes functional layout.

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Department store with sports goods shop-within-a-shop

Advantages and disadvantages of Cell layout

Line layout (product layout)

Locating the transforming resources entirely for the convenience of
the transformed resources. Customers, products or pieces of
information follow a prearranged route in which the sequence of
activities that are required matched the sequence in which processes
have been located. The transformed resources floe as in a line
through the process. Flow is predictable and therefore relatively easy
to control.
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A product layout in a paper manufacturing operation

An army induction centre which uses product layout

Advantages and Disadvantages

36

Mixed layouts
Hybrid layouts which combine elements of some or all of the basic
layout types. Use the pure basic layout types in different parts of
the operation.
A restaurant complex with all four basic layout types

37

Volume and variety characteristics of layout types

The relationship between functional and layout types

38

Basic layout types have different fixed an variable

costs that seem to determine which one to use

But uncertainty about exact fixed and variable costs

means the decision can rarely be made on cost alone

Workplace layout

39

Tesco case study

Give a sense of freshness like a good feeling
Same with the cool or heat when you enter to the supermarket
Milk butternever easy to find and they are not together to walk
around
Products are located. Some companies pay to promote the products
the most expensive Gondola (------) Position level of the eye they put
products with high
Worst place is near the Gondola
System on the entrance that calculate the number of customers that
entry during the day to get data and send the information to the
centres and they know how many tills have to open and so on.
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Supply network management (7.1)

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
Why

consider the whole supply network?

It helps an understanding of competitiveness
It helps identify significant links in the network
It helps focus on long term issues
It helps focus on cost

Performance objectives
Quality
Speed
Dependability
Flexibility (Agility)
Cost
Plastic home ware manufacturer (company)

First tier suppliers: plastic stockists and packaging supplier they are
the immediately suppliers
Second tier suppliers: Chemical company, cardboard company and ink
supplier
First tier customers: Wholesaler
Second tier customers: Retailers
Company that sells Bottles of water
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First tier supplier: plastic stockist

Third tier: chemical for plastic and ink
Firs tier customer: wholesaler
Second tier customer: Retailer
Third tier: customers
Direct supply:
Flow of Information is how many types and things the company need
to produce something.
Shopping mall

First tier suppliers: Security services, Cleaning services and

maintenance services
Second tier suppliers: recruitment agency, cleaning materials
suppliers and equipment supplier
First tier customers: Retailers
Second Tier customers: Retail customers

The decision logic of outsourcing

Main risk of losing control as Burger king, McDonaldshorse scandal

(horse meat) sick horses: the put injection of chemicals for the races.
Nike case: small kid doing a Nike trainers.

42

Supply chain relationships

Factors for rating alternative suppliers

The bullwhip effect

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Methods for coping with the bullwhip effect

Reducing uncertainty: this can be accomplished by centralizing

demand information
Reducing variability: this can be accomplished by using a
technique made popular by WalMart and then Home Depot calle
everyday low pricing (EDLP). EDLP eliminates price promotions
as well as the shifts in demand that accompany them.
Reducing lead time: order times can be reduced by using EDI
(electronic data interchange)
Strategic partnerships: the use of strategic partnerships can
change how information is shared and how inventory is
managed within the supply chain. These will be discussed later

The effect of supply chain compression

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Capacity management (7.2)

Capacity is in the static; physical sense means the scale of an
operation. But this may not reflect the operations processing
capability. Either by availability of its input resources or by the output
which is created. Which of these measures is used partly depends on
how stable the mix of outputs is. It is difficult to aggregate the
different types of output from an operation. Input measures are
usually preferred.
Mix of products that we product
How many customer you can serve and how many units you can
produce.

Input and output capacity measures for different

operations
Air-conditioner plant: input machine hour available/ output- number
of units per week
Hospital: input- beds available/ output- number of patients treated per
week
Hotel: customer may stay for min, hours, days or months
University: input-

The objectives of capacity planning and control

Number of tables or seatstells me the max number of people that
can seat in the restaurant. What else will affect the capacity or ability
to serve more customers?
Kitchen, staff, materials to provide food, efficiency So if I do an
appropriate amount of capacity my choices will affect to:

Costs
Revenue
Working Capital
Service level (People dont have to wait much time)

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Estimate the current capacity and Forecast demand tell me how much
I can produce for a niche.

The nature of aggregate capacity

Aggregate capacity of a hotel: rooms per night or ignores the
numbers of guests in each room.
Aggregate capacity of an aluminium producer: tonnes per month or
ignores types of alloy, gauge and batch variations.

Fluctuations on demand
Variation because of seasonality
Aluminium is because of the development of the industry =
Retail store: summer when people are in holidays or leave the city

Good forecast
planning

essential

for

effective

capacity

46

But so is an understanding of demand uncertainty because it allows

you to judge the risk to service level.

Normal distribution

Forecasting demand
Forecasting is the act of predicting likely future levels of demand for
products and services. If future demand can be forecast, decisions
can be made about what levels of capacity to provide. Forecasting
methods can be quantitative or qualitative. The forecasting data will
come from our information and knowledge collection, which may be
primary or secondary.

Forecasting methods
Quantitative methods
1. Time series (analysis extrapolates past demand into the future)
2. Casual analysis (models any cause and effect relationship
between demand data and some other variable)
Qualitative methods
1. Market surveys
2. Delphi studies (expert opinions)
3. Scenario planning (what if)
All methods are inaccurate.
Something very sophisticated: Delphi makes more sense because
they are experts
Something like a phone case: ask people on the street.
If is something simple you wont need to spend much money on
studies.

Capacity timing

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How we make decisions

When to invest in additional capacity
Three generic strategies:

Capacity leads demand always have more capacity than

demand.
Capacity matches demand as far as possible capacity always try
to get capacity equal to demand.
Capacity lags demand: most of the time allow demand to
exceed capacity.
Capacity Leads demand
Advantages
Copes with extra demand without deteriorating service, lead
times or quality
Operations can easily meet the demands of a growing market
Can win market share from those who lack capacity
Using spare capacity reduces unit costs, which can lead to lower
prices
May deter competitors from adding capacity themselves
Can be used as part of a market entry strategy into a new
country
Disadvantages
Demand may not increase as expected
Process technology may become out-dated
Capacity matched Demand
Relies heavily upon accurate forecasting (which is notoriously difficult)
Sometimes the investment in capacity has to lead the forecast by
long time frames-many years in some cases
Capacity Lags Demand
Advantages
Delays capital investment
Maximises the return on investment
High utilization means low unit costs
Disadvantages
Vulnerable to any unexpected upturn in demand
Difficult to respond to price competition
High utilization can lead to poor performance

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Ways of reconciling capacity and demand

Blue line capacity

Red line forecast in demand
I just produce what I can when my capacity is above to demand what I
can do is stop the production and sell it when my demand is higher.
For example if I sell boxes is possible to apply the strategy
Chase demand: I tried to change my capacity to meet the demand
when I Have a higher demands I increase my capacity and the
opposite when the demand is lower.
Demand management: Im trying to change the demand. Hotel lowest
demand in September I can invest on Marketing.
Madame Amsterdam: level capacity
Getting the message Demand management they are creating cards
for everything that way they change the demand and not the capacity

Ways of reconciling capacity and demand

49

Absorb demand

Part finished
Finished goods or customer inventory
Queues
Backlogs

Adjust output to match demand

Hire Fire
Temporary labour lay off
Overtime Short time
Subcontract 3rd party work
Change demand

Change pattern of demand

Develop alternative products and/or services

Capacity planning and control as a dynamic sequence

of decisions

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Queuing the range of behaviours

Inventory (8)
Inventory or stock is defined as the stored accumulation of resources
in a transformation system. Usually the term refers only to
transformed resources.

Inventory related costs

Cost of placing the order

Price discount costs
Stock out costs
Working capital costs
Storage costs
Obsolescence costs
Operating inefficiency costs
Consignment cost

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Reasons for keeping inventory

There are five main reasons for keeping inventory:
- To cope with random or unexpected interruptions in supply or
demand (buffer inventory or Safety inventory)
- To cope with an operations inability to make all products
simultaneously (cycle inventory)
- To allow different stages of processing to operate at different
speeds and with different schedules (de-coupling inventory)
- To cope with planned fluctuations in supply or demand
(anticipation inventory)
- To cope with transportation delays in the supply network
(pipeline inventory)
Disadvantages of holding inventory
Inventory ties up money, in the form of working capital, which is
therefore unavailable for other uses.
Inventory incurs storage costs (leasing space, maintaining
appropriate conditions etc.)
Inventory may become obsolete as alternatives become
available
Inventory can be damaged or deteriorate
Inventory could be lost, or be expensive to retrieve as it gets
hidden amongst other inventory
Inventory might be hazardous to store (flammable solvent,
explosives, chemicals and drugs etc.)
Inventory uses space that could be used to add value
Inventory involves administrative and insurance costs

Single stage, two stage and multi stage inventory

system

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Stage1:
Stage2: Some HD Some 3D
WIP: Send to different countries
Stage 3: Create the labels, instructions for the boxes

Determining the amount of inventory

The best-known approach to determining the amount of inventory to
order is the Economic Quantity (EOQ) formula. The EOQ can be
adapted to different types of inventory profile using different stock
behaviour. Another approach for gradual replacement of the inventory
is the Economic Batch Quantity (EBQ)
Q = Order Quantity
D = Steady and predictable demand
Q/2 = Average inventory
Q/D = Time interval between deliveries
D/Q = Frequency of deliveries

Inventory profiles chart the variation in inventory

level

53

1000 items per year

Plan A we order in batches of 400 Average inventory of 200
Plan B we order in batches of 100 Average inventory of 50
What is the most convenient plan?

Two alternative inventory plans with different order

quantities (Q)

We have advantages and disadvantages for both plans

If we play for transportation costs Plan B is not better
Bigger warehouse for the Plan A
EOQ is the formula that helps us to determine which plan is better for
us
Ch: total cost of holding a unit for a period of time
- Working capital costs
- Storage costs
- Obsolescence risk costs

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Co: The total cost of placing an order

- Cost of placing the order (Transportation)
- Price discounts costs
How much is cost to keep an item in my warehouse? Every bottle for
wine per year cost me 0,15 to hold it on a warehouse. The more order
you place the more discount you get
Holding cost = the holding cost/unit x average inventory
0,15 average inventory of a 100 how much is the total holding cost?
Would be 50
HC = Ch x Q/2
Ordering cost= ordering cost x number of orders per period
OC = Co x D/Q
Total costs= holding costs + Ordering costs
Ct = ChQ/2 + CoD/ Q
The optimum order quantity that minimizes the total costs is called
Economic Order Quantity (EOQ)
For Q = EOQ the holding costs are equal to order costs.
EOQ = 2CoD/Ch

Traditional view of inventory-related costs

The balance point would be EOQ combination when the total cost is
equal with the order costs.

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Criticisms to EOQ
-

The assumptions included in the EOQ models are simplistic

The real costs of stock in operations are not as assumed in EOQ
Models: The cost is no lineal. If I have 200 bottles is not twice as
when I have 100.
The models are really descriptive, and should not be used as
prescriptive devices. Which means that are not necessary
explain why it happens.
Cost minimization is not an appropriate objective for inventory
management: not to run out of store not to minimize the store

If the true costs of stock holding are taken into account, and if the
cost of ordering (or changeover) is reduced, the economic order
quantity (EOQ) is much smaller.

Exercise
A water distributer sells 300 20l tanks per month (30 days) and
purchase in quantities of 900 per order. The cost accounting
department has analysed inventory costs and has determined that
the cost of placing an order is 20$ and the annual cost of holding one
20l tank inventory is 4$.
Under its current policy of ordering, what is the water distributors
total annual inventory cost?
Annual demand (D)= 300x 12(months) = 3600
Co=20$
TOC (Total ordering cost) = 20x (3600/900)= 20x4=80
Ch=4$
THC (Total holding cost) = 4 x 900/2 = 4 x 450= 1800
TIC = TOC + THC = 80 + 1800 = 1880
(Total costs = Holding costs + Ordering costs)
56

What is the Economic Order Quantity?

How much money will the company save by switching to EOQ?
EOQ = 2(20)(3600)/4 =144000/4=36000= 189,736

ABC Classification

Codes and names of items I have a total of 20 itemsfirst four items

they are together account for as Class A. We should focus on them
because they are more important than the others.
30% of 20 6 items Class B
50% of 20 10 items Class
C
Most important are in the top.

For example C/150 is in the low value items. In the Class C

Critical commentary on Pareto / ABC Classification

Many managers point out that the Pareto Law is often misquoted. It is
not that 80% of SKUs (Stock keeping units) account for only 20% of
57

the value, it is that slow moving items, although only accounting for
20% of sales account for 80% of inventory usage, as they require a
large part of the total investment in stock.
If errors in forecasting or ordering result in excess stock of A class
fast moving items, it is relatively unimportant as the excess stock can
be sold quickly. A items can be left to look after themselves, B and
even more C items need controlling.

Planning and control (9)

Planning is formalization of what is intended to happen at some time
in the future. A plan does not guarantee that an event will actually
happen, it is a statement of intention. Although plans are based on
expectations, during their implementation things do not always
happen as expected. Control is the process of coping with any
changes that affect the plan. It may also mean that an intervention
will need to be made in the operation to bring it back on track.
Planning is deciding
What activities should take place in the operation
When they should take place
What resources should be allocated of them
Control is
Understanding what is actually happening in the operation
Deciding whether there is a significant deviation from what
should be happening
(If there is deviation) changing resources in order to affect the
operations activities.

Significance of planning and control

Time horizon if we move from top to the bottom I have to plan and
control: Long-term to Short-term. Ad hoc: here and now Opposite
Exante.
The more uncertainty the more emphasis we should put on control.
Less uncertainty more control.
Time horizon

58

How do supply and demand affect planning and

control?
The degree of uncertainty in demand affects the balance between
planning and control. The greater the uncertainty, the more difficult it
is to plan, and greater emphasis must be placed on control.
This idea of uncertainty is linked with the concepts of dependent and
independent demand.
Dependent demand is relatively predictable because it is
dependent on some know factor.
Independent demand is less predictable because it depends on
the chances of the market or customer behaviour.

Dependent and independent demand

59

How many cars I produce and how many tyre I need for the car (5)
How many tyres I need depends on the demand.
Tyre fitting service: Independent demand
Demand is not easy to anticipate because maybe you might have to
fix a tyre, replace 3 tyresDemand for tyres is largely governed by
random factors.

Main activities

Loading: How much to do?

Dictates the amount of work that is allocated to each part of the
operation.
Scheduling: When to do things?
Determines the detailed timetable of activities and when
activities are started and finished.
Sequencing: In what order to do things?
Decides the order in which work is tackled within the operation.
Objectives:
Meeting due date promised to customer (dependability)
Minimizing the time the job spends in the process (speed)
Minimizing work-in-progress inventory (element of cost)
Minimizing idle time of work centres (another element of
cost)

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Monitoring and control: Are activities going to plan?

Involve detecting what is happening in the operation, replanning if necessary, and intervening in order to impose new
plans.
Two importan types of are pull and push control.
Pull control: demand is triggered by requests from a work
centres (internal) customer
Push control: centralized system, where decisions are issued to
work centres, which are required to perform the task and supply
the next workstation.

Pull and push control

Push: when material is moved on to the next stage as soon as it has
been processed. It creates inventory.
Pull: where material is moved only when the next stage wants it. We
start producing only after someone (usually an internal customer)
place an order so there is no stock.

When you go to McDonalds they started to prepared the burger when

you order (pull system) si hablamos de hamburguesas no pasa nada
si las perdemos porque no valen mucho dinero pero en cambio en
coches como Toyota si saldra mas caro el perder una venta por no
haber demanda.
Toyota they build by order (Just in time)
Nike shoes orderJust in time-pull system. They dont expend much
time in the warehouse.

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Different approaches to sequencing

Customer priority: Allows an important or aggrieved customer (or
item) to be processed prior to others, irrespective of the order of
arrival.
Multimillonario entra en el banco y le dan un millones de euros. Es un
importante cliente que no queramos que espere. Hospital en
urgencias un paciente va antes que otro en funcin de la prioridad de
la situacin.( no es igual un dolor de estomago que un clico)
Physical constraints: physical constraints may determine the priority
of work.
Pintura- primero cortas la Madera luego la pintas porque si lo haces al
revs la Madera se daa
Due Date (DD): work is sequenced according to when it is due for
delivery, irrespective of the size of each job or the importance of each
customer.
Last in first out (LIFO): usually selected for practical reasons.
Ascensor si eres la ultima persona en entrar saldrs la primera
First in first out (FIFO): serving customer in exactly the sequence they
arrive in.
Si tenemos una fabrica con una puerta las primeros productos que
metamos en la fabrica sern los ltimos que saquemos de ella solo
por el orden por el que lo hemos colocado
Longest operation time (LOT): Sequencing the longest jobs first in the
system (better utilization of resources)
Tienes que construir un bloque de edificios. En este caso primero
construirs el bloque de edificios antes que la pequea casa. Por el
hecho que el bloque ocupa mas recursos y necesita tiempo.
Shortest Operation time (SOT): sequencing the shortest jobs first
(useful when there are cash flow problems) Cuando no tenemos
problemas de Cash flow.

Forward and backward scheduling

Forward scheduling: I give you a group project the next day you start
working on that order. Give flexibility bad a higher labour utilization
Backward scheduling: involves starting jobs at the last possible
moment to prevent from being late
- Lower material costs
- Less exposed to risk in case of schedule change by customer

62

You ask me the deadline, never read the syllabus, so the students
start really late. So as a company they have lower material costs and
customer less exposes them to risk in case of schedule change.

A simple model of control

We monitor the process seeing the quality of the products or how

satisfies are our customers. We compare it with our plans: Are
everything going as we plan for? If yes we are happy if not we have to
do an intervention and also replan. (Intervention could be an output /
input)

Operating equipment effectiveness (OEE)

Loading time: design time that operations take to work.

Availability losses:
1. Set up and changeovers: el tiempo que tardo en cambiar de un
sabor de helado a otro
2. Breakdown failure

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3. Not worked (unplanned)

Availability rate = a = Total operating time / loading time
Net operating time
Performance rate= net operating time/
Quality losses: the defected products
Exercise
In a 7 days period a particular machine is programmed to work for
120 hours its loading time. Changeovers and set-ups take an
average of 10 hours and breakdown failures average 5 hours every 7
days. The time when the machine cannot work because it is waiting
for material to be delivered from other parts of the process is 5 hours
on average and machine works on 80% of its full speed. Ten per cent
of the parts processed by the machine are found to be defective in
some way. Calculate Total Operating time, Net operating Time,
valuable Operating Time, Availability Rate, Performance Rate and
Quality Rate.
Loading Time= 120/ Week
Change overs= 10/ week
Breakdown = 5/ week
Waiting = 5/ week
80% speed
10% defective
Loading time = Total operating time + Availability losses
LT=TOT +AL
TOT= LT AL
120 -10-5= 105
Total Operating time = Net operating time + Speed Losses
Idling equipment: 5
Slow running equipment: 80
NOT = TOT SL = (105 -5)*0,8= 80
Net Operating time = Valuable operating time + Quality
losses
NOT = VOT +QT
VOT= NOT QL= 80*0,9 = 72
D= 105/120 = 0,875
P= 80/ 105 = 0,76
Q= 72/80 = 0,90

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Lean Synchronization (10)

Lean operations
The key principle of lean operation is relatively straightforward to
understand it means moving towards the elimination of all waste in
order to develop an operation that is faster, more dependable,
produces higher quality products and services and above all, operates
at low cost.

Synonyms

Continuous flow manufacture

High value-added manufacture: focus on activities of high value
Stockless production: No stock
Low-inventory production
Fast-throughput manufacturing: Try to have fast TRO
Lean manufacturing
Toyota production system
Short cycle time manufacturing: try to short the cycle time

JIT Material flow

We pull from stage C material from Stage B and we pull material from
Stage A to stage B.
Traditional approach

We produce a stock, we dont want to stop the production we have

more inventory, which means less problems being exposed and
solved is equal to more stoppages because of problems.
Lean approach

65

Inventories of material: information or customers have similar

characteristics.
Different types of products A B C and I have Inventory levels. I can
have smaller quantities instead of having it separately (A B C). So I
need smaller space/ warehouse

Inventories of materials. Information or customers

have similar characteristics

66

Delivering smaller quantities more often can reduce

inventory levels

Waste (muda)

Some operations dont add value.

The problem with inventory

Inventory is like the level of the water and the problems are like the
rocs. We have all productivity problems but with a high inventory we
dont see the problems really clear.
After 8hours
A 10/h
B 5/h
C 10/h
8h A 40 B 40C 40
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Smalls machines
Conventional Western Approach is to purchase large machines to get
economies of scale. These often have long, complex set-ups, and
make big batches quickly creating waste.

Using several small machines rather than one large one allows
simultaneous processing, is more robust and is more flexible

Flow principle
Batch flow (units processed in batches of 10)
A process consists of 3 steps: A B C
It takes one minute to finish each step of the process (A B C)
We produce 3 colours: Colour A clean Colour B cleans Colour C
Batch Production
It will take 30 min to move through the process.

68

Continuous flow (unit processed individually, that is, process one,

move one)
A process consists of 3 steps A B C.
It takes one minute to finish each step of the process (A B C)
It will take 1 min+1 min+10 min = 12 minutes to move through the
process.

The total amount of work required to complete each batch has not
changed, but the throughput time of each batch is reduced from 30 to
12 minutes.

Levelled scheduling equalizes the mix of products

made each day.
Over an eight-day period, need to make1200 of A
400 of B
400 of C
Scheduling in large batches, where batch size A= 600 B= 200 C= 200

Every day, the schedule needs to be calculated. Each day can be

different.
Levelled scheduling equalizes the mix of products made each day

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Over an eight-day period, need to make1200 of A

400 of B
400 of C
With levelled scheduling, where batch size A= 150 B=50 C=50

Every day is the same. Easy to notice if falling behind schedule.

70